(from ‘What Mortgage’ magazine: www.whatmortgage.co.uk)
There are more mortgage packages available in the UK than in the US. It is important to be familiar with these, so that our students pick the right mortgage for their investment. It is good to go over these again.
Fixed rates
When you choose a fixed rate deal, the interest rate you pay is fixed for a set period – for example 5.99 per cent for three years. The lowest fixed rates are available over shorter periods, but there are some longer-term fixes available at attractive rates.
One of the main reasons a fixed rate deal can be attractive is that you know exactly how much your mortgage will cost for a given period. If you know money is going to be stretched in the first few years you own your home, the security of knowing how much your repayments will be each month can give you valuable peace of mind.
That’s the advantage of choosing a fixed-rate deal, but what about the downside?
Well, the disadvantage of a fixed-rate loan is that the lender’s standard variable rate (SVR) could be below your rate, meaning you are paying more than other borrowers. If you think interest rates are going to fall, you would be unwise to commit to a fixed-rate mortgage.
Discounted rates
A discount mortgage offers a reduction in a lenders standard variable rate (SVR) of a set percentage over a given period. For example, a two per cent discount on a SVR of 5.95 per cent means you pay 3.95 per cent. Lenders are increasingly offering stepped discounts where the margin between the pay rate and the SVR decreases after a set period.
Whatever kind of discount you take, if the SVR changes, so does the rate you pay.
Choosing a discounted rate means taking a gamble – what you actually pay can move upwards as well as downwards. Although you still pay less when rated are rising, you have no control over how high they will go.
So how can you be sure mortgage rates will work in your favor if you choose the discounted rate? The simple truth is you can’t – many factors determine whether your lender chooses to increase or decrease its SVR.
Before committing yourself to a discounted rate, look at your personal circumstances and attitude risk. Can you afford to pay a bit more on a discounted rate if your lender increases its SVR?
If you are a first-time buyer you may be better off with a fixed or capped rate that guarantees your mortgage payments won’t exceed a certain level.
Tracker rates
Tracker mortgages are basically variable-rate deals, but instead of the interest rate you pay being based on your lender’s standard variable rate (SVR), it is linked to an outside force. This is usually the Bank of England base rate, but it can be the London Interbank Offer Rate (LIBOR).
The interest rate you pay is a set margin above, or below, the rate that is being tracked and it changes as the rate moves. So if you have a base rate tracker, your repayments will changes whenever the Bank of England changes its interest rate.
On the plus side, you don’t have to rely on your lender dropping its mortgage rate in line with any cuts in the base rate set by the Bank of England.
On the downside, the rate you pay will automatically rise if the base rate rises, regardless of your lender’s reaction to the rise.
Remortgage deals
It is very simple to remortgage these days, and lenders are making the switching process as easy as possible. It is always worthwhile speaking to your existing lender when you want to remortgage to see if they have a new deal that will suit your current needs.
If you decide to move your mortgage to a different lender, you will need to have your home valued again and a solicitor is required to undertake the legal work. Most lender offer special remortgage packages that take the hassle out of the process. Some lenders have special products where they can arrange for your property to be valued and have solicitors who will do the legal work. Best of all, they will pay their fees for you! This not only saves you money but also means you don’t have to go out and find these professionals yourself.
ERC-free mortgages
Often a fixed, discount, tracker or capped mortgage deal will come with early redemption charges (ERCs) that apply if the mortgage is repaid during the special deal period, or for longer in some cases. This can be a flat fee, but is typically charged as a percentage of the outstanding balance.
Some mortgages come without any ERCs, which means the borrower is free to remortgage at any time.
These mortgages may come with higher interest rates than special deals, but can represent good value over the long term.
ERC-free mortgages are also a good option at times of interest rate uncertainty, as they enable borrowers to move mortgages without penalty to take advantage of falls in the interest rate.
Self-certification mortgages
If you run your own business and can’t show mainstream accounts for the last three years, you may encounter problems getting a conventional mortgage. Most lenders ask self-employed applicants for audited accounts or a letter from their accountant. The loan is based on this proved income. Equally, some employed borrowers may also choose a self-certification mortgage because when lenders decide whether to lend or not, the affordability calculations may not always take into account extra income from annual bonuses or commission. Some self-cert lenders will consider employed borrowers for this reason.
However, even if you maintain full accounts, your accountant is likely to minimize the amount you declare as income for tax purposes. So when a lender looks at your accounts, its assessment of how much you can borrow may be based on a lower income that doesn’t reflect your ability to pay.
But all is not lost. Many specialist lenders, and some mainstream lenders, offer self-certification mortgages where you state your level on income without having to provide any accounts. There are two levels of self-certification: some lenders will accept a letter from you declaring your income; some require a letter from your accountant stating that your business is solvent.
There are a handful of lenders that will offer you a self-certification mortgage if you have poor credit history, but expect to pay a higher level of interest on the loan.
Flexible mortgages
Lenders are always devising new ways to let you manage your mortgage. One of the more recent innovations is the flexible mortgage. This has a set of features that allow you to vary when and how you pay off your loan. You can make regular overpayments in order to clear your mortgage early, deposit lump sums and even take the occasional payment holiday.
There are three types of flexible mortgage available: offset mortgages, current account mortgages and conventional flexible mortgages.
Offset products – these allow you to keep a number of accounts with the same lender, including savings and a personal loan. When the lender calculates how much interest you owe on your mortgage, it takes these other accounts into consideration. Any savings reduce the amount you owe, while any debts are added to your mortgage and charged at the mortgage rate.
Current account mortgages – here your home loan and regular bank account are combined, so you can have your salary paid into the account each month and maximize the advantage of daily interest calculations.
Flexible features – conventional flexible mortgages do not usually feature current account or offset facilities. Expect them to have the following features:
Regular overpayment facility – you can increase your monthly repayments
and repay your loan early
Lump-sum overpayment facility – you can pay off a chunk of your loan
Regular underpayment facility – you can reduce your monthly payments for
a period
Payment holidays – you can take a break from your payments for a set time
Lump-sum withdrawals – you can withdraw a chunk of money up to the limit of the total loan or your overpayment reserve
Flexible payment facility – you can choose to pay weekly or fortnightly
No redemption penalties – you are not penalized for repaying your loan early,
although some lenders will impose a limit on how much you can repay each year
Daily calculations of interest – interest on the outstanding balance is calculated
daily so any overpayments or underpayments you make are acknowledged immediately.
Some of these features are available on standard mortgages, so you may be able to get what you need without taking a fully flexible mortgage.
Shared ownership mortgages
Shared ownership allows you to buy part of the property. So, if a flat was for sale for £200,000 and you could only afford – or get a mortgage for – £100,000, then you would buy a 50 per cent share. The remainder would be owned by the Housing Association you bought the property from. The property is treated like yours; you’re responsible for all the maintenance and bills, and you have the right to decorate it and carry out home improvements of your choice. You pay your mortgage on the share you own, and rent ot the Housing Association on the remainder.
If your income improves, or you come into some money, you can increase your share at the current market value. You don’t have to do this, and in many cases buyers of shared ownership properties retain their original share for years.
But-to-let mortgages
A buy-to-let mortgage is a home loan used to buy an investment property. A number of high-street lenders offer this type of mortgage, as do a number of specialist mortgage lenders.
Up until a few years ago, only a few lenders were prepared to dabble in the buy-to-let market. Most saw it as a risky option, and those that did offer buy-to-let products usually advertised them as commercial mortgages with higher interest rates. But in recent years the buy-to-let market has really taken off.
Things started to change in 1996 when the Association of Residential Letting Agents (ARLA) was set up to revive the rental market. The association aimed to take the risk out of the buy-to-let market by getting fully qualified letting agents to manage properties and tenants. In addition, the association created a panel of mortgage lenders willing to offer proper buy-to-let products at competitive prices. There are now six lenders on the ARLA panel: Paragon, Bank of Ireland, Mortgage Express, Cheltenham & Gloucester, NatWest and GMAC. They account for a large part of the market. As well as the lenders on the panel, there are many other lenders offering buy-to-let mortgages, ranging from small building societies to larger high-street banks and specialist lenders.
There are lots of buy-to-let mortgages on the market, ranging from special-offer deals to flexible and variable-rate loans. Some schemes allow you to buy more than one property by remortgaging the last property in order to raise a deposit (down payment in US terms) for the next. If you are planning to invest in a portfolio of properties, it may be easier for you to stick with the same lender. Before you choose a lender, make sure it offers the scope you need. Most lenders will restrict the number of properties in a portfolio and the total amount you can borrow.
When you take out a buy-to-let mortgage you will be expected to meet certain criteria. Your expected rental income must exceed your mortgage repayment by a certain percentage. For example, your mortgage lender may require a rental income of 130 per cent of your monthly mortgage payment. Your lender will also want to establish whether the property you are buying is a good long-term investment
Some lenders will only consider your rental income when offering a mortgage, while others will take into account your normal income. For example, your lender may place more emphasis on your normal earnings than the rent, especially if you only have one or two rental properties.
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