Mortgages
Mortgages are loans which are intended to help buyers purchase residential property. When you take out a loan, the lender charges interest: the same is true of a mortgage.
A mortgage is a ‘secured’ loan, which means that the loan is secured against the property being purchased until the mortgage is paid off. Sources of residential mortgages include high street banks, building societies and other types of less well known financial institutions.
Introduction to Mortgages
Basic conditions
Mortgage providers follow a set of rules and procedures when deciding whether or not they will agree to provide a mortgage to purchase a residential property. Although different lenders apply different lending criteria, the amount a potential buyer can expect to borrow of a property’s purchase price is determined solely by the mortgage provider’s requirements.
Here are some of the factors lenders take into account when making their decision:
Affordability
At the moment it is easy to lull yourself into believing you can afford the mortgage you need. However, you need to ask yourself if you can afford your mortgage payments if interest rates rise and whether you can repay the capital if house prices fall.
Let’s say you manage to find a mortgage with an interest rate of three percent, fixed for three years. That’s a great rate. After three years you find interest rates have gone up and the most competitive you can now get is six percent. That’s an increase of three percentage points but, more frighteningly, your interest rate has increased by 100%. Will your net take home pay have increased at the same rate?
You should budget on the assumption that interest rates will rise during the term of your loan. So be sure you can afford your mortgage repayments when that happens, not just now.
Deposit
Lenders are no longer happy to take all the risk of buying your new home, and so do not lend 100% of the value of the property. If you are unable, in the future, to pay your mortgage, the lender needs reassurance that it can take your home and cover the loan by selling it. Less risk taking means lower loan-to-value (LTV) ratios, and personal deposits need to be larger than in the recent past.
You will typically need at least 5% as a first time buyer and commonly up to 20% to access the most competitive interest rates on the market.
The source of the deposit may come from your current property, savings, inheritance or a gift.
Be aware that deposit loans from family and friends can still not be accepted as a source of deposit by some lenders, or can influence how much they may lend you.
Valuation and Survey Fees
Before a lender will grant you a mortgage it will insist on a valuation to prove the property is worth what you’re paying for it. The size of the valuation fee will vary by lender and property value.
The basic mortgage valuation is for the lender’s benefit so that it feels comfortable lending against the property. You may feel you want to add a survey to the valuation that gives you a report on the general condition of the property.
If you are buying an older property, or one in a general state of disrepair, you may choose a full structural survey. This is a thorough survey that examines the structural condition of the property and gives you advice on repairs. Depending on the property expect to pay between £500 and £1,000.
Obtaining comparable examples in the same area and for similar property will help you obtain a benchmark.
Property type
Some properties such as flats over commercial properties, studio flats and ex-local authority premises can be viewed as having reduced future attractiveness and as such some lenders may not operate in that market. This may restrict your lending options.
Listed buildings (e.g. Grade 1, Grade 2) may have restrictions on how you can maintain or alter the property as well as buildings near to it (e.g. garage). Some unlisted properties can also be subject to similar restrictions (e.g. in an area of outstanding natural beauty).
Time frame
Mortgage providers generally have a maximum number of years over which they lend and will set a date when the mortgage must be repaid in full.
As a mortgage is secured against your home, it could be repossessed if you do not keep up the repayments.
Mortgage Repayment
Once your mortgage application has been accepted in principal, you may have the option of deciding how you repay the loan: on a ‘repayment’ basis, or on an ‘interest only’ basis.
Repayment mortgage
With a repayment mortgage your monthly repayments cover both capital and interest on the loan.
As the term continues, the amount outstanding on the loan reduces so the full amount of the loan will have been repaid at the end of the term as long as you have made all your payments on time.
No other repayment vehicle is needed and it avoids the risk of investing (e.g. in the stock market).
If you remortgage, you may be tempted to extend the end repayment date in order to lower your monthly payments. However this means that the amount you repay overall increases over time.
Interest only mortgages
With an interest only mortgage, your payments to the lender cover only the interest on the loan (i.e. they do not repay any of the capital). The total amount of your debt does not reduce over time and the full amount of the loan still has to be repaid to the lender at the end of the term, so you will need to ensure you have that money ready.
So you can make this final payment, you can invest so that you generate enough capital to repay the loan at the end of the term. If you choose to invest, some investment vehicles can have tax advantages and when you move or remortgage, your investment vehicle can usually be reallocated to the new mortgage.
However, there is no guarantee that your chosen investment vehicle will grow sufficiently to repay your loan (although you can usually top up your contributions to investments as you go along if this looks likely to be the case).
As a mortgage is secured against your home, it could be repossessed if you do not keep up the repayments.
Remortgaging
Whether you are looking at consolidating your debts, raising money for home improvements, looking for a better monthly payment than you currently have, or want to restructure the terms of your current loan, we can help.
Remortgaging can help your financial health in many ways. In simple terms, remortgaging involves moving your current mortgage to a new arrangement, arranged either with your existing lender or with a new lender.
Many borrowers choose to review their mortgage every few years in order to take advantage of the new rates on offer. Those that remain on the same deal for the full term of their loan could lose out by paying more money than they need to. They could also miss out on the chance to finish their mortgage term earlier than originally planned.
The core reasons to consider remortgaging are:
To avoid moving home
It can be more convenient and cost effective to enhance your existing property, rather than move home. This can be financed by remortgaging or a further advance.
To not lose money unnecessarily
When you took out your current loan, there will have been features that made it competitive and attractive to you. It may be that your incentive period is coming to an end, or simply that the market has changed.
This could allow you to save money on your monthly repayments, or to repay your mortgage sooner. If your current lender doesn’t offer better rates or greater flexibility on its other products, you may want to consider switching your mortgage to another lender.
You may be better off doing so, even if this triggers early repayment charges payable to your existing lender, as this could still mean a net saving to you.
To get a lump sum for a special cause
You may have a wedding or education fees to fund. If your property value has risen, you could release some of the equity to help towards this.
To consolidate debts
Remortgaging can allow you to release some of the value you hold in your home and consolidate other debts that can attract higher rates of interest than that of your mortgage (e.g. credit cards).
Think carefully before securing other debts against your home. While debt consolidation often reduces the amount of monthly repayments, making them more affordable, it will normally involve extending the term over which you repay the debt(s), which often results in you paying more for the debt in total.
Think carefully before securing other debts against your home. As a mortgage is secured against your home, it could be repossessed if you do not keep up the repayments.
Standard Variable Rate Mortgages
In a Standard Variable Rate (SVR) mortgage, the borrower’s monthly repayments are based on the prevailing rates of interest their lender charges — not the Bank of England (BoE) base rate. In other words, it is entirely the lender’s decision on the rate of interest they charge the borrower.
Although the rate of interest charged in a SVR mortgage can be influenced by changes in BoE base rate, whenever the bank raises or lowers base rate, the lender can do the same, or ignore the change altogether. On occasions, the lender may increase or decrease their rates of interest even if the BoE has not changed theirs.
The rate of interest charged on SVR mortgages can range from 2% – 5% above base rate, or more.
As SVR mortgages do not involve any special financial inducements, they can be more (or less) expensive than other types of mortgages. And unlike fixed rate mortgages where the rate of interest never changes, SVR borrowers can never be certain when their monthly repayment may change.
Generally speaking, arrangement fees for SVR mortgages tend to be lower than for trackers or fixed rate deals and if the borrower pays off their mortgage sooner than planned, he or she may not incur an early repayment charge.
As a mortgage is secured against your home, it could be repossessed if you do not keep up the repayments.
Fixed Rate Mortgages
In a fixed rate mortgage arrangement, the interest rate is fixed for a pre-determined period of time. The monthly mortgage payment will not change, no matter whether the Bank of England, or the mortgage provider, raises or reduces their interest rates. For the borrower, the advantage of a fixed rate deal is that he or she knows exactly how much their monthly repayment is going to be each month and for how long.
In some instances, the interest rate charged on a fixed rate mortgage can be higher than the interest rates charged for other types of mortgages. The borrower may also have to pay an arrangement fee to set up a fixed-rate deal.
Usually, once a fixed rate arrangement comes to an end, the lender’s standard variable rate applies.
As a mortgage is secured against your home, it could be repossessed if you do not keep up the repayments.
Tracker Mortgages
With a tracker mortgage, the rate of interest the borrower pays is linked to a specified index, normally the Bank of England’s (BoE) base rate of interest. So whenever the base rate changes, so does the tracker’s interest rate and the borrower’s monthly repayment. For those reasons, tracker mortgages are known as ‘variable rate’ mortgages.
When interest rates are low, the borrower’s monthly repayment might be less than it would be on a different type of mortgage, such as a fixed rate or standard variable rate mortgage. But when interest rates are high, the reverse is true. And as the rate is likely to vary, the borrower can never be sure exactly when or whether their monthly repayment may change.
Although the rate of interest on a tracker mortgage is linked to, for example, the BoE base rate, the actual interest rate charged on the mortgage will be determined by the lender and will usually be higher than base rate (the ‘margin’) and usually expressed as ‘Base rate’ + ‘margin’. So if base rate is 2%, and the margin is 2%, the interest rate on a tracker mortgage will be 4%. If the base rate increases to 2.5%, the rate of interest will be 4.5% (2.5% base rates plus 2% ‘Margin’).
It is important to note that most ‘tracker’ rate mortgages have a minimum rate that will apply to the loan. For example, if loan tracking at Base rate + 2% and had a minimum rate of 3%, any reductions in the base rate below 1% would not result in a change in the rate the borrower was charged.
Although some tracker mortgages run for the life of the loan, most last for less than that — between one year and 5 years is not untypical.
Once the tracker arrangement finishes, most lenders will switch the mortgage to a standard variable rate of interest.
As a mortgage is secured against your home, it could be repossessed if you do not keep up the repayments.
First Time Buyer Mortgages
The prospect of buying your first home could be both daunting and confusing. Our aim is to guide you through the process from start to finish so that you understand exactly what the purchase entails and how much it will cost.
The mortgage market changes all the time, not just in terms of mortgage deals and regulation but also in the way lenders assess loan applications.
Some of the changes have been in the way mortgage lenders assess the suitability of all clients for the different types of loan on offer. They base this decision on a variety of factors, primarily:
The property – type, condition, access and location
Employment status – amount and frequency of income (and time in your current role)
Financial commitments – current and future (and your history of managing credit).
There is now more focus on affordability and expenditure. This is very different to the traditional approach of simply multiplying your annual personal (or rental) income by a pre-set multiple to obtain a maximum lending amount.
We pride ourselves on being up to date with regulation, legislation and the economic market.
We understand your needs, match that to the requirements of lenders, and protect you and your dependants once you have bought your property.
This way, we help you save time and money in the new world of mortgage advice.
Getting on the ladder
There are actually some advantages to being a first time buyer, for example first time buyers are more appealing to sellers because they are not in a chain.
As we have access to many lenders we are well placed to assist you, however these days it is a necessity to provide a substantial deposit in order to get a mortgage (although there are a number of 95 per cent mortgage deals around), and you may be eligible for further assistance from the government.
As a mortgage is secured against your home, it could be repossessed if you do not keep up the repayments.
Cashback Mortgages
A cashback mortgage is an arrangement where the lender pays or rebates to the borrower a sum of money (or some other form of financial benefit/incentive) either on completion of the mortgage or at a later stage. The borrower can use the cashback to help pay some of their property purchase costs such as legal and surveying costs, stamp duty, removals charges or home improvements and repairs.
The amount of cashback the borrower will receive depends on the lender’s requirements: sometimes it is calculated as a percentage of the total mortgage advance and will therefore vary in value, or it may be a fixed and non-negotiable amount. Some mortgage providers insist that the borrower already holds (or opens) a current account with them before they qualify for cashback.
Cashback mortgages are usually associated with standard variable rate or tracker mortgages, although the rate of interest may or may not be higher.
As well as applying an early repayment charge, if a cashback mortgage is redeemed before the end of the agreed term, the lender may ask the borrower to repay all or part of the cashback.
As a mortgage is secured against your home, it could be repossessed if you do not keep up the repayments.
Offset Mortgages
In return for not receiving any interest on their savings, the homeowner pays a lower rate of interest on their mortgage: an arrangement known as ‘offsetting’. An Offset mortgage is only available where both the mortgage account and the savings account/accounts are with the same provider.
On a £200,000 mortgage for example, if the homeowner offset £20,000 of their savings against their mortgage, he or she would pay interest on the outstanding balance — i.e. £180,000. As the rates of interest charged on mortgages are usually higher than those paid on savings accounts, offsetting can be more financially advantageous to the borrower.
Furthermore, homeowners can use an Offset Mortgage to either shorten the term of their mortgage, or reduce the monthly repayments. Borrowers who wish to shorten the term of their mortgage would base their monthly repayment on the full £200,000 mortgage and pay more each month than the lender requires them to. Or the homeowner could base their monthly repayment on the lower (offset) figure of £180,000, which would reduce the monthly repayment but the term of the mortgage would remain the same.
Another aspect of an Offset Mortgage relates to income tax. In addition to reducing the interest on their mortgage, the homeowner might pay less income tax simply because their savings are not earning any interest.
Apart from the money in the savings account, some providers allow borrowers to offset the cash in their current accounts and their cash ISAs against their mortgage debt. If the borrower makes withdrawals from any of the accounts that are linked to their mortgage, the amount of savings offset against their mortgage reduces.
In common with other mortgages, Offset Mortgages are available on a fixed and variable rate of interest basis, although some borrowers charge a higher rate of interest for providing an Offset Mortgage than a standard variable rate mortgage.
As a mortgage is secured against your home, it could be repossessed if you do not keep up the repayments.
Tax treatment varies according to individual circumstances and is subject to change.
Second Charge Mortgages
A Second Charge mortgage is, as the name suggests, a separate and additional mortgage to the homeowner’s main (or first) mortgage.
Second charge mortgages (sometimes known as ‘Homeowner Loans’) are loans which are secured against the borrower’s residential property, and as such, are available only to homeowners. In common with remortgages, second charge mortgages are sometimes used by homeowners to raise money.
When considering a second (‘further’) advance, the lender will take into account the value of the borrower’s home, less any mortgage owed on it. The difference between the two amounts is known as ‘equity’ and provides the lender with security against the loan. If for example, the home is estimated to be worth £300,000 and the amount remaining to be paid on the mortgage is £100,000, the equity is £200,000. In addition to the amount of equity that’s available, the lender will consider the borrowers’ ability to service both mortgages if interest rates were to rise.
By taking a second mortgage, the homeowner will have two mortgages on his or her home. In common with a first mortgage, the borrower’s home will be at risk if he or she fails to keep up the mortgage payments.
When the property is sold, or the homeowner moves to a new home, the amount owing on the first mortgage must be repaid in full before anything is paid off the second mortgage.
Generally speaking, lenders charge a higher rate of interest on second charge mortgages than they do on first or main mortgages. The rate of interest (which may be fixed or variable) can also depend on the size and term of the loan, the homeowner’s credit rating and the amount of equity that exists in the home.
As a mortgage is secured against your home, it could be repossessed if you do not keep up the repayments.
Second Charge Mortgages are by referral only.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
Buy-to-let Mortgages
Buy-to-let (BTL) mortgages are specifically for individuals who wish to buy residential property which they intend renting to tenants. Although a BTL mortgage is similar in a number of respects to a standard residential mortgage, there are some significant differences between the two.
Eligibility and lending criteria
Most banks and building societies (and some other financial institutions) offer BTL mortgages, but terms, conditions and costs vary enormously.
Some mortgage providers will not lend to individuals who are under 25 years of age or earn less than £25,000 a year. Lenders may impose an ‘upper’ age limit on the term of the mortgage by insisting that the mortgage is repaid in full before the borrower reaches a certain age — 70 is not untypical.
Flats, newly built property, former local authority-owned properties — or properties which are priced below a certain value — can be unacceptable to lenders. Lenders may also restrict the number of BTL mortgages a borrower can have with them at any one time. Or the lender may impose a ‘cap’ on the total amount of BTL funding they are prepared to advance to a borrower.
Credit record
In common with a standard residential mortgage, the potential lender will take account of your personal credit rating. If you have any unpaid debts, County Court Judgements — or you have failed to make previous or existing loan repayments on time — the lender may not want to take you on as a BTL borrower.
Affordability
When considering their decision to make an advance or not, lenders will also take into account the amount of rent the borrower is hoping to release from the property. Unlike a standard residential mortgage, most lenders view the property’s rental potential — rather than the borrower’s salary — as the primary source of income for servicing the loan.
For that reason, BTL lenders like to see a situation where the rental income covers at least 125% of the monthly interest payment. In other words, if your monthly mortgage payment is £1,000, the monthly rent should be a minimum of £1,250. (The borrower’s projections in terms of rental income must be verified by an independent source.) The difference between the two figures should help you meet your mortgage repayments when no rent is being received, or when repairs need making to the property.
Deposit
Typically, the highest loan-to-value (LTV) mortgage available on a BTL basis is 85% — i.e. you will need a deposit of at least 15% of the property’s purchase price to proceed. Borrowers who are able to put down substantially more than the minimum 15% deposit (25%+ for example) will usually qualify for more favourable rates of interest.
Interest rate
Because BTL mortgages represent more of a risk for lenders than standard residential mortgages, BTL borrowers tend to be charged higher rates of interest.
BTL mortgages — associated fees and costs
Survey: A surveyor will be appointed (at the borrower’s expense) to assess the property’s condition, market value and potential rental income. The surveyor will also identify any issues which could affect the property’s future value.
Conveyance: Conveyancing — which is usually conducted by a solicitor or conveyancer — is the process by which the ownership (legal title) of the property is transferred from the seller to the buyer. The buyer pays for this cost.
Stamp Duty for Buy-to-let property: The purchaser may have to pay stamp duty land tax which is calculated as a percentage of the purchase price of the property.
Tax treatment depends on individual circumstances and is subject to change.
Other costs: The borrower may also have to pay arrangement and booking fees to the mortgage provider, which tend to be higher than those associated with a standard residential mortgage.
Which type of mortgage?
Depending on the lender, the types of mortgages available to the BTL borrower are usually the same as those available to the standard residential mortgage borrower — i.e., tracker, discount, fixed rate, capped rate and variable rate.
Given that most BTL borrowers buy for reasons of investment, some mortgage options may be more appropriate than others. With a fixed-rate mortgage for example, the borrower knows exactly what their monthly repayments are going to be; other borrowers prefer tracker or variable rate loans where the monthly repayment can sometimes be lower, but the cost can vary from one month to the next.
(Many BTL buyers have a preference for interest only mortgages, as distinct to a capital and interest repayment mortgage. An interest only mortgage, is a mortgage where the monthly repayment is used solely to pay off the interest on the loan but none of the capital, which is repaid only when the property is sold or at the end of the term of the current mortgage when a re-mortgage is obtained.)
As a mortgage is secured against your property, it could be repossessed if you do not keep up the repayments.
Some Buy To Let mortgages are not regulated by the Financial Conduct Authority.
Self Build Mortgages
For those who want to build their own home, a conventional residential mortgage is not an option. Instead, the self-builder would need to apply for a self-build mortgage. Not every lender is active in the self build mortgage market and those that are, tend to charge a higher rate of interest for self build mortgages. Self build mortgages involve regular site inspections, additional administrative tasks and are deemed to carry more risk for the lender than conventional mortgages do. Also, the self build mortgage application can take longer to process than average — five or six months is not unusual.
Key requirements
The lender will want to see detailed plans for the property, an accurate build cost projection, building regulations approval and would expect, at the very least, outline planning permission to have been granted. And rather than the borrower taking on the build, lenders are likely to require a professional builder or a qualified project manager to be appointed.
Deposit and lending criteria
Lenders will employ a professional valuer to assess the property’s market value on completion and during the build. If the mortgage provider considers the project viable, the amount they’re willing to advance will be determined by a range of factors such as build type, construction methods and materials used and the property’s location. The lender will also take account of the borrower’s credit history and judge whether they can afford to make the loan repayments or not.
As most lenders will not advance more than 75% of the current value of the land and a similar amount against the build costs, the self build borrower has to find a larger deposit than normal. Some providers require the mortgagor to have bought the land prior to applying for the mortgage.
Stage-by-stage funding
Houses are built in stages, which is why self build mortgage funds are released in stages. Precisely when each advance is made — either at the beginning or on completion of each stage — depends on the lender’s policy. Where applicable, the first advance is used to help buy the land on which the property will be built. Subsequent advances are made (subject to the valuer’s approval) once the foundations have been laid, at the point when construction reaches the level of the eaves, as soon as the property is watertight and when the interior walls have been plastered. The final advance materialises when the property is ready for occupation.
As a mortgage is secured against your home, it could be repossessed if you do not keep up the repayments.
For further advice on mortgages from experts that specialise in dealing with all aspects of wealth management, please contact us through our confidential online enquiry form or telephone 01327 317388
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