What is a fixed rate mortgage?
Fixed rate mortgage guarantee you a particular rate for a specific period of time. Typically between 2 and 5 years, but 7 and 10 year deals are available. The advantages of a fixed rate are that you know exactly what you will have to pay over that time period. Longer term fixed rates are usually more expensive, often because lenders expect borrowing rates to increase in the future as the economy improves. There is a risk that if you fix for a long period, and for whatever reason rates do not rise, you might end up paying more in the long run than if you had taken a shorter term. You would also be “tied in” (see what’s a tie in period) and may have early repayment charges to pay if you want to sell or refinance the property within this timeframe.
What is a tracker mortgage?
Tracker mortgages get their name from the fact they ‘track’ the Bank of England base rate. (See what’s the BBR?). Lenders will offer a percentage above the BBR, and so if the base rate rises, your mortgage rate and payments will rise too. Historically you would get quite a discount against fixed rates over the same period, but at the moment those differences are minimal. The Bank of England has committed to being more transparent about when it thinks future rate rises will occur, something it calls ‘forward guidance’ and so tracker customers should have a better idea of when to expect an increase and by how much.
What is an offset mortgage?
An offset mortgage allows you to save money alongside your mortgage account. Interest is only charged on the difference. You won’t get any credit interest, but you do retain full access and control of the money. If you are a higher rate tax payer the savings are even greater, because you also save the interest you would normally pay on any credit interest if you were to use a regular savings account. Offset mortgage rates are typically more expensive, so would only be an advantage to those with the funds ready to make use of the facility.
What does APRC mean?
Annual Percentage Rate is a measure imposed by the FCA (See what is the FCA) to enable consumers to compare loans. It’s generally felt to be a poor measure for mortgages because it only represents the first years total cost of the loan. With a mortgage you may commit to a term between 2 and 5 years, and so the cost of that 2 or 5 years has to be compared to get a true comparison.
For instance, compare the cost over two years of a £150,000 interest only mortgage to keep the maths simple. One is 3% interest but has a £2000 arrangement fee, the other is 4% but has no fee at all. The first costs £11,000 in interest and fees over two years, the second costs £12,000 over the same period. For this size loan the first option is the best value for money. The APRC of the first is 4.34% whereas APRC the second is 4% APRC. If you went by APRC alone you may think the second option is cheapest because the benefit of the lower interest in the second year has not been taken into account.
What does LIBOR mean?
The London Interbank Offer Rate is a set of daily statistics collated by the big international UK banks. This is the average rate at which they lend to each other, and gives a rough measure of the health of the banking industry and the economy as a whole. The LIBOR rate is used heavily in commercial loan rates, but is not terribly common in the mortgage market, probably due to a lack of consumer awareness. It can be found in some specialist Buy to Let mortgages however.
What is a “tie in period”?
When lenders offer a particular rate for a period of time, often 2, 3 or 5 years, they often have a similar tie in period, which means you would pay an early repayment charge to settle that loan within that period. It’s a way of the lenders ensuring they get a specific amount of interest from you in return for the cost of obtaining and lending the money. Although quite rare currently, lenders have in the past had tie in periods that were longer than the initial deal, meaning borrowers could be trapped in a mortgage where the Standard Variable Rate (SVR) could be much higher than expected. Similarly, there are some deals available where there are no tie ins, suitable for customers who know they will, or just want the option of settling early.
What is the FCA?
The Financial Conduct Authority is the government organisation that ensures customers are treated fairly by banks, and that ensures advice is transparent and right for the client. It is also responsible for ensuring banks lend responsibly and that the financial sector as a whole remains as stable as possible. As a result you may find that you cannot do certain things because lenders are not permitted to by the FCA. Whilst this is frustrating at times, these restrictions are always imposed with the best interests of customers in mind.
What does Bank of England Base Rate Mean?
The official bank rate (also called the Bank of England base rate or BOEBR) is the interest rate that the Bank of England charges banks for secured overnight lending. It is the Government’s key interest rate for managing monetary policy.
How much can I borrow?
The amount that you can borrow has now become quite a complex question to answer. Instead of simple income multiples, banks now have to take into account things such as age, number of dependents, planned retirement age, income, term of the mortgage, commitments, student loans, household bills and various other costs that might affect the amount of money a household will have spare to cover a mortgage. Generally speaking its recommended that no more than 75% of disposable income be used to pay a mortgage, and so this disposable income figure is very important.
We have access to affordability calculators provided by the lenders, but these are just a guide and full assessment of bank statements, payslips and the declared expenses are required to provide a final borrowing figure. As a result the more information you provide an advisor early in the process, the more accurate affordability advice can be.
How do Buy to Let mortgage applications differ from Residential?
There are a number of significant differences between a residential mortgage and a buy to let mortgage:
Larger deposit – Most lenders require deposits of 25% or more, however some will lend with 15% or 20%, with higher rates and fees.
Rent – This is the primary factor in determining the loan amount. Lenders want to see that the rent will cover the interest payments even when it goes onto SVR by 125% typically.
Affordability – Loan size is based on the rent, but most lenders still require applicants to earn at least £25k per annum, and for that income to be from something unrelated to their property income. The reason is to ensure that applicants have enough to cover the mortgage for a while if they do not have a tenant in place.
Cost – even though the deposits required are higher than on a residential mortgage, rates for buy to let mortgages are often much higher than residential rates. The costs of a buy to let mortgage are tax deductible however.
What is remortgaging?
Remortgaging is simply a mortgage on a property already owned by you. You can remortgage an unencumbered property, it’s still called a remortgage even if you are not replacing an existing loan. Most people consider remortgaging after an initial period ends and they go onto a more expensive standard variable rate and their “tie in” period ends. At this point there will be no penalty to redeem the mortgage and they may benefit from a lower interest rate.
What does unencumbered mean?
Unencumbered refers to property with no mortgage.
What is conveyancing?
Conveyancing is the legal process in transferring property ownership.
What are surveys/Valuations?
The term survey and Valuation are often used interchangeably, however a valuation is something only a lender would commission, and is an assessment of value and suitability for security. A survey however would be more informative and is more likely to be for the benefit of the buyer or seller of the property. A valuation may only be a few pages and detail that estimated value, dimensions, features and general condition. A survey might be structural and asses the whole building, or particular area, or may be a homebuyers survey that gives a grading on each aspect of the home, covering areas such as electrical, guttering, damp, etc.
Typically a lender will undertake a survey unless the applicant pays for it to upgraded to a more detailed survey. The surveyor will do both at the same time and will send the detailed report to the client, and a basic valuation to the lender.
How long can I take a mortgage for?
Some lenders will allow a maximum term of 40 years. Most allow 35 as a maximum (subject to retirement age of course) and 25 years is still the most common term take by borrowers. Loan terms are almost always restricted by the borrowers planned retirement age or age 70, whichever is lower.
What types of mortgage are there?
The main types of mortgage found currently are Fixed rate mortgages and Tracker mortgages. Fixed rate mortgages have a fixed interest rate for a specific period of time before going onto the lenders Standard Variable Rate. Tracker mortgages stay at a fixed amount over the Bank of England base rate, and changes in this base rate will usually see mortgage payments increase within a month.
Other types of mortgage include Variable rate mortgages, where the rate can change at any time. These are typically found alongside other features such as no tie in periods or the ability to borrow more. Offset mortgages are also available where the rate could be a Fixed or Tracker, but the actual interest charged depends on how much money is kept in an associated savings account. If a mortgage of £100k has savings of £90k alongside, interest will be charged on the difference of £10k. The funds are instantly accessible and so are popular with those who want flexibility.
Do I need life insurance?
There are many types of protection that are available depending on a client’s circumstances. There is never one right answer, and a thorough fact find should be undertaken to establish what these needs might be.
Life cover exists to protect the people you leave behind, at the very least to ensure they keep a roof over their heads if one or both borrowers are no longer there to make the mortgage payments. It’s generally considered to be one of the most important protection policies available, especially considering the cost is generally quite low.
Always discuss your situation, budget and needs with a protection advisor and ensure you get advice about the options available to you.
How much of a deposit do I need?
To purchase a residential property you need at least a 5% deposit, however this will often involve the use of a government scheme as lenders still see this as a high risk option. These schemes may involve additional loans or guarantees from the government and so will come with additional caveats.
What risks are there in taking a mortgage?
There are a number of significant risks involved in taking out a mortgage, however most can be mitigated by being cautious or by making use of available protection policies.
The main risk involves not being able to meet mortgage payments. If you lose some or all of your income then it may become very difficult to meet the mortgage commitments. Lenders will often work with clients to ensure they can keep their homes where possible, but if the chances of them catching up again seem remote, they may feel the only option is to repossess the home to pay off the debt. The greater the loan to value (LTV) the less chance the repossession will cover the mortgage and the cost of recovery and so there is a real chance that some debt may remain even after repossession. In these cases some form of income protection is wise
How do you make a mortgage application?
The process for making a mortgage application is largely the same whether you use a broker like ourselves, or if you go to the bank directly. Firstly there will be a fact finding stage, where the amount of money that can be borrowed is determined, as well as a look at the type of property
What is an interest only mortgage?
Most mortgages for residential purposes are taken with the expectation that the whole balance owed will be paid off at the end of the term. Sometimes, however, it might be beneficial to use a different method of paying back the mortgage, in which case the loan can be taken where the repayments only cover the interest on the balance. The balance never decreases and at the end of the term the bank will want full repayment. If the repayment vehicle is not available to settle the loan, the house would be repossessed. As a result of this alarming consequence, and in the wake of the last housing crash, lenders are very reluctant to offer these kinds of mortgages unless there is already a viable repayment vehicle available. This generally needs to be a cash lump sum, investment’s, equity on other properties or in some circumstances equity in the current property.
One exception to the rule is a Buy to Let mortgage, where the property is not the applicants home. In these cases its generally always acceptable to take the mortgage on interest only, on the basis that the properties would be sold once the term came to an end.
What happens if my completion and Direct Debit dates are different?
This is a common question and one that’s not always straightforward. The day a mortgage completes may not coincide with the date the direct debit was set up. To further complicate this some lenders won’t allow you to change the direct debit date immediately, or they may only allow two or three dates that it could be. It’s worth finding out how this will work once you know the completion date so you don’t get any nasty surprises. It could be that if the direct debit is a week after completion there will be a small payment due. It could be that the lender lets a full month elapse and then the bill covers 5 weeks. There are some lenders about that still charge interest monthly, and so as a result, this repayment may be 5 weeks capital payment, but 8 weeks interest payment.
Because of the sizable nature of a mortgage payment, and the other significant costs associated with buying a house, it can be very frustrating to get a large unexpected bill and so this question is well worth asking your mortgage broker as soon as it becomes answerable.
FCA does not regulate conveyancing, commercial loans and some forms of buy to let mortgages.
For conveyancing and commercial loans we act as introducers only.
Your property may be repossessed if you do not keep up repayments on your mortgage.