Mortgage Deals and Reading the Small Print
MORTGAGE DEALS – WHAT ARE AVAILABLE
Whilst these difficult times are with us and even though house sales have been given the green light to commence again, financial constraints may still affect the housing market.
We all want to either buy or sell at the best price, but the other major factor is mortgages. Obtaining an ideal mortgage deal makes the best possible financial sense and is now more than ever, an important factor.
What information affects the type of mortgage deal we can expect to be offered?
We have seen in a previous article that our credit score is very important, thereafter the factors are:-
This is the calculation made by a mortgage company when they decide whether or not to lend and if yes, how much. An applicant’s expenditure is scrutinised and confirming documentation will be requested. So, have such things as bank and credit card statements ready to present to the potential lender. This should speed up the process. They will look at debt repayments of credit cards, and loans, as well as lifestyle spending for example, eating out and socializing – weighing up income against monthly expenses and outgoings.
Along with your credit score, salary and personal details, a lender is looking to see how responsible your are. Simple things such as being registered on the electoral role will count positively toward their overall view. Not unexpectedly, a county court judgement registered against you will be a big negative, to the point it can be the main cause of a refusal to offer a loan.
Repayments – Proof of Income
Affording mortgage repayments is a must, the Financial Conduct Authority ( FCA ) insists that all lenders ensure that repayments are within your means. Proof of income is the first port of call, and thereafter the lender may look at your employment history. As with the bank statements, have your last three payslips available for the lender to view.
This can affect older applicants, if the loan extends into retirement the affordability aspect becomes crucial. Here, proof of income will come from pensions and investments whether now or in the future. Once again have the information readily available this really assists the process and speeds up the decision making.
TYPES OF MORTGAGES
There are various mortgages deals and opportunities available. Choosing the best one for you and your circumstances can save you a great deal of money over the long term.
Variable rate mortgages – which are broken down into tracker mortgages and discount mortgage deals. The former tracks the Bank of England base rate, which is currently at an all time low of 0.1 %. The discount mortgage is more predictable as it is a rate chosen by the lender and fixed with a discount amount. An example of the variable rate is 4% and the discount is 1.5% the interest rate charged on your loan is therefore 2.5%.
Fixed rate mortgages – there are many mortgage deals available with various terms of fixed rates from between two to five years. When the fixed terms comes to an end you are usually moved to a standard variable rate.
Standard variable rate mortgages – The rates for these are unique to each lender. These rates move in line with the Bank of England interest rate, so if that rate rises the costs of this type of mortgage also increases.
Interest only and repayment mortgages – The first type is where you repay the interest only on a monthly basis leaving the amount originally borrowed as a lump sum to repay at the end of the mortgage term. A repayment mortgage is setup so that each month you repay some of the capital as well as the interest. The result of this repayment method means that at the end of the term of the mortgage you have paid off not only the interest but the initial capital borrowed.
Flexible mortgages – Often more expensive overall but give the flexibility to under or over pay as you find you have a need or are able to.
Specialist mortgages – as the name suggests in certain special circumstances these more unusual mortgages can be found. They include for example, mortgages which allow for bad credit history, for the self employed and where a guarantor is either available or required.
You can find out more details on the types of mortgages, here.
FIRST TIME BUYERS
This group have by far the highest variety of opportunities available to them by way of mortgage deals. There are Government Schemes which offer incentives to assist the first time buyer in various different ways:-
Shared ownership schemes – these allow the first time buyer, through housing association schemes, to purchase part of the property and pay a subsidised rent on the balance. Then over time the remaining share in the property can be bought until you own the whole house. Usually a 10% deposit, for the share you are buying will be needed.
Help to buy schemes – if you have a 5% deposit, the government will lend you a further 20% of the house price ( more if the property is in London ) in the form of an equity loan. The loan can last for up to 5 years and during that period is interest free.
Some lenders are offering usually high percentages of up to 85% of the value of the property, due to the extra ordinary circumstances surrounding and caused by the Corona Virus and the problems facing many who need mortgages. Pre – Corona Virus there were some of the lowest mortgage deals ever known on the market, and there are still some of these offers available with interest rates as low as 1.5 % but the loan to value with this rate is 60%.
THE SMALL PRINT AND MORTGAGE DEALS
Reading the small print has always been of paramount importance when considering a particular mortgage deal as often the headline does not provide the reality in the details shown in the small print.
Low rate offers – The attractive headline rates being offered can look very tempting to some. Look below the surface and into the small print before you say yes. There are often hidden fees and charges. Whilst fees may look relatively small against the size of the mortgage, especially when added to the mortgage. They will soon look less attractive if they are £1000 each time you re-arrange your mortgage. Interest on £1000 over 25 years soon adds up to a substation sum. Some low rate mortgages are only for two years so beware of adding these fees to the loan each time you move to a new rate.
Mortgage arrangement fees are presumed to cover the cost of arranging the loan. They can vary from a couple of hundred pounds to over two thousand pounds. This variation is not just about the amount you are borrowing with the mortgage but also the interest rate. Generally the lower the interest rate you are offered the higher the arrangement fee will be. If the term of the mortgage is short, say two years, have a good look at it as the reality may be that the arrangement fee will affectively raise the interest rate so as to offer no advantage. It can be seen as a back door way for lenders to claw back some of the lost revenue through offering low interest rates. Looking at the annual percentage rate (APR) will give an idea of the total costs of the arrangement fee and it is always good to make comparison between lenders.
A final piece of the information to look at is the size of the loan to the size to the arrangement fee charged. With an arrangement fee of £1000 and a loan of £200,000 the percentage of the fee to loan is 0.5%. However if you are borrowing £60,000 and the fee remains £1000 the percentage is much higher and becomes 1.6% of the overall loan.
The arrangement fee added together with other fees such as valuation fees, Clearing House Automated Payment System (CHAPS) Fees and mortgage account fees all need to be considered against the eye catching headline of a mortgage deal.
Assuming you have already obtained your mortgage offer and appointed a conveyancer, your conveyacer will usually produce and provide you with a mortgage advice letter, detailing the various costs we have explained above, prior to completion. If you still have more questions regarding your mortgage offer, speak to your mortgage broker.