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Making the most of fixed-rate mortgages

Making the most of fixed-rate mortgages

Interest rates in the UK are still extremely low, although it may not seem that way to borrowers.  That means, mathematically, there is a whole lot more scope for them to move upwards than for them to move downwards.  With that in mind, borrowers might want to spend some time considering whether a fixed-rate mortgage would be the right choice for them.  Here are some points to consider.

Can I actually manage a mortgage at all?

If you are renting, then do your best to suck all the emotion out of the decision as to whether or not you want to “get on the property ladder” in the near future.  This can be very difficult, so you might want to enlist the help of a knowledgeable friend or financial professional).  If you are currently a homeowner and you have concerns about your ability to service your mortgage, then again, think long and hard about whether or not fixing your interest rate would really be the best approach or whether it might be best to sell now on your own terms and look for somewhere to rent.  This is probably an even harder decision than deciding whether or not to buy your first home, especially if there are children involved, but accepting reality now could end up being less painful than winding up in a foreclosure situation.

Does remortgaging make financial sense?

If you already have a mortgage then there’s nothing to stop you asking your existing lender if they’ll offer you a fixed-rate deal, but if they won’t, or you’d like to move elsewhere for a better offer, then you’ll essentially have to go through the whole mortgage-approval process all over again, with all the cost and hassle that entails.  Is the gain worth the pain?

Would an offset mortgage be a better option?

With an offset mortgage, you keep your cash savings with your mortgage lender, which sets them against your mortgage balance when calculating how much interest you are due to pay.  (Savers keep access to their savings and can use them as necessary or desired).  The basic idea is that it makes sense to forgo interest on your savings as it will be less than the interest you pay on your mortgage, which, in and of itself, is generally true (although it has to be acknowledged that there are different savings products with different rates so the sums can be a bit more complex than they might first appear).  In addition to the difference between the interest paid to savers and the interest paid by borrowers, there is also the fact that tax is charged on interest income.  Hence, if you are looking for ways to save money on your mortgage, then an offset mortgage could be an interesting option, particularly if you are a higher-rate taxpayer.

Would I benefit from the stability of a fixed-rate mortgage?

The real benefit of fixed-rate mortgages is stability, the security of knowing that your mortgage payments will be the same from one month to the next regardless of what happens with interest rates, however, this stability comes at a price as lenders which offer fixed rates will price them to reflect their perspective on what will happen in the future.  The longer the term of the fix, the harder it becomes to predict what will happen and hence the more a lender is likely to charge to protect themselves from the risk of making a loss on the mortgage.  In other words, fixed-rate mortgages may actually work out more expensive than variable-rate ones.  They also require you to have a plan of action for when the fixed-rate comes to an end, i.e. are you just going to accept a switch to a variable-rate mortgage or are you going to negotiate a new deal (or both)?

Your property may be repossessed if you do not keep up repayments on your mortgage.

What you need to know about mortgages

What you need to know about mortgages

In the UK, mortgages used to come in two main types, interest-only and repayment.  Now, it is practically impossible to take out an interest-only mortgage on a residential property (although it is still entirely possible to take out an interest-only mortgage on an investment property), which does relieve residential buyers in the UK from one key decision, but does leave them with another, namely, which specific type of repayment mortgage is the right one for them.

Standard repayment mortgages versus offset mortgages

Offset mortgages have been available in the UK for several years now, but they are still very much the newcomers in the UK mortgage market and as such may benefit from a bit of explanation.  The idea behind offset mortgages is that borrowers keep their cash savings with their mortgage lender, which then calculates the interest payable on the net amount (i.e. the outstanding balance on the mortgage itself minus the positive savings balance).  Borrowers keep access to their savings and can use them any time they need to.  In principle, this approach should provide a net gain as savers typically receive less interest income than borrowers pay in interest expense.  Objectively speaking, however, in and of itself, the calculation may be less straightforward as different savings products pay different levels of interest income and different mortgage products charge different levels of interest (and the same mortgage product may charge different levels of interest to different borrowers).  Having said that, it’s important to remember that tax is charged on interest income and hence forgoing it in exchange for reduce interest expense may generate meaningful savings, particularly for higher-rate tax payers.

Variable-rate mortgages versus fixed-rate mortgages

In and of themselves, variable-rate mortgages and fixed-rate mortgages probably need no further explanation, as the old saying goes, the clue is in the name.  It can, however, be rather more complicated to decide which one is right for you.  In theory, it might seem like a good idea to go for a variable-rate mortgage while interest rates are heading downwards, but fix when they look likely to head upwards again.  That way, you benefit when interest rates go down, but limit your losses when they go up (again).  In practice, however, there is a very real problem with this theory, which is that lenders are only too well aware of the fact that fixed-term mortgages shift the risk of interest-rate changes from the borrower to the lender and hence generally charge a premium to protect themselves from this risk.  In addition to this, lenders will typically only grant fixed rates for a specific period of time, and the longer that period of time, the higher the “fixed-rate premium” will be as the lender is assuming a greater degree of risk.  Once this initial period is over, you will either have to renegotiate another fixed-rate deal or move to a variable rate.  In other words, fixed-rate mortgages can work out more expensive than their variable-rate counterparts, plus they can involve a bit more administration.

On the other hand, however, fixed-rate mortgages do give borrowers stability and the reassurance of knowing that their payments will be the same from one month to the next regardless of what happens with interest rates and for some people this stability may be worth the extra money.  In particular, fixed-rate mortgages may be of benefit when interest rates are showing some level of volatility, perhaps going up or down a little each month, rather than either remaining constant or trending clearly in one direction or another.  In this situation, knowing that you’re going to be making the exact same mortgage payment each month, at least for the length of the fixed-rate period, can make budgeting a whole lot easier.

Your property may be repossessed if you do not keep up repayments on your mortgage.

 

A beginner’s guide to property investment

A beginner’s guide to property investment

If you’ve been paying attention to the financial news, you’ll probably have noticed that there have been numerous articles highlighting the increasing challenges faced by property investors in general and buy-to-let property investors in particular.  The fact still remains, however, that the UK has a high demand for property and especially for high-quality rental property.  This means that there are still very respectable profits available to astute property investors who operate in the right way.  If that sounds like something which would interest you, then here is a beginner’s guide to property investment.

It’s not just an old joke, location really does matter

If you’re planning on managing a property yourself, then you’re probably going to want to look for properties which are within practical travelling distance of where you live.  These days, however, property investors, especially beginners, might want to give serious consideration to using a lettings agent to ensure that every aspect of their buy-to-let business is managed in total compliance with the law.  This does add to costs, but it also means that investors can look at a far greater range of locations since they will not need to travel to them personally (or at least not often).

Teamwork makes the dream work

For “hands-on” investors, having an address book full of useful contacts (such as reliable and proficient tradespeople) can make life go so much more smoothly.  For “hands-off” investors, a good lettings agent can be more than worth their fee.  In either case, having an accountant on board is not just a convenience from the point of view of managing your tax returns with minimal hassle, but an investment from the point of view of minimizing the amount of tax you have to pay.  You may also want to have a lawyer on your side, particularly if you are a “hands-on” investor.  As previously mentioned, the UK buy-to-let market is becoming increasingly regulated and penalties for non-compliance, even inadvertent non-compliance, can be very severe.  You might also want to consider becoming a member of relevant associations and other networks as a handy way of keeping on top of developments in the property market and of benefitting from other people’s experience.

Make sure your portfolio is built on solid foundations

A rising tide floats all boats and a rising property market effectively gives property investors some leeway to make mistakes and escape unscathed (or with very little damage done to them).  When the property market is stagnant or falling, property investors need to tread more warily.  This has always been the case but recent developments have made it even more important that investors get their sums absolutely correct right from the off.  In this context, there are two changes which are of particular note.  The first is that Mortgage Tax Relief is in the process of being abolished, which could have significant implications for investors on higher incomes.  One way to deal with this is to hold property within a limited company, however, this carries a number of implications which need to be clearly understood before a property investor can make an informed decision as to whether or not this is the right approach for them.  It’s also worth noting that if you are a new property investor and choose to go down this road, you almost certainly want to buy your property through the company right from the start to avoid the costs of transferring it into the company further down the line.  Secondly, the government has now finally banned landlords charging additional fees to tenants, which means that it is now utterly vital that property investors have a clear view of all the expenses they can reasonably be expected to incur (and ideally a margin of safety) so that these can be incorporated into the rent tenants pay.

Your property may be repossessed if you do not keep up repayments on your mortgage.

The FCA does not regulate some forms of buy to let mortgages.

The FCA does not regulate tax planning and we act as an introducer for it.

 

A beginners guide to mortgages

A beginners guide to mortgages

For many people buying a house means getting a mortgage of some description.  At a basic level, a mortgage is just a loan secured against a property, however, once you dive a little deeper there is a level of detail which it can be helpful to understand.  With this in mind, here is a beginner’s guide to mortgages.

Residential mortgages and buy-to-let mortgages are very different

Although the basic principle behind them is the same, they work to very different sets of regulations.  This means that if you buy a house with the intention of living it and then decide you wish to let it out in its entirety, you may well have to change your mortgage unless you are letting it out to a close family member, in which case your mortgage lender may permit it.  Taking in lodgers is more of a grey area and will come down to a lender’s individual policy.

Residential mortgages typically require the property to be occupied

The basic idea behind residential mortgages is that you are buying a property in which to live, rather than one to let out or one to leave empty, both of which carry additional risks.  Obviously, lenders are aware that homeowners are going to leave their property empty some of the time, e.g. to go on holiday, but there will typically be limits to this, again, check your lender’s policy.

Residential mortgage lenders have to abide by the rules of the Mortgage Market Review

In very simple terms, mortgage lenders used to be able to work on rules of thumb based on multiples of income.  These days, however, (post the Mortgage Market Review), multiples of income may still be a handy guideline as to what level of mortgage you could be offered, but always keep in mind that post the MMR, lenders are obliged to look past headline income figures and look into the details of where your money is going now and where it is likely to end up going in the future.  There are two points to take away from this.  One is that you may find yourself being offered less of a mortgage than you expected and the other is that you may have to accept your (financial) life being scrutinized in detail.  Remember, this is nothing about you personally, it’s just the way the rules work these days.

Interest-only mortgages have basically disappeared from the residential market

While making predictions is always dangerous, it’s hard to see how interest-only mortgages could make a comeback to the residential market any time soon.

Offset mortgages are still fairly niche but available

The basic idea behind offset mortgages is that you hold your cash savings with your mortgage lender and these are used to offset the balance on your mortgage.  This means that although you lose out on interest income, you also pay less in interest expense, which should work out as a net financial win for you, especially for higher earners, who will need to pay tax on their interest income.

Fixed-rate mortgages offer security, but usually at a price

The key point to understand about fixed-rate mortgages is that they are priced so that the lender still has a decent chance of making a profit.  They are also time-limited, so the lender has a floor to their potential loss (or even just their loss of profit).  This means that they can actually work out more expensive than variable-rate mortgages (depending on circumstances and whether the fix is absolute or allows you to benefit from reductions in interest rates while capping the extent to which your repayments can be increased in response to them).  The benefit of fixed-rate mortgages is that they offer stability and security.  It is up to each individual to decide if this benefit is worth the price.

 

Your property may be repossessed if you do not keep up repayments on your mortgage.

The FCA does not regulate some forms of buy to let mortgages.

Some interesting facts about interest rates

Some interesting facts about interest rates

At a very basic level, interest rates are percentage fees levied whenever one person has use of another person’s money.  While the headline numbers can look small, they can have a very big impact so it really does pay to understand how they work.

Interest rates can be simple but they are more likely to be compound

Simple interest rates are based purely on the initial sum lent or borrowed.  For example, if you lent someone £100 and charged 1% per annum simple interest, then each year you will receive £1 in interest.  If, however, you charge 1% per annum in compound interest then the first year, you will receive £1 in interest but the second year, you will receive £1.01 in interest.  This may not seem like much of a change but as the years go by, it will add up.

That was, of course, a very simple example.  In reality, while simple interest really is simple, compound interest can be much more complicated as there can be all different kinds of ways of calculating it, which is why the annual percentage rate (APR) can come in very useful as a guideline to your financial “worst-case scenario”.

Different people (and companies) can be charged different rates for exactly the same product

If two different people (or companies) apply to exactly the same lender for exactly the same product, they can still be charged different rates for it.  This is because the lender will assess risk and reward on an individual basis.

For example, let’s say two borrowers want to buy identical houses on a new-build development.  One has a 10% deposit and is self-employed (albeit with the required level of documentation to show income) and the other has a 25% deposit and is fully employed, has been so for several years and works in a skilled and fairly secure profession.  It’s easy to understand why a lender would see the second borrower as being far lower risk and hence want to attract them with a lower interest rate.

The good news here is that being aware of this reality is a crucial first step in understanding what it means for you and hence what you need to do to manage it.  This basically entails looking at your situation as a whole and deciding where you are prepared to make compromises and where you are not.  For example, if you are currently employed but want to go self-employed, then it may be best to wait until after you have bought a property and been approved for the necessary mortgage, or, if you are already self-employed, then you may want to make sacrifices elsewhere in your life so you can build as big a deposit as you possibly can.

Interest rates are in a constant battle with inflation

If you’re a saver then the only way you can make an effective (i.e. real-world) profit from your cash deposits is by earning an interest rate which is above the rate of inflation.  If you are a borrower, then the only way you can earn a profit on the money you borrow is by generating a return which beats inflation after you have paid your lender interest on the sum which, as we have already seen, needs to make them a profit after inflation.  Whatever way you look at it, inflation is the enemy of profit whether that profit comes in the form of interest rates for savers or investment returns for anyone.  Of course, the fact that people do regularly manage to beat inflation shows that it is possible, however, it is important to keep the effects of inflation in mind when taking any financial decision, including assessing interest rates.

Your property may be repossessed if you do not keep up repayments on your mortgage.

 

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