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Tag: mortgages

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 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.

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