Archives for Mortgages

How to Use a Mortgage Calculator

I’m not just talking about using a mortgage calculator to work out what the monthly payments will be but how to make use of a calculator that shows the ‘amortization’ or monthly & yearly breakdown of payments and balance as well as the difference an overpayment could make.

Anybody who has any exposure to mortgages will know there are several options available which include fixed rate deals, trackers or lender’s ‘standard variable rates’.

Fixed deals last for a set number of years and for those set years the interest rate stays the same.

Tracker deals may offer an interest rate that ‘tracks’ another rate such as the Bank of England base rate with a set percentage difference. e.g. BBR (Bank Base Rate) +2%. (The base rate is 0.5% so the tracker rate would be 0.5% + 2% = 2.5%).

Variable rate or lender’s Standard Variable Rates simply start at a certain rate and can fluctuate up or down from that point. These rates are usually higher than fixed or tracker deals to encourage people to tie themselves into a lower rate deal with a particular lender (or to make a tidy profit from people unable to switch lender due to credit problems or reduced income).

A fixed rate deal offers security because monthly payments will not change for the term of the deal but what if the safety of fixed payments is not your main agenda?

What if the thing that really motivates you is getting clear of your mortgage as quickly as possible?

In order to clear your mortgage more effectively and pay less interest in the process it will be important to know if a fixed deal or a tracker will leave you better off.

Will the outstanding balance be lower after a 2 year deal at 3% compared to a 5 year deal at 5%…?

For the purpose of this exercise I will be using the mortgage calculator I put here:

http://www.creditmarket.co.uk/mortgage-calculator/

I hunted high and low for a good calculator to place on that site and I think I found a good one!

It produces amortization tables with a month-by-month breakdown.

Let’s look first at an example of a £150,000 mortgage over 25 years.

Assuming an initial fixed rate deal of 3% the calculator shows this:

If you then click on the ‘Amortization Schedule’ tab it shows this:

As you can see it shows a monthly breakdown for the first 12 months and you can scroll this amortization schedule to look at every month for the full 25 years.

In the graph the black line represents the timespan which is 25 years. The red sections are the interest (which goes down over time as the debt reduces) and the green sections are the ‘capital’ (how much you are actually paying off the debt).

The big thing wrong with this is that fixed deals only last for a set number of years, typically 2, 3 or 5.

Going for the middle, if the mortgage is on a 3 year fixed rate then we need to scroll down to month 36 and look at the numbers.

This shows the outstanding balance after 3 years.

Now that we know where to look, let’s see the difference between taking a 2 year fixed at 2.49% with a £995 fee compared to a 2 year mortgage at 3.45% with no fee.

2.49% with £995 fee:

Note the ‘total’ shows £150,995 to include the fee – this assumes the fee is added to the loan.

3.45% with no fee:

As you can see, even by adding an extra £995 to the mortgage, a rate of 2.49% will see you about £104 better off.

But wait! The mortgage at 2.49% works out at about £676/month so in 24 months costs £16,224. The mortgage at 3.45% is about £746/month or £17,904.

The 2.49% mortgage saves £17,904 – £16,224 = £1680 over 2 years and still reduces the mortgage by over £100 more!

Worth finding out in advance? I think so.

Now how about this option. Take the £1680 saved and divide by 24 = £70.

Instead of saving this, how about using it to overpay the mortgage each month? Put £70 in the ‘overpayment’ box and:

The mortgage could be paid off in 21.9 years and after 2 years the debt is £1721 lower even though you only paid an extra £1680.

Try more overpayment figures and see how drastically you can reduce a mortgage by overpaying.

If making overpayments it’s important to know there could be penalties if you’re tied into a fixed or tracker deal but probably not if you’re on the lender’s SVR (standard variable rate).

When comparing tracker rates it’s also important to know the rate could change so any calculations can only be estimates.

Thinking About Mortgages Again

After several years skirting around the field of financial services I finally decided to obtain the necessary qualifications to provide mortgage advice, in 2007.

Yep, I became a qualified mortgage adviser about 6 months before the industry collapsed. It was a fun time.

Like many advisers, when the mortgage enquiries started to dry up, I started looking more closely at protection products like life insurance, income protection etc. and for the last few years that’s where I have been focusing my efforts (I even have some testimonials from happy customers!).

At one time I toyed with the idea of taking financial adviser exams but there were so many changes going on I waited but I have recently picked this up again and I’m part way through the exams (reading about pension tax & law is like trying to read a foreign language).

As a qualified mortgage adviser I am still registered with several lenders and I get regular updates about the industry and new product releases. Just today I received one such email that made me think it might be time to start looking at mortgages again.

There is hope for first time buyers!

If they earn enough money, have a squeaky clean credit history and can raise the necessary deposit.

Those have been the key problems for first time buyers of late but recently products have become available that take at least one of those out of the equation.

90% loan to value mortgages at sensible rates with sensible fees.

The rate I’ve seen advertised is 4.84% for a 2 year fixed rate with a £495 fee.

There may be better rates available from other lenders. I’m going to look into that now too.

Some might say a rate of 4.84% is not really competitive when other lenders are offering rates below 2.5% for lower loan-to-value products but that’s only if you look at a snapshot of the present.

If you go back a few years those kinds of rates were very competitive. Even at lower loan-to-values.

Things don’t appear to be too bad for first time buyers but of course the cost of living has gone up and lenders are still trying to avoid risk like the plague so actually getting accepted is another thing altogether.

Does anybody reading this know of any first time buyer success stories they’d care to mention?

The Impending Doom of the Interest Only Mortgage

Interest only mortgages first came to our attention alongside the infamous endowment policy (but that’s another story), but whilst endowments are no longer popular because of their poor returns and inflexible properties, interest only mortgages have remained a firm favourite with homeowners, mostly because it is cheaper to pay interest only instead of capital and interest.

Now they are coming of age and lenders as well as borrowers are beginning to realise that the monthly savings have been a false economy.

Many borrowers who said they had an investment vehicle such as an ISA or a pension were not telling the truth and as the mortgage expiry date approaches panic is setting in because there is no way that the capital can be repaid on time.

The result in many cases will be a forced sale and possibly a homeless family or elderly couple following that. These regulated loans cannot easily be extended just because it suits the borrower and lenders have already started to show their teeth when faced with this situation.

Not only is the writing on the wall, but it is written in very large letters. The question arises as to where should any blame be laid?  Probably there is no single culprit but it is clear that it will be the borrowers who suffer the most. If only people would review their finances on a regular basis!

Too late – the FSA has woken up to the problem and is warning lenders to be more careful in future when asked for an interest only mortgage. Virtually no lender will allow it if the loan exceeds 75% of the property value and some go no further than 50%.

Lenders now want confirmed evidence of repayment vehicles which in many cases must be existing products, sufficiently well funded to repay the capital at a prudent rate of interest.

Halifax recently made some changes to their acceptable list of repayment vehicles and all new interest only Mortgage Applications must be supported with evidence.

They will no longer accept cash savings as a repayment vehicle for any new interest only lending.

Pensions must have a minimum current value greater than £1 million and up to 25% of the current fund value can be used to support interest only lending. So even if you are lucky enough to have a pension worth £1 million it will still only support a £250,000 mortgage – even if that mortgage is still going to run another 25 years!

How many people do you know with pensions worth £1 million or more?

All other repayment vehicles, or combinations of repayment vehicles, require a minimum current fund value of £50,000 of which up to 80% of the current fund value can be used to support interest only lending. So if you have an ISA with £100,000 in it, you can use it to support borrowing of £80,000.

As you can see, lenders just don’t want the risk on their books so they are making it incredibly difficult for anyone to qualify for an interest only mortgage.

Exceptions are buy-to-let properties where it is still acceptable to pay just the interest and to use the eventual sale of the mortgaged property as a repayment vehicle and any capital gain is considered the return on investment. Whether that is a good idea depends on all the particular circumstances.

Anyone with an interest only mortgage who is concerned about the future should take stock of their current predicament and make in-roads to reducing the debt by switching to a ‘repayment’ mortgage if they can afford it or by making ‘overpayments’.

The majority of lenders allow limited overpayments to be made (usually 10% of the balance per year) and while interest rates are low it seems sensible to overpay within a comfortable budget and so reduce the capital debt.

If in any doubt, consult a professional adviser. Or to put it another way – Don’t take chances – take advice!

Some of these words were kindly donated by a friendly Chartered Financial Planner and I just put them in the right order!

House Prices to Stay Flat for 10 Years! – Oh No!

A bit of a shocker of a headline! House prices to stay flat for 10 years!

That was the headline I read for an article I received today based on discussions from the BSA conference.

I don’t know why I only received this today when the conference took place in April and I’m not sure how ‘on the pulse’ the delegates are at the ‘British Sociological Association’ when it comes to the wonderful world of finance and mortgage lending.

The article didn’t exactly say who had made this claim but it did reference a Mr Robert Parker, head of strategic advisory group at Credit Suisse (and he should know a thing or two).

Mr Parker is said to have commented that we, in the UK, are changing the way we look at property and returning to a frame of mind that regards houses as ‘homes’ as opposed to money making commodities.

Two competing opinions suggest that house prices will remain stagnant for a time due to 1/ Affordability and 2/ Availability of credit

John Cridland, director general of CBI is going with “Until wages catch up, the forecast of flat house prices is probably right” and Peter Griffiths, chief executive of Principality Building Society disagrees insisting that the bigger issue is the availability of credit.

I think the stigma of the crash is still making investors the word over a bit skittish when it comes to investing in property so they are not making the money available to the lenders.

Another reason they don’t want to invest is because they don’t see much in the way of short term ROI due to the lack of borrowing taking place.

People can’t buy houses because they don’t make enough money to save up the percentage deposit required. The average household does not have a great deal of spare cash so saving for a deposit is a mammoth task (or would that be ‘tusk’?)

Less people are in a position to borrow at the moment but if all of a sudden all the major lenders decided to offer 3%, 5 year fixed rate mortgages at 95% LTV something would surely happen.

So both Mr Cridland and Mr Griffiths have a point.

Lenders aren’t going to all of a sudden start offering such great deals because most of them are still trying to convince the market they are on top of their bad debt problems of the past. Not to mention the billions they’ve had to pay back in PPI claims.

Households aren’t about to start putting enough away to quickly come up with the deposit they need.

So is the projection of 5 – 10 years accurate for a flat housing market?

I’d go with closer to 5 but probably not as long as 10.

The economy needs to gain strength before salaries can increase so the country regains stability and creditworthiness. People will be able to save, banks will have more capital and will also be more stable which in turn will attract money for lending.

I could be wrong but it seems the banks are still very much at the heart of the problem but they are not alone. The Government may profess to be doing all it can but the ‘credit crunch’ (dust that off and use it again) left a massive hole which is taking a long time to fill.

I heard the books should balance by about 2015..?

Mortgage News – From the Inside

From the ashes of disaster grow the roses of success. The problem is the ground isn’t very fertile and nobody’s watering the bed.

We’re in a recession again albeit more of an economy that is ‘bouncing along the bottom’ than a sharp drop and I don’t think the title ‘double dip’ is strictly accurate either. Too much time has passed since the last recession and it is barely a ‘dip’ this time around.

It is plain to see however that the outlook is still pretty grim.

National Australian Bank has announced the loss of jobs at Yorkshire and Clydesdale Banks between now and 2015 because the forecast for the European economy isn’t looking good for several years to come.

I guess this means interest rates are likely to be kept low for a few more years, if possible, to try and help households keep their heads above water and to encourage lending to businesses.

But what happens if mortgage lenders end up being forced to pay higher rates of interest on the money they borrow from money markets because of the state of the UK’s economy and the increased risk associated with lending to the UK? This would increase mortgage interest rates despite a low base rate at the Bank of England which would in turn put pressure on households, reduce the amount of disposable income and put more strain on an already fragile situation.

But if interest rates do go up it will actually be good news for – mortgage advisers!

As things stand, interest rates are low. Many home owners are currently sat on their mortgage lenders Standard Variable Rate because there simply aren’t any offers out there that can beat the rate they are on.

I personally know mortgage advisers with hundreds of existing clients who are just sat on their lenders SVR because at the moment it’s the cheapest place to be.

Imagine this, a mortgage adviser has 300 clients and all of a sudden they all want to remortgage. If the adviser makes an average of £1000 in fees and commission from each, there’s a quick £300,000 to be made!

So any mortgage advisers still active in the industry with a good solid client base are itching and twitching at the prospect of interest rate rises.

But every morning they wake up and look out the window only to see that things have not improved and today will not be their lucky day.

Some consolation may come from the fact that active independent mortgage advisers are now a rare breed. I heard (and I need to really double check this) that there are now only about 5,500 active independent mortgage advisers in the UK.

There are more advisers working but they include advisers in banks and building societies who are limited to what they can sell.

So if that figure is true and there are only 5,500 active independent advisers they will all be very busy and very happy when things start to improve – if they can wait that long!

UK First Time Buyers Given a Boost with a 95% LTV Product Launch

This isn’t one of my own but a useful tidbit nonetheless. I have some thoughts and ideas floating around for some original articles but January has started with a boom and free time is hard to find!

So here’s something someone else wrote!

Newcastle Building Society has launched two competitive mortgage schemes to help first time buyers (FTB) with a low deposit take their first steps to owning their own home. 

With recent research highlighting that affordability for first time buyers is at the best level since before the credit crunch the Newcastle’s new products may be a timely introduction.

Newcastle Building Society’s two mortgage deals require a minimum 5% deposit. One product is a two-year fixed rate at 5.95% (APR 6.3%) with a £800 Completion Fee and £195 Reservation Fee.

Or, as an alternative, a fees-free option is available to suit those who want to use their available funds to maximise their deposit. This product is a two-year fixed rate at 6.25% (APR 6.2%) and comes with no completion or reservation fees.

Both products have a minimum loan amount of £10,000 and a maximum of £250,000 and are available in both NBS’ branch network and through the telephone-based direct mortgage team to make it as accessible as possible.

These products are also available for re-mortgages, as well as first time buyers and other home movers.

Steve Urwin, Sales and Marketing Executive at NBS: “When it comes to the housing market, it is a well known fact that first time buyers are key to keeping it mobile.

“Additionally, there is no doubt an appetite and ambition to own a home amongst this market still exists. However, the big hurdle for them is to obtain a mortgage deal that suits their specific needs with a smaller deposit requirement.

“Our two new mortgage products ultimately aim to give those new borrowers the chance to get onto the property ladder sooner rather than later.”

PRODUCT INFO:

The product features are outlined below:

5.95% (APR 6.3%) Fixed Rate until 31st March 2014

£800 Completion Fee (can be added to loan up to max LTV)

£195 Reservation Fee (payable upfront and non refundable)

Minimum Loan £10,000

Maximum Loan £250,000

Max LTV 95%

Early repayment charge of 3% if repaid before 31st March 2014

6.25% (APR 6.2%) Fixed Rate until 31st March 2014

No Completion Fee

No Reservation Fee

Free Standard Valuation (on properties up to £500k)

£300 Cashback (payable 14 days upon completion) or Free Legal Fees (for re-mortgages only in England and Wales)

Minimum Loan £10,000

Maximum Loan £250,000

Max LTV 95%

Early repayment charge of 3% if repaid before 31st March 2014

100% Mortgages are Back! – Or are they..?

A new product that has appeared on the mortgage scene is being called a 100% LTV Family Guarantee Mortgage.

This has been designed for families who wish to help their children get on the property ladder.

As the name suggests, a family member must provide a guarantee and that guarantee must come in the form of security on their property and must cover at least 25% of the child’s new mortgage.

What’s more, the security on the family member’s property must not take the total combined liability of all the secured debt (mortgages, loans etc.) above 75% across both properties.

eg: Parents have house worth £250,000 with a £100,000 mortgage.

75% LTV on parents home would be £187,500

Child wants to buy £120,000 flat.

25%  of flat value = £30,000

A £30,000 charge is placed on the parents property and the child gets a mortgage of £120,000 (provided the child can afford it).

In this example, if the parents mortgage was over £157,500  (75% less £30k security) it would not be possible.

For a small percentage of the population this represents an opportunity for parents without liquid funds available, to help their children onto the property ladder.

The risk is there for the parents because they could be forced to sell their home if the child defaults.

The risk is there for the child because their parents would disown them if they didn’t keep up the payments and as a consequence put the family home at risk.

The risk to the lender is minimal because they could repossess the £120k flat to cover all of the mortgage and they would also be able to go after the security in the parents home.

So although the borrower has a 100% mortgage, 25% of it is covered by security in the guarantor’s property.

The offer is a 3 year fixed at 6.48% (repayment only).

For the few who qualify for this product, it might actually work out cheaper for the parents to dip into their equity at a lower rate and gift the deposit to their child. The only drawback then is the parents would have to make the repayments on the money they raised – or try to get money out of their offspring!

Guarantees can come from parents, step parents or grandparents.

Independent advice could help determine the most appropriate solution!

Equity release calculators – what are they and how do they work?

Equity release; a term met with instant distaste and fear, however this out-dated approach could may well be having an impact on how people view their financial options during their retirement years with many having little knowledge and understanding of how it truly works and what rules have now been put in place to regulate the industry.

Equity release could be a way to alleviate the stresses for many retirees who are struggling on low pension plans and reduced state benefits, coupled with the rising costs of day to day living.

If you’re wondering about equity release and a little unsure of where to begin, then a good start is to start at the beginning…naturally!

Simply put, an equity release plan is a way of releasing cash tied up in your home to spend as you wish. The cash released can be drawn down in stages or taken as a cash lump sum. There are typically no monthly repayments to make and you are able to stay in your home until you and your partner pass away or move into long term care.

Before the equity release industry was regulated, many people who had taken out an equity release plan ended up leaving their loved ones with debt as the loan plus interest accrued on the loan exceeded the value of the property. Nowadays there are equity release plans available which are SHIP approved (Safe Home Income Plans) and ensure a ‘no-negative’ equity guarantee, allow you to stay in your home for life and enable you to move home if you wish (subject to provider criteria).

There are currently three types of equity release schemes available on the UK market. Lifetime mortgages, drawdown lifetime mortgages and home reversion plans. All these plans have their own benefits and drawbacks, which you can gain further information on through the UK’s leading independent adviser, Key Retirement Solutions.

However, most of us want to skip that stuff and get to the nitty gritty facts and figures, which you can obtain from an equity release calculator. An equity release calculator works on the basis of your age and property value and calculates the maximum you could release through an equity release plan. An equity release calculator is completely free to use and can be found across many websites, however it is highly advised that you contact an equity release specialist after receiving your results so that you can find out more about the types of plans available to you.

At Key Retirement Solutions, they search the whole of the market to find you the very best plan. Their first consultation with one of their local advisers is completely free of charge and you have no obligation to commit to anything should you decide not to go ahead with a plan.

Mortgage Deals for a Limited Time Only!

I found it quite bizarre when in my inbox dropped an email with a limited 7 day offer on some mortgage rates from Abbey.

It’s the kind of marketing I’d expect from a closing down furniture shop!

A 7 day only offer on a mortgage product?! Is this the shape of things to come?

Now what could the reason be for such a limited time offer…?

Are Abbey a bit worried they’ll get mobbed with applications and struggle to handle the enquiries if they open the offer up for longer?

Or do they only have access to a limited amount of money to lend and they calculate 7 days is about the life expectancy of the funds in the current climate?

Will they run it for 7 days, process the enquiries and then run it again a few weeks later…?

I have no idea.

What I do know is how the offers compare to others:

Abbey’s 7 day offers are:

2 year fixed –  2.89% – 75% LTV – £995 booking fee (can be added to loan) MAX LOAN £1m – Completion deadline: Sept 30th 2011 Available to remortgage and purchase customers with free valuation and legals / £250 cashback

&

2 year tracker – <1.99% – 70% LTV – £995 booking fee (can be added to loan) MAX LOAN £1m NO COMPLETION DEADLINE (Offer valid for 6 months) Available to remortgage and purchase customers with free valuation and legals / £250 cashback

The thing to pay attention to here is the LTV (Loan to Value).

There are better deals at lower LTV’s but at comparable LTV’s to those above, I’ve had a little look around and the best comparable Fixed rate I can find is a:

2.99%, 2 year, fixed deal from the Yorkshire Building Society with a £995 fee up to an LTV of 75%.

So, just from a quick scout around the Abbey deal looks pretty good.

As far as the Tracker is concerned, once again the Yorkshire Building Society have a rate of:

2.39% for 2 years (and they go up to 75% LTV) with a £995 fee.

So once again, the Abbey offer looks like it could just pip the competition and top the charts for a week.

If you can find them and they are right for you…. get some proper advice before deciding what to do…. but alas, you don’t have long to decide!

Or do you… They might do it all again in a  few weeks!

Is it Time to Switch to a Fixed Rate Mortgage?

My mortgage has been on my lender’s Standard Variable Rate (SVR) for over a year now and once again the Bank of England has announced that the Base Rate is to remain at 0.5% for the 23rd month running.

So here I sit, safe in the knowledge that for another month my mortgage repayment will stay the same. The big question is, how much longer will it stay this way?

The talk of rate rises has been a buzz for sometime and as more time passes the louder the buzzing seems to be getting.

Markets were suggesting a 25% chance of rates rising today but a 25% chance isn’t that high.

If someone told me there was a 25% chance of winning the lottery I’d get my money out but it’s no comparison when it comes to trying to predict rate changes in this tumultuous economic climate.

When markets suggest there is a 75% chance or more that rates will rise, then the likelihood of an increase will be much more profound.

And the markets are suggesting a 75% chance of a raise in rates by May.

Here’s a good analysis of feelings and predictions: http://www.thisismoney.co.uk/interest-rates

But what of my mortgage?

Should I be thinking about a fixed rate for safety? I don’t think there’s much point considering a tracker at this stage because rates can’t get any lower. Even though trackers are still cheaper than fixed rates it wont take much of a rate rise to make them less competitive.

So I’m leaning towards a fixed rate but my worry there is what will rates be like in a few years time? If I fix my mortgage now for 2 or 3 years will it be a massive ‘rate-shock’ when I come to remortgage then?

I’m partially inclined to think not… Not because I don’t think rates will have risen by then but because rates have been exceptionally low for quite some time now and even if the base rate rises by 2% in 2 years time mortgage rates are not likely to sky rocket above and beyond the heights of late 2007 – 2008.

In early 2008 mortgage rates were about 5.6% for a 2 year fixed deal.

At the moment the average  is around 3% (if you want to pay a very high arrangement fee for a 1 year fixed deal the lowest is actually 2.14% – amazingly low but totally unrealistic as a product & Santander have a 2.65% offer but you have to go direct and they have on occasion been known to ‘cherry pick’ the best customers).

So if the base rate rises by 2% and Swap Rates do the same (currently about 2% for 2 year money) then mortgage rates might climb back up to around 5 – 5.5% ish.

Compared to a 3% product it would be a jump but compared to historical mortgage rates it’s actually not that bad!

Unless of course the cost of living goes up and income doesn’t, then it could be a squeeze….

Ah, the prevailing winds….