Mortgages - What to consider
First-time buyers
First-time buyers tend to have lower deposits than second- or subsequent-time buyers who would be expected to have equity from their sale(s).Â
The available deposit is usually between 5% and 15%.
Interest rates are set by the ratio of loan-to-value (the LTV). A £95,000 loan on a £100,000 value = 95%. 95% is the maximum percentage offered by lenders on standard mortgages (family mortgages?) with correspondingly high interest rates.
The lowest rates are offered below 60% (50% with a couple of lenders), rising in 5% or 10% bands up to the maximum.
It is important to understand that it is loan-to-value not to purchase price unless the price is less than value. On the above example – paying £100,000 on a valuation of £95,000 with same £5,000 deposit produces an LTV of 100%.
Affordability is a critical factor for all borrowers but is perhaps especially significant for first-time buyers who, inevitably, are unable to provide a clear history of managing debt.
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First-time buyers
Home movers
Re-mortgaging
General
Products
Home reports
Affordability
Buy-to-let
Home movers
Moving home entails some of the pitfalls of first-time buyers plus a few new ones! Equity from sale can mean a larger deposit and hence lower LTV.
It can also mean being subject to an early redemption penalty (ERP). Mortgage products, especially fixed rates, invariably carry an ERP; borrowers are tied-in to the deal for the duration of the deal two years on a two year fixed etc, or to a specific date. repaying the loan within that period, eg on sale, will cause the penalty to be charged. This is usually a percentage of the then mortgage balance and can be 1% up to 5%. To avoid this potentially significant charge most mortgage products can be ported.
Porting means the rate and remaining product term is transferred to the new mortgage. It does not mean the lending conditions are automatically moved across. As an example – a change in personal circumstances, lower salary, increased costs with arrival of child – can result in the lender not offering to lend us much as before.
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Re-mortgaging
When a product ends the mortgage reverts to the lender’s variable rate – the SVR. this is likely to be higher than the ending interest rates. Variable rates can vary quite substantially between lenders. There can be a good reason for reverting to the variable rate (they are penalty-free) but it is usually better to move to a new deal with the same lender (product transfer) or move to another deal with a new lender – re-mortgage.
Re-mortgaging is only worthwhile if the current lender cannot offer a suitable or competitive product.
Changing lender takes longer and requires more paperwork. It also requires legal work and a valuation. Both are usually paid for by the lender. The legal work is carried out by a member of the lender’s conveyancing panel, not by your own solicitor.
The valuation may be done automatically (AVM), by a ‘drive-by’ or by a surveyor visiting.
Some lenders permit borrowers to move to a new product up to three months before the ERP ends. This is usually only worthwhile if the new rate is lower than the expiring rate. the facility is only available for product transfers, it is not possible to re-mortgage to a new lender three months early.
General
The default payment method is capital and interest AKA repayment.Â
Under this you pay an element of capital and interest each month, the balance between the two changing over the term ie as term progresses the capital element rises as the interest element correspondingly falls.
The longer the mortgage term the lower the monthly cost.
Interest-only (IO) is not generally available on residential mortgages. Changing the term on IO has no impact on the monthly cost.
Lenders often offer deals with cashback. This is paid when, or just after, the mortgage commences and can be a fixed sum eg £500 or a percentage of the sum borrowed. Inevitably interest rates are higher for these deals with the overall cost usually very similar to deals without cashback. They can however be worthwhile if the cash would be useful at the outset.
Similarly lenders offer deals carrying fees. These should provide lower rates than corresponding fee-free deals. Their value depends upon the sum borrowed and the product term. In simple terms paying £999 for a two-year fixed deal should be at least £42 per month cheaper than a corresponding fee-free deal.
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Products
There are three basic types – fixed, tracker, discount.
Fixed – as name suggests, the rate offered by the lender does not change throughout the product term. This can be a set number of years – two up to ten – or to a set date.
Trackers follow the Bank of England base rate. As such they are volatile, rising or falling with that rate. In practice, more recent products are ‘collared’ meaning they cannot fall below a certain level.
Discounts are rare, offered by a few building societies. Rather than base rate plus a rate they are variable rate less a rate.
A mortgage offer must be in place before conclusion of missives as after this you are committed to buy.
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Home reports
A property sold on the open market will have a home report. Lenders obtain a transcription (a two page synopsis) of the single survey.
Home reports have a ‘shelf-life’ of three months; in effect this means a little over two months at time of application.
If it is near or beyond this it should be ‘refreshed’. This means the surveyor revisits the property to ensure no fundamental changes to the property. The value can, depending on market conditions, change from original.
Affordability
Affordability is a factor on all mortgages and for all types of borrowers.
Most lenders use a ‘score card’ system in addition to their affordability calculator. Roughly it means the higher the LTV, the tighter the lender’s maxima and the better the credit score required.
Very roughly lenders use an income multiplier of 4.5 times. This can rise to 5.5 times for those on higher salaries. From this lenders deduct ongoing costs – loans, credit card debt, student loans, childcare costs and (occasionally) pension contributions – to arrive at a maximum borrowing figure. It is not necessary to have a poor credit history (missed payments, payday loans etc) to have a poor credit score. An absence of credit, not being on electoral roll, multiple addresses in last three years, can all impact on the overall score.
This can be a particular problem for first-time buyers; subsequent buyers do have a mortgage payment and settled address history.
As mortgages become commoditised, lenders move towards automated processes, producing decisions which cannot be over-ridden by even senior staff. A number of lenders still use human underwriters to consider cases, arriving at a decision based on the merits of the case rather than an algorithm run by a machine.
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Buy-to-let
There are three types of buy-to-let (BTL):
- Business
- Consumer
- Regulated
Business BTL is most common – a property bought or re-mortgaged for commercial letting.
Consumer BTL is for ‘reluctant landlords’ – borrowers who are forced to let due to circumstances eg unable to sell the property on moving to a new home.
Regulated BTL is where the property is let to a family member. Lenders do not permit this on business or consumer.
Generally on BTL the maximum LTV is 75% (a few offer 80%) and maximum loan based on the projected rental income. There is fairly wide spectrum of calculation methods but as a rough guide every £100,000 of mortgage requires a monthly rental income of at least £600.
Interest-only is permitted on BTL mortgages.
To view a full glossary of mortage related terms click here.
Balfour+Manson are happy to recommend Cornerstone Mortgage Consultants or Malleny Mortgage Solutions who offer independent, whole market, mortgage advice. Click on the links below for contact information.
