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FISCUS MORTGAGES - INFORMATION AND ADVICE |
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Questions & Answers (Q&A)If neither the FAQs nor the main site are able to answer your mortgage questions, then please submit a question and we'll endeavour to answer your query. 1. What is a mortgage? A mortgage or ‘home loan’ is a type of loan that is
used in the purchase of property. Usually you shall require a deposit
(say, 10%) of the property value, with the mortgage financing the
rest of the home purchase. The property purchased is used as security
or collateral for the loan. Should you default on the loan (miss
or not pay your mortgage repayments), this means that the lender
can repossess your property and sell it to recoup their loan. Remortgaging is the recalculation or renegotiation of the mortgage on your house, in order to get a deal which is better suited to your current financial circumstances. There are numerous reasons for remortgaging, as explained in our detailed remortgage advice section. The main reasons for remortgaging are:
3. How should I decide whether to choose an interest only mortgage or a repayment mortgage? With an interest-only mortgage, your monthly repayments pay off the mortgage interest only. The capital owed on the property remains the same. Lenders usually expect the borrower to put an “investment vehicle” in place that will pay the loan capital owed at the end of the mortgage term. A repayment mortgage sees repayments contribute to both the interest and the loan capital. This means that there is no need for an investment vehicle, but the mortgage provider may require you to purchase life cover, or “term assurance”, to insure the mortgage in the case of death. A repayment mortgage is a very simple loan proposition. You borrow a certain amount and you repay it in set instalments, with only the interest rate a possible variable. This contrasts with the need to develop an investment vehicle on an interest-only mortgage that is run independently of mortgage interest repayments. With an interest-only mortgage, your investment vehicle can benefit from a buoyant stock market, and in addition, some available investments have desirable tax benefits included. The flip-side, however, is that there is no guarantee that your investment vehicle will generate enough funds to cover the mortgage capital (although pre-emptive action can be taken if you realise that this will be the case). With most repayment mortgages, the bulk of early repayments are interest and a small amount of capital repayment, with later payments accounting for more capital. This means that if you plan to remortgage with relative frequency, a repayment mortgage may extend the effective mortgage term, suggesting it may be worth opting for the interest-only mortgage where capital and interest repayments are independent. For more information on the varying mortgages available, take a look at our Mortgage Types explanation. 4. Should I look for a CAT standard mortgage? CAT refers to Charges, Access and Terms and the standard was introduced
by the government to help mortgage lenders structure their products
in a way that ensures information provided to UK consumers is straightforward,
fair, and easy to understand. The official HM Treasury information on CAT mortgages states that they “…do not carry a government endorsement or guarantee, are not guaranteed to suit every borrower and may not be the best deal available.” For more information, please take a look at our detailed analysis of CAT standards within our Mortgage Advice Section. 5. What are Bank of England base (or ‘repo’) rates and how do they affect my mortgage? Each month the Bank of England’s Monetary Policy Committee (MPC) meet to decide whether to change the Bank’s base rate. The Bank of England’s role is to ensure maintenance of a low inflation environment (i.e. prices and wages do not rise greatly each year) and ensure that the UK economy remains in rude health. This is carried out through the changing of interest rates, known as Monetary Policy. Taxation (and spending it) is known as Fiscal Policy and is controlled by the Treasury. The Bank was granted ‘operational independence’ in May 1997, during Gordon Brown’s tenure as Chancellor of the Exchequer, so ensuring that the Bank works in the interests of society, rather than politically motivated changes to the interest rate. The economists within the MPC focus principally on inflation when deciding upon the correct repo rate. High inflation, broadly speaking, stems from a stronger than expected economy, resulting in an increase in the interest rate. Conversely, a weak economy leads to lower inflation, and so the bank is prepared to stimulate the economy by lowering interest rates. This stimulus is linked to a ‘mortgage effect’ as much as anything else. If the economy is performing poorly, lowering interest rates lowers tracker and standard variable rate (SVR) mortgage repayments. This leads to an increase in disposable income, and in theory, leads to an increase in consumption. This effect should therefore boost the economy. The effect works the other way round when the economy is booming. 6. What is the difference between a Standard Variable Rate (SVR) and a tracker mortgage? The SVR is defined by lenders as a rate that changes with market conditions. The tracker mortgage, on the other hand, varies only with the Bank of England base rate. The standard variable rate can be changed, in effect, to whatever the bank feels it needs (or wants) to charge. SVRs, like trackers, are still predominantly geared around the Bank of England base rate. The difference is that a tracker mortgage will be fixed at a specific interest premium above the base rate, while the standard variable rate premium can vary. The standard variable rate is generally considered to be the least competitive rate on the market and most people will find they are placed onto the SVR after initial fixed-term deals have ended. There are detailed explanations of Standard Variable Rate and Tracker Mortgages in our Mortgage Types section. 7. What types of flexible mortgages are available on the market? A flexible mortgage allows the borrower to benefit from a flexible repayment schedule. Different flexible features are all encompassed under the ‘flexible mortgage’ umbrella, with the most popular features being: penalty-free lump sum repayments, overpayment, underpayment (or ‘repayment holidays’) and some mortgage providers allow the borrower to increase the amount borrowed. Fiscus Mortgages takes a detailed look at the various features and benefits of flexible mortgages within our Types of Mortgages section. 8. Will I have to pay redemption fees if I change my mortgage? You may decide to pay off your existing loan early, possibly due to a windfall that allows you to clear your mortgage, or perhaps you are shopping around for a remortgage that provides a better deal. In many cases, you will have to pay an early-payment penalty, known as a redemption fee. Redemption fees will vary, not only from one lender to another, but for different mortgage products from a single mortgage provider. When applying for your initial mortgage, you should always enquire into any penalties that may apply and the timeframes involved with each penalty. You should not just accept a formula that explains how the lender calculates any penalty – insist on an actual ‘bottom-line’ cost that you would be expected to pay should you redeem the mortgage before the end of the mortgage term. As a general rule, most ‘offer’ mortgages (i.e. that provide cash-back or other discount mortgages) and fixed rate mortgages are likely to have the strictest redemption penalties. However, as stated previously, terms can vary widely from product-to-product; we can’t emphasize enough how important it is to ask about these fees before choosing a mortgage. 9. What is conveyancing and how does it work? Conveyancing is the act of transferring both the property and the Title Deed from vendor to purchaser. In property law, the conveyance may sometimes refer to the actual document that transfers ownership between the two parties. In a nutshell, this is where the lawyers (or unsurprisingly, conveyancers) get involved. You must appoint legal representation to ensure all the paperwork is carried out in an orderly fashion and that all necessary legal checks are carried out on the property in question. In the UK, a solicitor or conveyancer is authorised to perform this task. 10. What is a ‘mortgage in principle’? Does this mean that I have been accepted for a mortgage? When you find your perfect house, in today’s climate, you may have to act quickly to secure the property. To speed up the process from finding an ideal house to buying it, you could obtain a mortgage in principle before looking for a property. This is a conditional offer from a mortgage provider that states that they will in principle provide the mortgage you have enquired about, assuming the information you have provided is accurate. A mortgage in principle is useful to have, not only to indicate to Estate Agents that you are a serious purchaser, but also as a good price guide for you to bear in mind when you go out house-hunting. They are relatively straightforward to obtain, either by visiting a branch of a high street lender, or via telephone or internet. The flipside of all this, of course, is to remember that a mortgage in principle is not binding. They usually have a set timeframe for which they are valid (commonly 30-60 days), after which you have to obtain another. However, some lenders will perform credit checks before providing this document and this can adversely affect your credit score. It is therefore worth noting that you should not get a mortgage in principle too early in the property hunting process but should wait until you at least have narrowed the search down to a certain area and property type/size. If you are concerned about how applying for credit affects your credit score, we suggest you visit our sister site, Fiscus Credit Cards, which has a comprehensive credit scoring advice section. 11. Who should I speak to if I want to get in-depth advice before deciding upon my mortgage? At Fiscus Finance, we can put you in touch with one of our team of Independent Financial Advisers (IFAs) that can help you source the mortgage best-suited to your needs. As independent advisers, they are not tied down to any single lender, so can scour the market looking for the best deal for you. This means that they are able to compare over 8500 mortgage products available across the UK from all leading high street banks, building societies and financial institutions. Please complete our quick enquiry form for a free, no obligation mortgage consultation from one of our IFAs. Our Independent Financial Advisers will endeavour to contact you within 24 hours of your mortgage form submission. 12. How can I maximise my earnings from buy-to-let mortgages? There are numerous factors that need to be considered when attempting to profit from buy-to-let properties. Fortunately, with a comprehensive buy-to-let mortgage advice section, Fiscus Mortgages is able to help. On these pages you will find our Suggested Residential Investment Strategy, which provides a detailed explanation of the intricacies of buy-to-let and includes a section that explains how you can use finance to maximise your from buy-to-let property. 13. What factors affect my credit score? When applying for any form of credit, the lender seeks a simple and inexpensive way to find out about the individual they may lend to, and for this they will use a credit scoring agency. There are numerous factors that are taken into account when lenders decide upon offering credit. The key issues to consider are: • Your level of income Our sister site, Fiscus Credit Cards has a detailed credit scoring advice section, which we suggest you view for further information on credit scores and related information. 14. I have missed or been late with payments in the past. Can I still get a mortgage? Due to the use of credit scoring agencies by lenders, many high-street lenders are reluctant to lend to individuals with poor credit, particularly if there is an outstanding CCJ or significant arrears have been accrued. However, it is not just high-street lenders that offer mortgages; there are some specialist lenders that focus on helping borrowers who have a less than perfect credit record. Most of these lenders will take a look at ‘bad credit’ borrowers with CCJs and arrears, either paid up or outstanding. These firms do generally charge a higher rate, but look at factors outside of your credit score, such as the size of your deposit and whether you are remortgaging or purchasing new property. For more in-depth information, please take a look at our bad credit mortgage advice section. 15. What happens at the end of the discounted, fixed or capped rate period? At the end of the offer term on your discounted, fixed or capped mortgage, your lender will transfer your mortgage to a previously agreed rate, usually the standard variable rate (SVR). The SVR is usually the least competitive rate offered by a lender and many lenders offer discounts and other offers in the hope that borrowers will remain with the mortgage provider after the offer period and thus generate higher profits for the companies (similar to balance transfer deals with credit cards). As the end of your (let’s assume) discount period approaches, the first thing you should do is contact your existing mortgage provider and find out what they are prepared to offer you (although this could be hampered by strict redemption penalties, depending on your mortgage). You should also contact other lenders and weigh up the benefits of a remortgage - i.e. shop around for a better mortgage. The last thing you should do is show loyalty to the mortgage provider and accept the uncompetitive SVR. This will end up costing you in the long term. 16. What is Loan to Value (LTV) and how does it affect my mortgage costs? If a lender were to have a maximum loan-to-value (LTV) ratio of 90% (this is a good estimate), this would mean that to finance your property purchase, you can obtain a loan for up to 90% of the value of the property from the lender. If the property is worth, say £250,000, a 90% LTV would allow for a £225,000 mortgage. The other £25,000 must come from the borrower as a deposit, often coming from savings accrued over time or from parents, relations and close friends. We take a closer look at LTVs, particularly higher loan-to-values, on our Mortgage Indemnity Guarantee page. 17. Do I need a deposit when I apply for a mortgage? There are some instances where you would not need a deposit when applying for a mortgage, although it is advisable to develop some deposit funds, and in many cases, is required. Providing a deposit has become a problem as a result of the booming property market. An increase in house prices has led to an increase in the absolute value of deposit required. It has therefore become increasingly difficult for individuals, particularly first-time homebuyers, to get onto the ‘housing ladder’ as the standard deposit needed to secure a mortgage makes it very difficult to purchase a property. As a generalisation, the greater your deposit, the lower the rate of interest charged. As the amount borrowed against the house (loan-to-value or LTV) increases, the mortgage interest rate increases. At high LTVs, typically above 90%, the borrower is often required to obtain a Mortgage Indemnity Guarantee. Depending upon the property, it is therefore possible to get high LTV mortgages that require a small or nil deposit. 18. What is the typical timeframe of a mortgage term? The typical timeframe of a UK mortgage is 5 – 25 years. This is a rough guideline only and it must be pointed out that it is possible to borrow outside of this time-bracket. In some cases, the term can increase without the borrower realising: if you were to remortgage frequently, and your repayment mortgage payments are predominantly interest payments in the early years, you may find the capital repayment takes longer than the initially expected mortgage term. 19. If I decide to get a mortgage, how much can I expect to borrow? Due to the current, historically low interest rates available, lenders are currently more flexible than just a few years ago. However, industry 'standards' are still on the cautious side. Most mortgage providers will offer a loan of three-and-a-quarter times your income if you are a sole applicant. For joint borrowers, expect a maximum of two-and-a-half times your joint income, or three times the principal borrower’s income plus the value of the secondary income. A few lenders on the market lend on affordability – they take existing debt and other commitments into account, rather than just income multiples. However, much of this will depend on other factors such as the borrower’s credit history, the value of the property, the type of mortgage and the size of your deposit. 20. Why do I need a Valuer and how much does a valuation cost? Both the mortgage provider and you need to accurately know the value of a property before purchase or a remortgage. On top of this basic valuation, there is a full structural survey (or buildings survey) and the homebuyer’s report. With a remortgage, you will only really need to worry about the basic valuation, however if moving into a property you should seriously consider one of the more detailed surveys that are likely to show up any problems with the property in question – the basic valuation is unlikely to uncover these. Lenders will understandably insist on a basic valuation. They need to know that their loan is secured against a property that will cover them in case of default. The valuer will calculate the worth of the property by comparing it with similar buildings in the area and take into account numerous factors, such as condition, location, size and age. There will also be a note of easily-observed major faults and damage to the property. Although the basic valuation is there to provide the mortgage provider with a framework for calculating how much they can loan you, it will still be you that is expected to stump up the cost of the valuer. There is a chance that the valuer informs you that the property is not worth the price being paid. This may mean that either the mortgage application is declined or you are able to renegotiate the price paid for the property with the vendor. Anyone can make a mistake though, so ensure that the valuer is completely confident in his valuation. When it comes to a basic valuation, which usually takes 30 minutes to an hour, the cost is related to the value of the house but expect to pay somewhere in the region of £100 - £400. Some lenders will throw in a free valuation as part of a discounted package that is offered in an attempt to gain your business. 21. I've got an endowment mortgage and I'm concerned as I've heard many negative things said about them. What should I do? There are many people in the UK with an endowment mortgage, and although troubles with beleaguered life companies (such as Equitable Life and Friends Provident) have concerned many individuals, there are still many people happy with their endowment policies. The biggest blows to individuals’ investment vehicles came immediately after the events of 9/11, where poor performance in aviation and the bursting of the technology bubble hit the markets very hard, causing numerous life companies to struggle with their investments. If you are concerned about your endowment mortgage, then you should first take a look at the Financial Services Authority’s (FSA) website and the Financial Ombudsman. 22. I am moving to London soon, from abroad. Having seen the prices for renting a flat in London, I have thought about buying a flat (I would have to take a UK mortgage) in London, and perhaps selling it a few years’ later so it would also be an investment. Do you think it is a sensible idea, and which type of mortgage would you advise me? I am first-time UK property buyer, I own a flat in Prague, Czech Republic (no mortgage) and have excellent credit history. We suggest that you consider arranging a meeting with one of our IFAs when you are next in the UK, as the mortgage market is somewhat involved. In principle you could buy a flat but you would need to be able to justify the borrowing based on your income. Roughly you should be able to borrow 4 times your earnings. I hope this helps but if you require any further information please feel free to write again. 23. I am just looking for some advice about my mortgage. My partner and I bought a property in November 2002. We are separating and I just wondered if it is legal for one of us to carry on with the mortgage our self or if we should sell the property? I just need to know what I should be taking into consideration should things come to the worse. We do not have a co-habitation agreement or anything; just a straightforward joint mortgage. With regard to your situation, it should be possible for one of you to carry on with the mortgage, although presumably the other partner would want their share of the equity to be released so there will be some additional capital-raising required for this purpose. You will have to remortgage to be able to release the equity and it will depend on the amount of equity available in the property but we should be able to find someone to lend you the money. 24. We have a buy-to-let LIBOR interest-only mortgage of £248,000 at a current interest rate of 5.12%. We have £20,000 available in mini cash ISAs earning 4% on £10,000 and 4.5% on £10,000 per annum. Interest payments in the coming year are going to be at least £12,697 at 5.12%, all of which is tax allowable against the buy to let property income of £18,000. The person assessed earns approx £36,000 a year including the property income. Is it sensible to pay off some of the loan with the £20,000 or leave it where it is? Which option gives the best financial return forgetting peace of mind in repaying the debt? Mr T Dillon (IFA), Rugby Touchstone Financial Services replies: Assuming the interest remains at a constant 5.12% and the full amount can be offset against the rental income, this would result in the equivalent of being charged 3.07% based on paying 40% tax on this amount of income. On the basic rate of 22% you would be paying a rate equivalent to 3.99%. As you are making a tax free minimum of 4% it would seem to make sense to keep the money in your ISA. For a higher rate tax payer this is clear cut but for a basic rate tax payer the argument still stands, but only very slightly. Your income would appear to straddle both bands of taxation. I hope this helps and if you ever consider remortgaging your buy-to-let property or taking out a mortgage on a new property, then please fill in one of our quick enquiry forms and we’ll have an IFA contact you within 24 hours. We are Independent Financial Advisers and are able to source mortgages
from hundreds of lenders using the latest computerised systems. |
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