August 30, 2010
Offset mortgages represent one of the biggest mortgage innovations seen in recent years. Six years ago there was hardly an offset mortgage to be seen. Now they and the current account mortgage, to which they are closely related, account for £10 out of every £100 of new lending.
What’s more, one of the UK ’s large lenders believes that 25% of existing mortgage holders would be better off with an offset mortgage. So if you’re in the market for a mortgage you need to know what they’re all about. Otherwise you could be missing out.
Firstly, how does an offset mortgage work?
The basic idea is that besides borrowing money from the mortgage lender, you also run savings or deposit accounts with them. Then you are charged interest not simply on what you have borrowed but on what you have borrowed less the balance in your savings and deposit accounts. So, if you had an offset mortgage of £100,000 and had £20,000 in their savings account you would only be charged interest on the difference, £80,000. In these circumstances, no interest is paid on your savings the interest is offset.
It doesn’t sound like a ground breaking idea where’s the benefit?
Quite simple. Whilst the full benefit of your savings is reflected in a lower interest charge on your mortgage account, legally you have not received any interest. If you have not received interest you can’t be charged tax on the interest. Step away Mr Taxman!
This means that offset mortgages are especially attractive for higher rate taxpayers who would otherwise pay-away 40% of the interest they receive in tax.
Consider some figures. If you had a £100,000 mortgage paying a competitive rate of 4.69% plus £20,000 on deposit, how would the figures work out? Well over a typical 25 year mortgage, without offset you would pay £85,351 in interest but with offset you would pay just £41,998 that’s a saving of £43,353. What’s more you would repay the mortgage five years and eight months early. That’s because the monthly repayments are based on the full mortgage debt before offsetting is taken into account so borrowers are effectively overpaying their debt each month.
And doesn’t Mr Taxman look sorry! In theory, a standard tax payer saved £9,538 in tax and a higher rate taxpayer a whopping £17,341 in tax.
Flexibility can also be a major advantage. You can typically pay off capital without penalty, underpay and take payment holidays so long as you’ve made sufficient overpayments throughout the years.
Too good to be true where’s the catch?
Historically borrowers have had to pay a higher interest rate for the benefit of an offset mortgage. But the good news is that with banks and building societies fighting for a bigger share of the offset market, offset interest rates are falling.
This means that you need to look carefully to ensure that the apparent tax savings you could make are not eliminated by the slightly higher interest charge. Quite honestly this is not an easy calculation so it’s best left to your professional mortgage adviser.
But as a guide, a standard taxpayer needs around £20,000 in savings behind a £100,000 mortgage to make the offset deal better value than a traditional mortgage. For a higher rate taxpayer the savings requirement drops to around £10,000. (These figures are based on a typical 4.69% fixed offset rate, compared with a typical 4.49% rate for a tracker.) These figures will change as interest rates vary and, in all probability, as the cost differential between an offset and a traditional mortgage closes.
Not all Offset Mortgages are the same!
As you would expect, with the offset lenders fighting for your business lots have added bell and whistles to the basic concept. Free property valuations and free legal work are relatively common. Then some banks will include your current account in the offset calculation, some lenders enable two nominated savings accounts to be offset, some will even agree an additional borrowing facility with a cheque book that can be used at any time.
On the interest rate front you’re bound to be offered a low starting rate fixed for six or twelve months. You might also be offered a tracker which is below the Bank of England base rate for six months and which only rises above after six months or a tracker which exactly tracks base rate plus a tiny premium for a few years. There are lots of variations.
The interest rate can also depend on what percentage of the house valuation you want to borrow. For example, one lender is currently offering 5.6% if you are borrowing less than 50% rising to 6.45% for up to 99%.
Like so many things, whilst the basic concept is simple, it then gets complicated! This clearly underlines the need to talk things through with an independent mortgage adviser. It’s their job to ensure you get the right type of mortgage and the best deal.
If you have savings, there’s a big chance they’ll recommend an offset mortgage.
*Indicative figures correct as at November 2005
Michael Challiner has 15 years experience in financial services marketing at senior level.
August 23, 2010
Two million Muslims in the UK face an ethical dilemma if they want a mortgage or a loan. Conventional mortgages and loans all require the payment of interest and riba as interest is called under Islamic law, is forbidden by the Koran.
British financial institutions are increasingly catering for Muslims’ specialist needs through a number of alternative arrangements that respects the teachings of the Koran. Here are just two of them:
Ijara with diminishing Musharaka the mortgage alternative.
Ijara with diminishing Musharaka is an Islamic alternative to a conventional UK mortgage and has been adopted by several British banks and building societies.
In essence, Musharaka means partnership. Under this Islamic financial concept, the bank buys the house and legally becomes its owner. Then throughout the pre-agreed period, say 25 years, a monthly payment is made. Each monthly payment includes a charge for rent and a charge that buys a small proportion of the house itself. It’s form of variable shared equity plan with the proportion of the house being owned by the purchaser, steadily increasing as payments are made. Once the final payment has been made, the house is owned outright. Ijara
Here you tell the bank or financial institution what you want, for example a car, and they buy it. In return for a monthly payment that covers the cost of the bank’s capital, the bank then allows you to use the asset for an agreed period. In reality, it’s a form of leasing
Islamic finance is not widely available in the UK so where can find it? Here are three suggestions:
Over the last few years Lloyds TSB has introduced Islamic products to 33 of its branches. Their spokesperson says, It’s important for our customers to see that we are following the right procedures. We have a panel of four Islamic scholars who over-see the products. They offer guidance on Islamic law and audit the products.
Another high street bank, HSBC, is developing a special range of Islamic products under the Amanah brand name. This range includes home finance plans, home insurance, commercial finance, and various current accounts and pensions. Hussam Sultan, the Amanah product manager says, As a bank, we are not here to moralise or tell our customers that Amanah finance is the way to please Allah. We’re just here to provide them with a choice.
The Islamic Bank of Britain has three branches in London, two in Birmingham and one each in Leicester and Manchester. They’re the only British bank specifically providing for Muslim customers and claim to be halal throughout their operations. All their financial products are approved by their Sharia’a Supervisory Committee all Muslim scholars who are experts in all aspects of Islamic finance.
For your interest we show below, definitions of some words used widely in connection with Islamic finance.
A Glossary of selected Islamic words used in finance.
Amanah : Means trustworthiness, with associated aspects of faithfulness and honesty. As a central supplementary meaning, amanah also describes a business deal where one party keeps another’s funds or property in trust. This actually the most widely used and understood application of the term, having a long history of use in Islamic commercial law. It can also be used to describe different financial activities such as deposit taking, custody or goods on consignment.
Arbun : Means a down payment. It’s a non-refundable deposit paid to the seller by the buyer upon agreeing a sale contract together with an undertaking that the sale contract will be completed during a prearranged period.
Gharar : This means uncertainty. It’s one of three essential prohibitions in Islamic finance (the others being riba and maysir). Gharar is a sophisticated concept that encompasses certain types of uncertainty or contingency in a contract. The prohibition on gharar is often used as the grounds for criticism of conventional financial practices such as speculation, derivatives and short selling contracts.
Islamic financial services Islamic banking Islamic finance : Means financial services that meet the specific requirements of Islamic law or Shariah. Whilst designed to meet specific Muslim religious requirements, Islamic banking is not restricted to Muslims. Both the customers and the service providers can be non-Muslim as well as Muslim.
Ijara : Means an Islamic leasing agreement. Ijarah permits the financial institution to earn a profit by charging leasing rentals instead of lending money and earning interest. The ijarah concept is extended to hire and purchase agreements by Ijarah wa iqtinah.
Maysir : Means gambling. It’s another of three fundamental prohibitions in Islamic finance (the other two being riba and gharar). The prohibition of maysir is often used as the basis for criticism of standard financial practices such as conventional insurance, speculation and derivative contracts.
Mudarabah : A Mudarabah is a form of Investment partnership. Here, capital is provided by the investor (the Rab ul Mal) to another party (the Mudarib) in order to undertake a business or investment activity. Profits are then shared according to pre-arranged proportions but any loss on the investment is born exclusively by the investor and the mudarib then loses the expected income share.
Mudarib : The mudarib is the investment manager or entrepreneur in a mudarabah (see above). It is this managers responsibility to invest the investor’s money in a project or portfolio in exchange for a share of the profits. A mudarabah is essentially similar to a diversified pool of assets held in a conventional Discretionary Managed Investment Portfolio.
Murabaha : means purchase and resale. As opposed to lending money, the capital provider purchases the required asset or product (for which a loan would otherwise have been taken out) from a third party. The asset is then resold at a higher price to the capital user. By paying this higher price by instalments, the capital user effectively gets credit without paying interest. (Also see tawarruq the opposite of murabaha.)
Musharaka : This means profit and loss sharing. It’s a partnership where the profits are shared in pre-arranged proportions and any losses are shared in proportion to each partners’ capital or investment. In Musharakah, all the partners to the commercial undertaking contribute funds and have the right, but without the obligation, to exercise executive powers in that undertaking. It’s a similar concept to a conventional partnership and the holding of voting stock in a limited company. Musharakah is regarded as the purest form of Islamic financing.
Riba : This means interest. The legal concept extends beyond interest, but in simple terms, riba covers any return of money on money. It does not matter whether the interest is floating or floating, simple or compounded, or what the rate is. Riba is strictly prohibited under Islamic law..
Shariah : This is the Islamic law as disclosed in the Quran and through the example of Prophet Muhammad (PBUH). A Shariah product must meet all the requirements of Islamic law. To facilitate this, a Shariah board is usually appointed. This board or committee is usually comprised of Islamic scholars available to the organisation for guidance and supervision for the development of Shariah compliant products.
Shariah adviser : Means an independent professional, usually a classically trained Islamic legal scholar, appointed to advise an Islamic financial organisation on the compliance of its products and services with Islamic law, the Shariah. While some organisations consult individual Shariah advisers, most establish a committee of Shariah advisers (often known as a Shariah committee or Shariah board).
Shariah compliant : Means the activity that ensures that the requirements of the Shariah, or Islamic law are observed. The term is often used in the Islamic banking industry as a synonym for “Islamic”- for example, Shariah compliant financing or Shariah compliant investment.
Sukuk : This has similar characteristics to a conventional bond. The difference is that that they are asset backed and a sukuk represents the proportionate beneficial ownership in the underlying asset. The asset is then leased to the client to yield the profit on the sukuk.
Takaful : This is Islamic insurance. Takaful plans are designed to avoid the characteristics of conventional insurance (i.e. interest and gambling) that are so problematical for Muslims. They structure the arrangement as a charitable collective pool of funds based on the comcept of mutual assistance.
Tawarruq : When used in personal finance, a customer with a cash requirement buys something on credit on a deferred payment basis. That customer then immediately resells the item for cash to a third party. The customer thereby obtains cash without taking an interest-based loan. Tawarruq is the opposite to murabahah.
August 16, 2010
Types of Interest Rate
You have researched into all the different mortgage types and found a suitable one for you. Now is time to look into what type of interest rate you wish to pay. The type of interest you wish to pay will depend on your circumstances and how much you are willing to pay out every month. You will find out below that not all interest ratestypes are the same.
Discounted rate
A discounted rate allows the buyer to pay a reduced payment for a fixed amount of time. After the fixed term is aver the rate usually increases to the national base rate. Discounted rates are attractive for first time buyers and also home buyers who require extra cash for renovations. The term of discount does give you time to get used to having a mortgage payment.
Fixed rates
With a fixed rate mortgage you are guaranteed the same rate of interest every month for a fix period or term. This rate will not fluctuate as long as you are in an agreement for a fixed term. The fixed term can be anywhere from 1 to 7 years. Do be careful when taking a fixed rate mortgage term dont forget to ask the lender if you have any obligation to stay with the lender after the fixed term is over?
Variable rate
Variable rate mortgages do tend to fluctuate around the base rate, and are generally higher then the discounted, fixed and capped rates that are also available. Usually, after you have been at a discounted rate, your interest rate will move up to a variable rate. This could be for a specified time you have agreed to with the lender.
Capped rate
With a capped rate mortgage, the lender will cap the mortgage rate to a specific amount, which allows the interest rate to never rise above this level for a fixed term. However if the interest rate decreases? So will your rate.
Tracker mortgages
A tracker mortgage actually tracks the Bank of England base rate. This means your mortgage stays in line with interest rates. The way a tracker reflects on your monthly mortgage interest payments is that they go up when the base rate goes up and go down when the base rate goes down.
Similar to a standard variable rate mortgage a tracker follows the percentage rate imposed by the Bank of England. Unlike the standard variable rate mortgage changes annually or monthly a tracker mortgage guarantees to follow changes in the Bank of England base rate within 2 weeks of the interest rate changing, allowing the borrower to benefit from both falls and rises of the interest rate quicker.
However, there are disadvantage to tracker mortgages. If interest rates were to rise sharply, so too would the cost of a tracker, so in situation like this you would lose out and find yourself paying more per month that you did the previous month. In this type of situation a fixed rate or a capped rate mortgage would have been advantageous to the borrower.
Trackers do work better for the borrower when interest rates are falling but if you look at the bigger picture, they give you clear insight to whatever the Bank of England does with rates. With a tracker both the borrower and the lender know exactly what they are getting.
Flexible Mortgages
With a flexible interest mortgage, you the lender can usually pay more if you have extra cash available, pay less if you need to save a little, maybe even take a holiday from your payments. Flexible is what it is, flexible. Also the interest on a flexible mortgage is calculated daily instead of annually. So you reduce the interest amount with every payment.
Checking the APR
Always remember to check the Annual Percentage Rate (APR) of the mortgage you are considering taking out for a specified term. Usually the lower the APR the cheaper the rate at which you will pay back every month. However do be careful, some lenders will offer you the opportunity to take a very low APR over a fixed period and then a standard rate for a further fixed term. Situations like this can potentially turn to disaster for some people. If you have discounted mortgage rate for two years at 3.9% which totals a monthly payment of 300 per month, after the 3.9% term has ended, you are still in a contract with the lender for a further two years at a rate of 5.9% you will find that the payment will increase substantially.
In this situation you could find yourself not being able to afford the mortgage payment, also unable to transfer your mortgage to another lender due to redemption penalties for early breach of contract.
Redemption penalties
The various discounted mortgages available e.g. capped, discounted and fixed do tend to carry a redemption penalty. This is due to the lender operating a special rate for the fixed amount of time. Some of the standard rate periods can be for a longer period than the special rate term. So do not forget to read the small print, and always remember to ask about the redemption penalties and the standard rate period of the mortgage you are enquiring about. There are mortgages out there now that offer no fixed penalties or require you to be tied in with a lender over the discounted period.
August 9, 2010
Monetary policy of every individual works though different channels. Financial conditions are fluctuating always making way for loopholes in your particular economy. Being a homeowner equips you with the ability to take on mortgages for sustained economic expansion. You have already completed the first major task for getting mortgages, i.e. buying a home. Now, we can safely move on the other part of the process.
The market for Mortgages is huge and there is an exhaustive list of types of mortgages available. Therefore, it is important to realize which mortgages type you need and how much you can afford. Mortgages are secured loans. For the entire mortgages term which can range form 25-30 years the lending institution or the bank will hold the title to your loan. In case of non repayment your home will be on risk of repossession.
It is crucial to shop for mortgage loan and rates. Often borrowers neglect the importance of shopping around in their enthusiasm of finding the good rates. The effort that you will put in as researching for mortgages will bring great returns as better interest rates and repayment alternatives.
While searching for mortgages you must be looking at interest rates. Lenders who provide mortgages are part of a profit making process. They would charge interest rates with the idea of making profit but will avoid charging more for they might loose a customer to a competitor. For that reason shopping around becomes essential. While shopping for mortgage you will be looking for APR. It is the actual amount of interest rate that is charged for the entire term of loan. Though it is vital factor but that should not be the sole criteria for applying for mortgages.
Loan term is basic to mortgages. The most common type of fixed rate mortgages is 15-year mortgages and 30-year mortgages. The monthly repayments of 30 year mortgages will be lower than 15 year mortgages. However, your will be paying more interest rates in a 30 year mortgage. With 30 year mortgage you will get a tax right-off which can be sizeable. With 15 year mortgage you will just be paying taxes without any savings.
Two basic types of mortgages are fixed and adjustable rate. With fixed rate mortgage you owe certain percentage of loan amount as interest rate. Interest rate remains fixed for entire loan term which can be 15 or 30 year mortgages. The disadvantage with this mortgage type is inability to make use of drop in interest rates.
Other major type is adjustable rate mortgages (ARM). The interest rates changes according to the interest rates in the mortgage market. The first year interest rates are generally lower than market rates. There is an upward limit above which the interest rates cant go. However there is always the disadvantage of not being able to make use of drop in the interest rates.
The above two types of Mortgages are the major ones while the other types are derived from either or contain the characteristics of both of them. Balloon mortgages have fixed interest rates for a particular period of time. After that the entire loan amount has to be paid back in one go. This will push the borrower to start on another mortgage borrowing task. But if you are unable to find new mortgage, you stand loosing your home. The advantage with balloon mortgages is low initial payment. Balloon mortgages also have a conversion option and you can change balloon mortgages to another type.
There is also something called two-step mortgages. They combine characteristics of fixed and variable rate mortgages and have names like 228, 525 or 723. A 228 will have two years of fixed payment, an adjustment and then remaining term with fixed payment. Similar pattern will follow for other mortgages. Bi weekly mortgages enable you to make payment bi weekly instead of monthly. This mortgage is used to shorter the term of 30-year-old mortgages. Bi weekly mortgages are a great tool for budgeting but wont be of good help when faced with emergency money requirements.
There is not a mortgage that refuses to solve your financial dilemma. Interest rates have fallen, equity prices have raised this is the best time to apply for mortgages. If you have plans in the pipeline there is not better way to get them materialized than acquiring mortgages.
August 2, 2010
Owning a home means money management and good sense. The first step is to sit down and take a hard look at your finances. Then decide to purchase a home where the down payment and mortgage will be what you can afford. Stay well within your means. If possible consult a finance professional and consider putting down a greater down payment.
Cost factors will include: total cost of home; maximum monthly housing cost (approximately 32% of your gross monthly income); and monthly debt load (not more than 40% of your gross monthly income). Try and keep the debt ratio as low as possible.
A reduced monthly mortgage payment is a dream come true for just about everyone. There are many ways in which one can do this:
Since interest rates keep changing you would need to keep a track of changes and opt for refinance at a lower rate when the time is right. This would reduce your outlay considerably. Do the calculations to determine your savings after paying closing costs and other fees.
Consider changing from a short term mortgage to a long term mortgage. This will tide you over the financial crunch and enable you to pay lower monthly payments. If your situation strengthens you could always foreclose the loan.
Request for cancellation of the insurance you are paying to secure your mortgage. Once 20% of your loan is settled and you have established a good credit history ask the lender to wave payment towards the insurance. This will help reduce your monthly outlay.
Find out where lower homeowner insurance rates are being offered. You will succeed in reducing your PITI payment, principal, interest, tax, and insurance payment.
Check your calculations regularly make sure all adjustments are being made correctly.
Choose a mortgage that offers a degree of flexibility. In this interest is paid only on the balance outstanding every day. This means you can pay off the mortgage in accordance to your earnings.
Consider an accelerated equity plan or biweekly payments. This will reduce your burden quicker and yield big benefits.
Study the details of your mortgage; find out what constitutes the principal and what the interest. Every month try and pay a little more than the amount due to be adjusted towards the principal. By reducing the principal you will save considerable outlay of funds as interest.
Try variable interest or short term loans. Find out about teaser rates, loans which attract a lower interest for asset period.
Consolidate your loans into a single loan with lower payments. Study all the loans, home, car, education, and so on. Make a table and analyze the outlay. Consult a mortgage specialist and find out what consolidation will mean and how much it will reduce your monthly payments by.
A home loan or mortgage is a debt that can be long term and a burden. Advisable is to pay off the mortgage as early as possible. Handle your finances wisely by keeping an eye on interest rates, insurance, and loan disbursements.
July 26, 2010
How much are you paying back?
When considering a mortgage do you consider all of the right questions, for example do you consider which bank is best because of their reputation or do you instead look solely at the interest rate tables, do you look at the ability to switch mortgage provider or do you look at how long they can guarantee a given mortgage rate? These are of course all important questions and ones that should be given due consideration when choosing a mortgage provider but there are more important questions.
Most of us consider a mortgage to be one of life necessary evils, after all its not nice to be in debt to the tune of the house price right. Well theres actually one question that most people ignore, if youre borrowing 100,000.00 how much are you actually paying back?
The reason that most people ignore this fact when they consider choosing a mortgage, refinancing or embarking on any other kind of equity refinance is that on paper you are borrowing a given sum (100 K in this case).
Wrong!
You are borrowing a few thousand now but that is not the amount that youll be paying back.
This may seem like a bit of a nonsense statement but lets analyse it in a little detail.
We initially borrow 100,000
The interest rate is 4.25% – per year
Our repayments are the interest + 4%
We take the mortgagerefinance over 25 years.
So our yearly figures are as follows:
Year 1:
Interest = 100,000 100 * 4.25 = 4,250
Amortisation (paying back) =100,000 100 * 4 = 4,000
Total to pay back this year 8,250
So now in year two we only owe 96,000, so it looks like this:
Year2:
Interest = 96,000 100 * 4.25 = 4,080
Amortisation (paying back) =100,000 100 * 1 = 4,000
Total to pay back this year 8,080
So as you can see, theres less interest to pay because were clearing the initial balance, but still were paying 4.25% per year, so if we borrowed 100,000 to start with how much are we actually paying back in the end?
Were actually paying back 151,000 in the end, thats right, the interest on the mortgage is 51,000 doesnt seem such a good rate any more does it. But what if you decide to pay back over a longer period, that might help right? Wrong, if you double the term to 50 years (so paying back 2% per year), then the interest effectively doubles the amount of your mortgage to just over 200,000.
Now perhaps when people discuss getting the best rate for the mortgage and seem to be messing about for a few points difference you can see why, perhaps now you can also understand that it is better to take a mortgage over the shortest possible time frame it does mean that youll need to amortise faster but it also means that youll potentially save yourself thousands in interest payments.
If you are not financially in a position to really negotiate initially then perhaps one of the most important questions you should be asking is whether or not there is an early repayment option you might have enough money to pay it of early but whats the point if the bank will still charge you the same amount of interest?
If you want to run the simulation yourself heres the code in C#, simply create a new project, add a button, double click on the button and cutpaste the following code:
int years =25; years for mortgage
float mVal = 100000; total amount borrowed
float intRate = (float)3.00; interest rate
float result =0;
float totalAmountInt =0; total interest payable
float yearlyAmount = mVal years; repayment per year
for (int i = 1, i
I don’t seem to be able to post the rest of the code, email me and I’ll send it to you.
July 19, 2010
The Council of Mortgage Lenders figures are showing a growing trend in interest only mortgages. From January to March 2002, 9% of new mortgages were interest only. Now take the period from October to December 2005, and the amount of new interest only mortgages has risen to 23%. In the same timeframe, the number of first time buyers choosing interest only mortgages has increased from 6% to 15%.
Theres a good reason for this upturn, and thats because the monthly payments are so much lower than with a repayment mortgage. All you have to do is pay the interest, delaying the repayment of the capital itself until the end of the mortgage term when it is paid off in full.
Getting an interest only mortgage is an easy way to avoid having to change lifestyle habits like eating out and holidays and having a mortgage is incredibly affordable this way. However, we think that there could be a lot of people in trouble in the future when they realise that they didnt start saving soon enough for this eventual lump sum payment.
The Financial Services Authority (FSA) have voiced concerns about homebuyers potentially getting an interest only mortgage and not making sufficient provisions to pay off the capital, so as a result mortgage lenders have tightened up the rules on interest only mortgages. Now you need to provide proof of an alternative savings fund to cover the capital, before they will agree to lend you the money. The most common ways to save include pensions and ISAs, regular payment schemes that could potentially save more than the capital required. Of course, they may also fall short. The main danger is that the homebuyer will go and cancel the savings plan once the mortgage has been agreed.
If a borrower decides not to save money to cover the capital, the only option would be to sell the home and then buy a home of less value when the time comes to repay the capital. This is not a scenario that the FSA and lenders want to be faced with, especially as property prices cannot be depended on.
Back in the 1970s and 1980s interest only mortgages were very popular homebuyers would take out an endowment policy to cover the capital repayment at the end of the term. However, we all heard in the news recently about endowment policies under-performing many borrowers were not able to cover the capital because of an endowment shortfall. They were considered to be a guaranteed way of saving, but they did not fulfil their promise. In a similar way, theres no way to be sure that an investment product will have performed as well as is needed when it comes to paying back the capital in 20 years time.
As people realised that the endowment policies had under-performed, the whole concept of getting an interest only mortgage with a separate savings vehicle fell out of favour, and now repayment mortgages are the norm. But from the recently published statistics mentioned earlier in this article, it looks like the tide may be turning again. For some people its the only option. House prices are too high for many people to be able to afford the full repayment mortgage payments.
So it looks like interest only mortgages will be becoming a lot more popular again, but we think that mortgage lenders could do more to help homebuyers see the other options available to them. For example, a mortgage doesnt have to be over 25 years the term can be extended to 30 or even 35 years, which would help lower the payments on a repayment mortgage considerably.
A 25-year repayment mortgage of 125,000 at 4.9% will cost 731.69 per month. Stretch the mortgage over 35 years instead, and the monthly payment is 103.53 less at 628.16. That can make the difference between a mortgage being not affordable and affordable.
Many mortgages now offer the option of overpaying when you can. So just because a mortgage is over 35 years, it doesnt mean it will take 35 years to pay it off. Many homebuyers move house every eight to ten years as well, so the mortgage never needs to run its full course. Its then a good opportunity to reassess how much you can afford on monthly repayments.
There are other options too, like a mortgage in which you repay half of the capital on repayment, and the rest at the end. It means you get a head start on repaying the capital, and the mortgage can always be renegotiated if you feel you can afford to pay more each month.
Our most serious advice is this dont try and make a decision about something as important as a mortgage without getting advice from a professional first. There are a number of solutions so it is always best to get the whole picture from someone who knows the market well.
July 12, 2010
With the housing market is now showing marked signs of recovery, especially in the South and London, the number of homeowners mortgaging for more than 500,00 is increasing. (Also see Latest Market Facts at the end of this article.)
Previously, prospective borrowers for these mega mortgages have experienced a mixed reception from the lenders sometimes the lenders would provide the facility but viewed them as higher risk. For that reason lenders typically charged a premium rate of interest. But no longer. The tide has turned.
Mega mortgages have well and truly joined the mainstream and lenders are now competing hard for the business. Instead of facing a premium, borrowers are being offered around a quarter of a percent less than comparable deals for more normal sized mortgages. This is because lenders are increasingly basing their lending decisions on the borrowers ability to afford the mortgage with lesser emphasis being placed on the security provided by the property. It also helps that interest rates remain low.
If youre a potential mega mortgage borrower, youll find that the banks will generally be the most welcoming. Compared to building societies and other mortgage lenders, banks tend to set higher lending limits. Some smaller lenders still set a cap at 500,000 whilst others restrict the amount theyll lend against an individual property. But perhaps the best way of finding a really competitive mega mortgage is to go through a specialist mortgage broker. In the current market, any broker worth their salt will be able to source a great deal on six and seven figure mortgages.
For example, the Halifax will lend up to 90% on a 4.49% fixed rate for a two years on mortgages up to 2 million. And the arrangement fee is just 499. If youve got a larger deposit, at least 25%, then there are several other deals around at 3.99% – again for a two year fix usually with a fee of just a quarter of a percent.
Latest House Market Facts
In March, the average achieved sales price was 94% of the asking price.
The average number of viewings to sales was 11.
During March house prices in England and Wales rose by 0.5% driven by buoyant London market. London prices grew by 1.1%.
This is the fourth month in succession of house price growth. Its also the highest monthly rise since the summer 2004.
Over the last 12 months house prices rose by 0.1%.
The performance of the London market results from of a number of factors:
A shortage of new housing coming onto the market
London has underperformed in terms of house price growth over the last few years. This in turn has meant that incomes and house prices in the capital are more closely aligned than in other regions.
In other parts of England and Wales, levels of affordability remain stretched.
At a local level away from London, prices have picked up mainly in cities in the South of England. Berkshire (0.7%) and East Sussex (0.6%) performed well.
Cities in the North saw slower price growth, with Newcastle, Liverpool, and Manchester all reporting growth of just 0.1%.
The under-performing counties were Derbyshire (-0.1%) and the Isle of Wight (-0.1%).
The areas reporting the highest rises in March were all across London: Central London & City (1.9%), East London (1.4%), North London (1.2%), West London (1.2%), South-West London (1.0%) and South-East London (0.8%).
In March the national average house price stood at 162,500.
July 5, 2010
In the first three months of 2002, just 9% of all new mortgages were taken as interest only – but by the last quarter of 2005, the figure had risen to 23%. And amongst first time buyers, the figures rose from 6% to 15%. (Source: Council of Mortgage Lenders.)
The reason is obvious. It’s down to family economics. With an interest only mortgage, the monthly repayments only repay the ongoing interest so your monthly repayment is low. Repayment of the capital borrowed is delayed to the end of the mortgage when it has to be repaid as a lump sum.
So the popularity of interest only mortgages is a reflection of borrowers wanting to minimise their fixed monthly outgoings in order to preserve their lifestyle they still want their nice cars, nights out and holidays abroad. But their reluctance to cut back on their life style spending, combined with steadily rising house prices, could be storing up problems for the future. If they’re not repaying some of the capital now, how are they going to repay it?
Egged on by the concerns voiced by the Financial Services Authority (FSA), many lenders are now becoming much stricter when assessing an application for an interest only mortgage. They’re insisting that there’s a viable repayment vehicle in place before they’ll payout the money. These repayment vehicles could be the tax-free cash forecast from a pension policy, or an ISA or some other regular investment or savings scheme. The danger is that having got the mortgage, the borrower subsequently cancels their savings scheme.
If that were to happen, when retirement finally arrives accompanied by the looming commitment to repay the mortgage capital, they’ll be faced with having to sell their home and down size simply to free up money to repay the mortgage. And that’s a scenario that lenders and the FSA are anxious to avoid.
Twenty years ago interest only mortgages were the accepted norm with endowment policies being used as the most popular investment to repay the capital. But as we now know, returns on endowment policies have not been as high as many had assumed. This has left thousands of homeowners with a capital repayment shortfall. Endowment policies have certainly failed to be the guaranteed repayment solution that many of us had assumed twenty years ago. So, in today’s economic and investment environment, how certain can you be of any scheme to repay the capital?
When the shortcomings of endowment policies slowly became understood, interest only mortgages fell out of favour and repayment mortgages took over as the norm. But once again the pendulum is swinging. Interest only mortgages are back in a big way. It’s the result of high house prices and people straining to get onto and up the housing ladder without wanting to economise on other areas of their spending.
We’re sure that the pressures within family finances will continue to fuel the demand for interest only mortgages. However, it becomes the duty of mortgage brokers and the lenders to point out the alternatives open to their clients.
In the past, a 25 year mortgage term has been the norm for a young buyer. But now they can stretch the repayment period to 30, even 35 years. This makes the payments on a repayment mortgage far more affordable.
For example, the monthly repayments for a 125,000 repayment mortgage over 25 years at say, 4.9% cost 731.69 per month, but if the repayment period was stretched to 35 years, the repayment drops to 628.16 per month, a cash flow saving of 103.53.
The idea is that as and when family finances permit, borrowers can reduce the capital outstanding by making optional lump sum repayments. In practice, people tend to move house every eight to ten years and at each move a new mortgage has to be organised. These moves then represent an obvious opportunity to reassess long-term family finances.
But other solutions are available. You could arrange a mortgage where part of the loan is on a repayment basis with the balance on interest only. It’s a mid way option. At least these types of mortgage start the repayment process and later when you move home or the family income builds, you can take the opportunity to reassess the most suitable type of mortgage.
But please bear in mind that you shouldn’t speculate when it comes to your home finances. Mortgages are complicated and there is never just one solution. Our advice is take professional advice and use a mortgage broker who can search the entire market.
June 28, 2010
There are some new types of home loans coming onto the market which are being advertised at present. Several of the mortgage companies are offering variation of them and they are being marketed as lifetime loans. So might this be the end of the short-term mortgage? Not necessarily so, it appears that there are still bargains out there for those prepared to shop around.
Mortgage brokers usually advise discounted short term mortgages and advise clients to regularly shop around after the two year discount has come to an end to obtain an even better deal. These clients are known to the insurers as rate tarts. But who can blame them for obtaining the best possible deal, especially as the broker does all the work for them, making the whole procedure painless and trouble free.
First of all, if you need to borrow over 150,000 the above advice is still without a doubt the very best and asking your broker to shop around for discounted rates is, in our opinion, essential.
For borrowers of less than 150,000, some of these new mortgages appearing on the market initially sound tempting. They are classed as low-rate lifetime loans. Abbey and Woolwich are two of the building societies offering flat-rate low cost home loans, amongst others.
The Woolwich has a lifetime tracker mortgage rate which has a guarantee of staying at 0.19 percentage points above base rate. At present the Bank of Englands base rate is 4.50%, therefore the rate is 4.69%.
Conversely, the Portman Building Societys two year fixed rate plan presently stands at 4.19%, still cheaper than the Woolwich lifetime. You do, however, have to factor in the cost of shopping around, which we have listed:
Legal fees 350 on average.
Application fee 499.
Valuation fee 300 on average.
Deeds release fee 199.
This is worked out on a loan of 150,000. The above sums come to just under 1,350 and the saving on interest over the Woolwich comes out at 1,500. This means that there is a very small saving on the Portman deal at two years. You would need to find another tempting deal and be ready to switch to it at the end of this period as a 6.5 per cent rate would come into force otherwise.
Abbeys Flexible Plus tracker has a slightly higher rate than the Woolwich, at 5.09% but, as the name implies, it is very flexible and will allow you to reduce the amount of money borrowed by offsetting your mortgage and also permitting you to withdraw money from the mortgage. One advantage is that you can make use of the mortgage as a type of savings account. Money withdrawn is charged at the mortgage rate.
To sum up, these new loans do seem to be competitive, but the mortgage market alters all the time if youre out for the very best deals, check with your on-line broker and find out whats available out there. Theyll search the whole market and get you the very best deal. Thats what theyre there for!