Don't be beaten by the mortgage mayhem
The property boom bubble has long burst and taken down with it 100% mortgages and happy-go-lucky buy-to-let landlords. These have now been replaced by a housing market that has taken a severe battering and suffered grim repossession figures – a report from the Council of Mortgage Lenders shows that quarterly repossessions in Britain are up 50% in a year.
So what are the prospects for those trying to get onto the first rung of the property ladder, or homeowners in need of a new mortgage deal? It doesn’t have to be all snakes and ladders.
However, although the glut of property programmes and careless advice of past years has vanished, there are still a few snakes lurking, ready to knock you off the ladder.
So, whether you’re a first-time buyer or already a homeowner, here is our guide to help you find the best mortgage deal for you.
There are now some attractions for first-time buyers. According to Halifax, the average house price is now £158,565, down from £183,694 a year ago, so if you’re looking to save a 25% deposit, you only have to get together £39,641, rather than £45,923.
Assuming an interest rate of 4.5%, your monthly payments would then be £718.07, rather than £831.87, based on a repayment mortgage over 40 years.
Of course, buying your first home will not be without its hitches. Lenders are more cautious about lending these days, so you’ll need a larger deposit. “You’ll need to save at least 20% to get a decent rate on a mortgage,” says Nici Audhlam-Gardiner, mortgage director at Abbey and Alliance & Leicester.
According to moneyfacts.co.uk, the best first-time buyer rates require a 20% deposit. But if you only save a 10% deposit, there are deals available, albeit at a higher cost.
If raising sufficient money is hard, Richard Campo, technical adviser at mortgage broker Alexander Hall, suggests you ask relatives to help. “A parent or grandparent can be a guarantor,” he says. “Or you could ask them to help with the deposit. Saving rates are low, so they could help you reduce your interest rate by increasing the deposit you can put down.”
You could also consider buying with friends. Lenders will take into consideration up to four salaries on a mortgage and allow you to borrow as much as three times the total income. However, Campo recommends you make sure any agreement is legally watertight.
“Take legal advice, and ensure you all understand what would happen if someone wanted to move out,” he says. “Consider taking out insurance in case any of you lost your job or became ill and were unable to pay your share of the mortgage.”
Although first-time buyers have to cough up bigger deposits, some lenders offer first-timers special deals. “There aren’t so many around at the moment, but they will often give you better terms,” says Audhlam-Gardiner.
Campo advises opting for a fixed-rate deal for your first home. “Many first-time buyers have to stretch themselves, so it’s important to make sure you can afford your mortgage. The certainty of fixed repayments can be very useful,” he says.
“If you’re still at home or renting, you’ve got a lot more flexibility than if you had to sell somewhere first. So be bold when you make an offer. A friend of mine recently bought his first home for £300,000 – the asking price was £400,000.”
But what if you already have a place of your own? If you have sufficient equity in your home, remortgaging may be an option, if your discount period is coming to an end. With the Bank of England base rate falling from 5% in April 2008 to 0.50% this March, and remaining unchanged since then, remortgaging is certainly a money-saver.
But as property prices have fallen and lenders become more cautious, you’ll face some challenges if you’re looking for a better deal.
“It all hinges on the level of equity in your property,” says David Hollingworth, mortgage specialist for broker London & Country. “You can get deals at 95% loan-to-value (LTV), but the rates get better the more equity you have.”
So having sufficient equity is crucial. Hollingworth recommends being realistic when estimating the value of your home: “Valuers are being pretty conservative at the moment, so check out the local market and speak to estate agents.”
If you’re not sure about the value of your property, another option is a deal with a free valuation. Providing there are no upfront booking fees, if you find your home isn’t worth what you thought, there’s no charge if you later back out of the deal.
Speak to your current lender if you suspect you’re in negative equity or need a high LTV.
Melanie Bien, spokesperson for independent mortgage broker Savills Private Finance, says: “You may find your current lender will do you a deal”
You should also look at your overall financial situation if you don’t have sufficient equity to get one of the best deals. With interest rates low on savings, you might be better off using some cash to pay off part of your mortgage to increase the equity.
As well as focusing on the amount of equity in your home, you’ll also need to decide whether to go for a fixed deal, a tracker or a discount. While your own personal preferences will come into play, the certainty of fixed rates means they have the upper hand in the current market.
According to the Council of Mortgage Lenders, 56% of new loans were fixed rate in February, up from 49% the previous month.
“Fixed rates buy protection from an increase in the Bank of England base rate,” says Ray Boulger, senior technical manager at John Charcol. “We don’t know where the base rate might go over the next few years.” He adds that while it’s possible the base rate could stay low for the next two or three years, as the government tries to sort out the economic mess, it’s not inconceivable either that it could go up quickly to counter inflation.
Given all the uncertainty about where the base rate is heading, Melanie Bien favours longer-term fixes: “It may be worth fixing for five rather than two years, as rates on longer fixes are historically cheaper. If you fix for two years, you may be coming to the end of your deal just as interest rates are rising, and this could be expensive.”
Trackers are viewed less favourably. While these were great when they were a percentage point or less above the Bank of England base rate that they track, the margins now are much wider.
“Trackers look cheap at the moment, but some of them are three or four percentage points above base rate,” says Bien. “This is fine when the base rate is 0.5%, but not so attractive if it returns to its historic average of around 5%.”
As well as the wide margins, Boulger says that a further downside of the trackers currently available is the early repayment charges: “Many of them tie you into exit charges, so you could miss the opportunity to fix when rates start to climb again.”
Discounts are an option, although, like trackers, they won’t give any protection if rates climb rapidly, and they often come with early repayment charges. But the rate you’ll pay now is cheap.
You should check whether you’ll be hammered with any early repayment charges on your existing product. “Even if you’ve got an early redemption penalty, it could be worth switching,” says Hollingworth. “If the new deal has a much lower interest rate, you could save enough to cover the penalty.”
There’s also an argument for moving onto your lender’s standard variable rate. Boulger says: “If there’s no real risk of your LTV exceeding 75%, you can afford to wait for more deals to come up. As the market picks up, the margin the lenders charge above base rate will decrease.”
Many standard variable rates are low at the moment. But, if you do decide to stay put, Boulger advises that you keep a close eye on the market. “Fixed rates will start to shift before the base rate, so check the deals regularly,” he says. “Or get a broker to do this for you, as they review the market on a daily basis.”
Top five tips for first-time buyers
1. Save as big a deposit as you can, aiming for around 15%.
2. Try to clear any other debts you might have – they can severely restrict the amount you can borrow, and raise the interest rate.
3. Shop around for the best deal – interest rates can vary by over 2.5% between the best and worst deals.
5. Don’t cut corners on the survey, especially if you are buying a period property or converted flat. Paying for a more detailed report or building survey could save you money in the long run.
Source: London & Country
A “traditional” mortgage, where the monthly repayments entail of repaying the capital amount borrowed as well as the accrued interest, so that during the loan period the capital debt is gradually paid off so by the end of the term the mortgage has been fully repaid. One advantage of a repayment mortgage is that it removes the risk of having a parallel investment (such as an endowment policy or pension), the performance of which is dependent on the stockmarket, such as with an interest-only mortgage.
Changing mortgages without moving home. Property owners chiefly remortgage to get a better deal but some do so to release equity in their homes or to finance home improvements, the costs of which are added to the new mortgage. Even though you’re not moving house, you still need to engage solicitors, conveyancing and the new lender will require the property to be surveyed and valued.
A homeowner’s worst nightmare; repossession is an action of last resort by mortgage lenders to recover money from borrowers that have failed to keep up with repayments on their mortgage or other loan secured on their home (see secured loan). Repossession is a legal procedure that has to go through several processes before the homeowner is evicted and the property reposed. These are: if a borrower keeps defaulting; the lender applies for a solicitor’s notice; the lender instigates possession proceedings through the court; at the court hearing a possession order is granted and sometimes a possession warrant; a bailiff is appointed and an eviction notice issued at which point the homeowner has two to three weeks to vacate the property.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
If you want to escape from a special mortgage deal within a specified timeframe, which often extends beyond the deal ending, the lender will levy redemption penalties. The early redemption penalty might be several months’ interest or a percentage of your loan. Either way, it could cost you several thousand pounds and is the mortgage lender’s way of making you stay put after the initial low interest rate period has ended paying an above-average rate.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
A charge some brokers (and, increasingly, lenders) make for arranging your loan or mortgage, either as a flat fee or a percentage of the amount you wish to borrow. In order to look ultra-competitive in the best-buy tables, some mortgage lenders will offer mortgages with an attractive low rate and recoup any losses with a hefty arrangement fee.