The next part of my series: why you should use a mortgage broker, is the mortgage affordability calculator.
We do a little pay-per-click advertising on various search engines; this is no secret.
But it surprised me to get so many hits on the somewhat spurious term; mortgage calculator. It occurred to me that this might be people searching for their maximum loan amount rather than monthly payments.
If this is the case, and you are reading this article because you want to know how much you can borrow, let me explain something; most consumer-facing calculators for maximum loans are a waste of your time. Plain and simple.
This is particularly true with calculators on mortgage brokers’ websites or those on comparison sites.
Every lender has a different method of calculating how much of your income to consider, and how many times that income they will lend in different scenarios (such as lower amounts for smaller deposits).
They all have individual approaches to factoring in typical expenditures or calculating other commitments like credit card debt; or other loans.
They may deduct a figure for each dependent child you have; they may use a form of stress testing based on a notionally higher interest rate too.
In short, it is highly nuanced. It is extremely difficult to create a calculator that accurately reflects these subtleties; most sites present a very conservative and vastly oversimplified figure as a gimmick.
So whilst it is tempting to get a quick answer to these questions, they are rarely worthwhile having.
Even the calculators on lenders’ intermediary websites are highly dependent on individual case-by-case discussions of a client’s circumstances to ensure the figures entered will reflect the values as interpreted by the lender; it requires considerable industry experience to get even these calculators to produce accurate outcomes.
It may seem laborious to speak to a mortgage adviser, but an experienced one should be able to condense all that nuance into a relatively brief conservation; that’s the real hidden value of a human advice process.
Big shifts are happening in the mortgage market at the moment, which are affecting all mortgage advisors quite a bit.
One of the biggest trends is the growing movement towards self-execution facilitated by comparison websites.
Now I am a fan of the internet; I even support comparison websites as they have a valid role to play. But Financial Advice and Mortgage Advice are not defunct because of them, and I want to give you some points to consider in my posts this week.
I had a recent scenario of someone looking to buy a second property as an investment and repay a mortgage over a short term; of perhaps ten years.
The client was self-employed and wanted a product without any tie-ins.
Now in this scenario, he would have very high monthly payments, and it would hamper his affordability and potential maximum loan.
The best rate product for his requirements also had an offset facility, so I suggested he could increase the term, reducing the payments he had to make, therefore making the loan look more affordable.
However, as it was an offset product, he could pay as much as he liked extra, and this would then reduce the mortgage term in line with his requirements.
This meant that he would not have to make the high payments; but could do so if he wished. For a businessman in the credit crunch, that was a compelling option.
It’s a great illustration of how mortgage advice plays a very different role to a comparison site.
In this case, it wasn’t about getting a lower cost; but using the features of a product to improve his chances of getting the loan and reduce the financial risk to him and his business; without increasing the cost.
That is why a Mortgage Broker is well worth speaking to, regardless of how much experience you have with mortgages.
I wrote a couple of weeks ago about the number of enquiries mortgage brokers receive about buying without a deposit.
But I forgot to mention a couple of other important ways to buy without a deposit in my previous post.
Firstly it is possible to arrange a gifted deposit from relatives; or even possibly another interested party, using a contract which entitles them to a specific share of the property. This contract would allow you to buy the interested party out at your choice; or give them a share upon any sale.
This device gives the giftor a legal right to some of the sale proceeds, even if values continue to fall, and much more certainty of receiving their gift back in the future.
Also, those who are lucky enough to have the right to buy a council property may be able to buy without a deposit as well because many lenders will accept the discounted value of the property as the deposit as long as their valuation reflects the council’s figures.
However, if you are eligible for a Right to Buy but live in a council flat, don’t get too excited, as many lenders are restricting their exposure on flats due to the flood of 1-bed properties built during the boom.
So if your property isn’t a house, it is a good idea to speak to a mortgage advisor and see whether a deposit will be required.
Halifax has just announced a drop in their house price index for June of 0.5%. This suggests that the worst may not yet be over for property values, despite promising rises in similar indexes over the past few months.
But there is a general feeling among the industry now; that the bottom is out, and while prices are likely to remain relatively stable for at least the next year due to a lack of mortgage products, there is some good news for people looking to borrow.
Recent research from Unbiased.co.uk suggests that many people now believe they can only borrow between 0.5 and 2.5 times their income when arranging a mortgage.
And only 24% of the UK population believed they could get a mortgage for more than four times their income.
The truth is that most lenders would accept four or more times the primary income as a guide, or perhaps 3.5 times joint income. The difficulty is really for those with dependent children, which has started to play a more significant role in lenders’ assessment of affordability and those people who have existing credit commitments which will continue to run after the mortgage completes.
If you have significant savings and existing loans, which have a short term to run, it may be worth considering paying off loans before applying for a mortgage. To assist your maximum loan and affordability calculation, particularly if you have children.
If you are unsure how much a mortgage lender will consider lending you, many now have calculators, which indicate the maximum loan, available on their websites, but the results of these are often questionably simplistic.
So if you want to know how much you can borrow, call a mortgage broker.
I wrote recently about the tough decision some people have about whether to fix their mortgage now; or wait on their standard variable rate, exposed to potential rises.
With today’s announcement that the Bank of England Base Rate will stay at 0.5%, the decision hasn’t got easier.
There is, however, a nifty product currently being offered by the Nationwide Building Society (one of the few lenders still vying for new business).
It allows you to take one of their current tracker products now and switch it to a fixed rate whenever you choose; without incurring early repayment charges.
Other providers have similar offerings; however, a key difference sets them apart.
The Nationwide will allow you to switch to a fixed rate based on the Loan-to-Value of the valuation taken when you arranged your tracker, which means that if house values continue to fall, you can still access new deals.
You will have to pay a second arrangement fee, however. And you will be restricted to the fixed rates available when you decide to change, which could be higher than those available now.
But if you are not sure which way to turn, this at least offers a get-out clause which typical tracker products will not.
