One of the most bewildering and confusing items on any mortgage illustration must be the Annual Percentage Rate or APR listed on a product.
APR gives a comparative measure between various loans to show the overall cost of borrowing on an annual basis, taking into account a broad range of fees, not just the interest alone, as well as giving a more direct comparison of the impact of a daily calculation of interest versus other less favourable terms.
Now, that is a good thing where the calculation makes sense, but for mortgage products, in its current guise, it makes no sense at all.
A simple look at the best buy tables on our website will show you; a product far cheaper during its initial deal may have a much higher APR than a product with a considerably higher interest rate and identical fees.
That is because the APR is calculated over the whole lifetime of the loan and will include the reversion rate of the product after its initial term.
There are several reasons why this is misleading;
- Reversion rates are generally variable and are not linked directly to the Bank of England Base Rate. In two years a lender with a previously un-competitive reversion rate could lead the market and vice versa. Hence it is not a factor that should play a major part in the decision-making process.
- Generally, customers should remortgage regularly during the early years of their mortgage repayment to ensure a competitive interest rate, including the reversion rate after the initial mortgage term distorts the picture.
- A clever design can skew the figure. Lifetime trackers appear very competitive because they have no reversion rate, and refunding upfront fees affects the calculation but could cost a pretty penny if the loan never goes ahead.
APR is a system that was never really designed for mortgage contracts but has become a legal obligation when advertising them; due to the confused dual regulatory system; between the FSA and the Office of Fair Trading. APR makes some sense on unsecured loans and little in the mortgage market.
It is high time that dual regulation ceased and APR calculations either scrapped on mortgage contracts or replaced with something far more specific to the complex nature of a mortgage product.
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.
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.
As a mortgage advisor, you often have to try and combat the expert opinion of “the bloke down the pub” and even apparently knowledgeable sources.
Whilst looking for a table of current standard variable rates recently I came across this quote on fool.co.uk:
“First of all, let’s look at Standard Variable Rate (SVR). This is the standard rate of interest that lenders use, and as it says, it is variable. This is because it is linked to the Bank of England base rate – so whenever that goes up, so will your mortgage rate and thus so will your mortgage payments.
However, SVR Mortgages aren’t just linked to the base rate, they’re usually set at around 1-2% higher. This makes this type of mortgage very expensive.”
Any mortgage broker worth his salt would cringe at the apparent advice that SVRs are linked to the Bank of England Base Rate or “BOE Base Rate”, and will move in line with it.
Any borrower whose SVR is still above 3% is probably more than aware that this is not the case.
In reality, the lender’s SVR is a rate that could move due to many things including; LIBOR, the BOE Base Rate; the need to attract savers and a myriad of other market forces.
That’s why the full extent of the cuts in the BOE Base Rate has not been passed on in full to many borrowers, as banks just need to recapitalise.
What’s the point you ask? When you’re looking to find out what to do with your mortgage, a qualified mortgage advisor has a legal duty of care to you. Something neither a website nor the bloke down the pub; will provide.
