In Q&A, we take a look at some of the questions mortgage advisers deal with regularly.
Question; what are the pitfalls and benefits of an interest-only mortgage?
They say life is all about risk; this question is a prime example.
If you want the certainty that your mortgage is repaid in full (providing you keep up your payments), then you should take a repayment mortgage.
However, if the cost is too high in the short term, you could take an interest-only mortgage and move to a repayment mortgage later, although you should be aware that the interest paid will be dead money and not reduce your debt.
If you take an interest-only mortgage in the long term, you are gambling that by investing wisely, you can outperform mortgage interest rates with your investments, producing a surplus by the end of the mortgage.
However, if your investment does not perform as planned, there will be a shortfall which you will have to find elsewhere at the end of the term.
But your investment must also outperform mortgage interest rates over the full loan balance; and the entire term.
Whereas if you take a repayment mortgage, the capital part of your payment would gradually reduce the interest element, so like for like, you will repay more interest over the term on an interest-only basis too.
Also, income earned from investments may be subject to further taxation, which increases the risks of shortfalls attached to interest-only loans.
That means interest-only lending on people’s primary residence is considered high risk and is harder to arrange.
On buy-to-let loans, interest only is commonplace. The reduced monthly payments give landlords more breathing space if a tenant fails to pay; allowing for the faster accrual of additional funds for other purchases.
In Mortgage Adviser Q & A we look at some the common questions answered by mortgage brokers on a day to day basis.
Question; Will lenders consider my benefits as income when assessing affordability?
Most lenders will consider some types of benefits as income and this varies from lender to lender. For example it is quite common for child tax credits to be considered as income but child benefit not to be, it is also quite common for other income such as regularly received child maintenance payments to be considered. Again though how much is applied will be specific to each individual lender.
Most lenders will however require you to have some form of income apart from benefits as well, this is because year by year benefits will be changed in the budget and your entitlement to a benefit cannot be guaranteed in the long term.
For information about which benefits are considered as income with different lenders seek independent mortgage advice.
In Q&A, we take a look at some of the common questions faced by mortgage brokers currently.
Question: I recently moved to the UK from abroad; when can I buy a property?
High street lenders will usually require you to have a permanent right to reside in the UK and to have been resident and working in the UK for a minimum period, often a year or perhaps up to three years.
There are exceptions to this; some private banks may be able to lend from the moment you arrive regardless of whether you have a permanent right to reside. These arrangements may be restricted to people with higher incomes (for example, £50K a year) or high levels of existing assets.
There are also a small number of lenders able to consider applicants without permanent rights to reside, i.e. those on visas. Again several will still require six to thirty-six months of residency history, but a small number can consider applications from day one.
For that reason, there isn’t a black-and-white answer to this question; so it’s usually best to seek professional mortgage advice, so if you would like to know; call us on 08454594490 and speak to a mortgage advisor.
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.
