Mortgage Broker Q&A; what’s an offset mortgage?
In Q&A, we look at some of the questions mortgage advisers answer; on a day-to-day basis. Question; what is an Offset Mortgage, and how could one save me money?
Offset Mortgages have lessened in number thanks to the credit crunch, but for some people, they could still represent a very effective way to save money on mortgage repayments.
In an offset mortgage, a savings account is retained with the lender, and any balance in that account; will offset the outstanding mortgage amount.
The savings earn no interest, and none is owed, on the equivalent balance, of the mortgage.
The benefit of this is that mortgage interest rates are generally above savings interest rates, as this difference is the premium or margin the lender will make for the loan.
You are also taxed at either 20% or 40% on your savings interest (unless you don’t pay tax, but let’s assume you do if you have a mortgage).
That means that if you could get a savings rate of 3.5% gross, and your mortgage was 4.5%, for example, then the real return on your savings would be either 2.8% or 2.1% after tax.
That would mean for every £1000 in the offset account, you would be better off by either £17 or £24 a year in this scenario, and your mortgage payments could be reduced: by £45 per £1000.
But it doesn’t end there; you can usually choose for the offset either to; reduce the term of your mortgage or your monthly repayments.
If you reduce the payments but deposit the savings into the offset, the balance will increase, accelerating the reduction of your interest payments; increasing savings month on month.
But, it also can be used as a way of effectively paying lump sums off a mortgage with the added benefit that these can be easily accessed should you have a rainy day.
For more information on offset mortgages, call a mortgage advisor on 0845 4594490 for advice.
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.
Question; What’s the difference between life insurance and life assurance?
Assurance is cover for an inevitable event, so in the case of life assurance, the policy always pays out unless cancelled; it will run for the whole of your life and inevitably pay out when you pass away.
Life Assurance is, therefore, an investment.
Life insurance will run for a specific term and only pay out if you die within the term, or in the case of many policies, are diagnosed with a terminal illness before the final year of cover.
Should you survive the term, there would be no return on the premiums. But this also means that life insurance would generally be considerably cheaper than life insurance.
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.
