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.
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.
A big question for many first-time buyers is whether it is possible to buy a property without a deposit; in the absence of 100% mortgage products.
One way is the government’s Home Buy Direct shared-equity scheme, which allows customers to buy a house for 70% or more of its value.
The property developer makes a loan for the remainder on an interest-free basis which reverts to a low rate, such as 1.75%, after several years.
Some property developers involved in the scheme offer purchases without a deposit.
The scheme operator is repaid by “staircasing” (the owner buying a bigger share later on); or on the sale of the property, in which case they will take their percentage of the sale value.
Housing associations also run similar schemes known as “shared ownership”, where you purchase between 25-75% of a property and pay a nominal rent on the remainder; however, these may require a small deposit. Broadly both schemes are similar.
To find out more, search for Home Buy Direct on Google or for housing associations in your area.
One way that won’t usually work is the vendor reducing the sale price. Known as a vendor’s deposit, this is very unlikely to be accepted (in the present climate of declining property prices).
So pretty much all lenders will take the lesser figure for the valuation, leaving you back at square one.
With rising unemployment and the continued economic downturn, it is unsurprising that mortgage brokers and insurers alike have noted increases in enquiries about mortgage payment protection insurance or accident sickness and unemployment insurance, as it is otherwise known.
So I thought now would be a good time to discuss how the cover works and what types are available.
Few homeowners know that income support for mortgage interest is only available 39 weeks after redundancy or incapacity leaves you out of work.
And very few people would continue to receive pay at full salary for this length of time or even have sufficient savings to cover their mortgage and lifestyle for this duration; this is where the need for ASU cover applies.
ASU covers being unable to work due to an accident, sickness or unemployment (if applicable). And to help pay bills like your mortgage, insurance, utilities and food. They typically provide a benefit for between 12 and 24 months.
It has a deferment period usually of 4, 8, 12 or 24 weeks. It is the amount of time from being unable to work before being able to make a claim on the policy; in general, the longer the deferment period, the cheaper the cover.
You can also decide whether it will then pay back to day one (i.e. from the date of being out of work) or from the end of the deferment period, which again will usually reduce the premium.
You may have the option to include unemployment; this will only cover you for involuntary redundancy. If you are dismissed or resign, there will be no cover.
For the self-employed, care is required as many policies will not cover this type of employment, or supplementary income from freelance work.
Another point is they generally require you to have been in permanent employment for a minimum of a year; and for the policy to have run for at least 3-6 months before a claim for redundancy.
And they may exclude redundancy where you could reasonably have expected it prior to arranging the cover. So, if your firm has announced job cuts in the future, you need to ensure that the policy will be valid.
Cover can usually be arranged, for the cost of your mortgage and insurance, with the option to add an extra cover up to a maximum percentage of your income; or a percentage above your mortgage costs so that you cannot be better off receiving the benefit than if back at work.
There may be the option to “waive the premiums”, from the point of being out of work; you won’t be able to claim until the deferment period is complete, but you can stop paying the monthly premium as soon as you are out of work. Again though, this will usually make the cover more expensive.
As usual, if you are interested in this type of protection, it makes sense to speak to an independent mortgage or financial advisor before making a purchase.
