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.
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.
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.
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.
