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Time to end black-boxing

While everyone is up in arms about bankers bonuses and the lending practices that led to the credit crunch the bigger picture of fair and open practices within the financial services industry seems to have fallen by the wayside to a culture of pandering to politically driven objectives.

One thing that most definitely flies in the face of the FSA’s treating customers fairly objective is the practice of credit scoring and what is referred to as black boxing. Black boxing is one of the terms used to describe the elements of a lenders credit scoring criteria that are kept secret and undisclosed.

While I don’t think that using a system of credit scoring is unfair or bad practice I do believe that it is unfair to keep any part of the methodology behind a scoring system secret. Firstly there have been a lot of issues with lenders accepting a decision in principle from an applicant which obviously incurs no cost, and then declining a mortgage application based on the secondary scoring of the application.

There is an obvious issue with this practice particularly where funds are limited in supply in that it leaves the lender open to accept many more applications than they can possibly fund while accepting application fees and booking fees (many of which are now charged up front) and declining an application post valuation. Interestingly many lenders also now include administration fees within their basic valuation fee, or have moved free valuation incentives to the back end of the deal asking you to pay for a valuation then refunding the costs upon completion. Several newspapers have also reported that many lenders are now removing the right for mortgage brokers and consumers to contest valuation figures on deals with free valuation incentives as a way of forcing borrowers into a higher loan to value product.

It’s also well known that while the idea of a credit blacklisting is a bit of a myth it is true that lenders may apply a weighting to their credit scoring systems that is based on geographic location for example. Some streets or postcodes may be dragged down on score based on the lenders experience in the area which may make it more difficult for people residing there to get credit. Now take this concept and how do we know that ethnic groups for example are not being penalised, which would naturally be illegal under racial discrimination laws? The simple answer is we don’t because we can’t see how these decisions are being made. Which means it’s bad for public faith in the industry and consequently the industry as a whole.

Mortgage Broker Q & A – Letting a mortgaged property

Question – I am intending to let my property which has a residential mortgage on it, what should I do and is this ok?

Firstly it is a typical condition of almost all residential mortgage contracts that the property should not be let without the consent of the lender. So you should always speak to your lender first and see what they say.

Most lenders will be relatively helpful with this as there are numerous reasons people choose to let what was once their home and it’s a very common occurrence. They may want to change the mortgage contract to a buy to let type or in some circumstances change nothing until the current mortgage is out of its initial term.

A lender is unlikely to give you a positive response though if you only entered into your mortgage contract very recently. If they did then very few people would bother paying the higher interest on a buy to let mortgage and would simply take a residential mortgage and switch it a week later.

You will also need to look at your buildings and contents insurance as it will very likely invalidate this policy if you are not the main occupant. Tenants are more likely to ruin a property than the owner so your home insurance may be a little more expensive, and last but not least you need to make sure you comply with all the regulations around being a landlord as regards gas inspections and using a secure tenant’s deposit scheme to avoid any litigation in the future.

As usual if your need further information about this call 0845 4594490 to a speak to a mortgage advisor about your own circumstances.

The end of self cert mortgages?

I wrote an article some time ago about the FSA’s proposed changes to end self certification and fast track mortgage lending in which I made a big point about how this could leave a lot of people struggling to refinance and cause trouble for the recovery of the housing market.

The FSA last week confirmed that action would be taken, and the press have been making similar observations to my own today about the impact that this could have on our recovery and those borrowers with an existing loan of this type.

But over the weekend I had a realisation and did a u turn on the subject. In reality there are few if any legitimate borrowers who cannot “prove” their income. The point being that “proof” and it’s interpretation is the key point here, because almost all people can show evidence that the income they declare is broadly accurate however they may not be able to prove income in the manner that a normal full status mortgage would require.

For example if you have a business from which you could take far more income than you currently do without running the business into decline that is your prerogative, and if you can show that you can still afford a large mortgage then fine, but you can also evidence that your business has the potential for you to take further income. It may not be satisfactory at your local building society now, but lenders with good product development teams will soon see how to create a new type of product to cater for this market once their appetite comes back.

So if the FSA get this legislation right and don’t dictate or define what proof consists of then there will still be the opportunity for lenders to market products for those with non standard income, priced above full status products as before but simply requiring some evidence to back up that the income declared isn’t total fabrication. This is what’s needed in the market and the FSA just need to be careful not to try and make this legislation so watertight that it chokes the housing market to death.

Rates continue to drop at lower loan to values

There have actually been so many new rates announced over the last two weeks it hasn’t been possible for me to talk about them all. Suffice to say if you are remortgaging or buying your first or second property rates across the board have dropped by as much as 0.3%. Arrangement fee’s also seem to be reducing slightly as well with several of our broker best buy products now having arrangement fee’s below £600 against an average fee of £999 for most headline rates a few weeks ago.

Swap rates have dropped significantly since the massive drop in BBA LIBOR over the past two months and this has helped to fuel cuts in fixed rates, however there still seems to be a general lack of movement on rates at higher loan to values for borrowers looking to remortgage. Fixed rates at 85% loan to value for example continue to sit around the 5.99% mark with little movement.

It will be interesting to see who makes the first move on this market of higher loan to value remortgage borrowers if indeed there is any drop at all, it seems almost as if the pot is so big that banks are scared to dip their toe in the water in case they get swamped. It certainly can’t be claimed that a remortgage at 85% is a greater lending risk than a purchase at the same loan to value yet you could get a much better rate if you were buying at this ltv.

Mortgage Advisors will be keeping their eyes peeled for changes on these higher LTV products and hopefully the news that interest rates are likely to remain low in the long term will help to drive swap rates down further and one of the big banks into releasing some decent remortgage rates for those with little equity. And if you’re listening a 95% purchase product wouldn’t go amiss either!

Woolwich respond to criticism with revised rates

The Woolwich have responded to criticism around their stepped tracker rate which with a current headline rate of 1.98% is one of the lowest rates available in the market. I commented on the fact that the product was restricted to mortgages between 200K and 500K severely limiting its market when I announced the new rate here a couple of weeks ago, theses restrictions have now been removed and the rate is available for loans between 5K and 1 Million now from today.

They have not chosen to address however the lengthy tie in for five years with a 2% early repayment charge which could make the product very costly in the long term.

Instead they have released a new lifetime tracker at bank base rate +2.29% with a £999 application fee available up to 70% loan to value or at +2.69% with no fee again to 70% loan to value. The new products have early repayment charges of 1% for 2 Years making them much more favourable but crucially both allow you to switch to a later fix without penalty too.

Both products would have a valuation fee of £295 for a purchase at 70% loan to value with a mortgage of 100K and lender Conveyancing fee of £126 giving an APR of 2.9% and 3.3% respectively.

As usual always read the separate Key Facts Illustration prior to making a decision on a mortgage product and to speak to a mortgage advisor call 0845 4594490.

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it. We do not usually charge a fee for mortgage advice although you do have the option to pay up to 1.5% of the loan amount. Some buy to let and commercial loans are not regulated by the Financial Services Authority.

Mortgage Broker Q & A. Interest only or repayment mortgage?

In Q & A we take a look at some of the questions mortgage advisers deal with on a regular basis.

Question; what are the pitfalls and benefits of an interest only mortgage?

They say life is all about risk, and this question is a prime example.

If you want the certainty that your mortgage will be repaid as long as you keep up your payments then you should definitely take a repayment mortgage.

However if the cost is too high in the short term however you could take an interest only mortgage and move to a repayment mortgage later although you should be aware that 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 on your investment return and produce a surplus by the end of the mortgage. However if your investment does not perform as planned then there will be a shortfall which you will have to find elsewhere.

It should be remembered though that your investment will not only need to outperform mortgage interest rates as you will pay interest on the full balance of the mortgage for the full term. Whereas if you took a repayment mortgage the capital part of your payment would gradually reduce the interest element and so like for like you will repay more interest over the term on an interest only basis as well.

Woolwich have more good news for Mortgage Brokers

Woolwich have announced changes to their 4.19% fixed rate until 31/10/2011 Mortgage product at 70% Loan to value.

The product was previously restricted to a maximum borrowing of £200,000 and a minimum borrowing of £100,000. The amendments now allow maximum borrowing of £1 million and minimum borrowing of £50,000 opening the product up to a much wider audience to the delight of Mortgage Brokers and borrowers alike.

The product remains the same otherwise with a £499 arrangement fee. The APR is 2.5% and reversion rate currently 1.99%. Based on a loan of £100,000 other applicable fee’s are a valuation fee of £295, land registry fee of £200, lender Conveyancing fee of £126 and a £35 completion fee. Early repayment charges are 3% of the outstanding loan if the mortgage is repaid before 31/10/2011.

As usual consult a mortgage advisor or mortgage broker and request a Key Facts Illustration about the mortgage prior to making a decision.

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it. We do not usually charge a fee for mortgage advice although you do have the option to pay up to 1.5% of the loan amount. Some buy to let and commercial loans are not regulated by the Financial Services Authority.

Mortgage Calculators for maximum loans are a waste of time

The next part of my why you should use a mortgage broker theme of the week is the humble affordability calculator.

We do a little pay per click advertising on the various search engines, this is no secret. But it surprised me to see so many hits coming through the somewhat spurious term “mortgage calculator” and it occurred to me that rather than this being people searching to find out what their monthly payment would be (as pretty much everyone has one of these calculators) it is probably people looking to see how much they can borrow.

If this is the case and you are reading this article because you were looking to find that out let me explain something, calculators that purport to tell you what the maximum you can borrow is are a waste of your time. Plain and simple.

The reason is this, every lender will take a multiple of your income and your partners if applicable or a percentage of your gross or net income and the sum will be different with ever lender. They may then deduct your loans and other credit commitments (but the way they do this will also be different with every lender). They may deduct a figure for each dependent child you have, and they may use their standard variable as a basis for affordability or the product rate you will be borrowing if they use a rate to calculate it at all.

Clearly a calculator cannot be set up to work out the maximum based on all the different methods of assessment used, so they use a “best case” method to give you a rough idea. This might seem useful but if the best case happens to be a bit optimistic it could cause you some big headaches and if it is woefully underestimated then you might miss your dream home based on poor information. The only calculators that are reliable are those on lenders websites, but they only work for that lender and will often be based around your credit score anyway which you cannot predict.

Affordability assessment is very complex and is an ever changing landscape, so if you want to know what the maximum you can borrow is speak to a mortgage advisor as that’s what we’re here for.

Mortgage Advice VS Comparison Sites

There’s some big shifts in the market at the moment which are affecting all mortgage advisors quite a bit, and one of the biggest trends is the growing movement towards self execution facilitated by comparison websites.

Now I am a fan of the internet and I even support the comparison websites as they do 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 scenario recently of someone looking to buy a second property as an investment and repay a mortgage over a very short term perhaps 10 years. The client was self employed and wanted a product without any tie in.

Now in this scenario he would have very high monthly payments, and it is a tricky market for affordability at the moment. The best rate product for his requirements also had an offset facility so I suggested he could increase the term of the mortgage reducing the payments he had to make and make the loan look more affordable. However as it was offset he could pay as much as he liked extra and this would then reduce the mortgage term back in line with his requirements.

This meant that he wouldn’t have to make the high payments but could do so if he wished, and for a businessman in the credit crunch that is a very useful option to have.

I think this is a prime example 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 a products features to improve his chances of getting the loan, and to reduce the financial risk to him and his business without increasing the cost. That’s why a Mortgage Broker is well worth speaking to regardless of how much experience you have of mortgages.

Site Relaunch

Just a quick post today to say our website has recenly been re-launched including lots of new content, online quote forms, mortgage calcultors and much more.

Theres lots of new information about other areas of our business including Commercial Insurance, Key Persons’ Insurance, Shareholder & Partnership Protection plans, our conveyancing partners, Life Insurance, Critical Illness cover, Permanent Health Insurance, Home Insurance and much more so if you haven’t stopped by recently drop in and take a fresh look.


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