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Does a fixed rate mortgage make sense in the current market?

This is probably the biggest mortgage related question on everyone’s lips at the moment and it is certainly very difficult to tell what is going to happen with interest rates. I can remember a conversation with a client almost 18 months ago where media coverage suggested interest rates were going to shoot up and they were worried the tracker product I had recommended might end up being very expensive.

In my opinion the question of whether to fix your interest rate comes in two parts. Firstly your attitude to risk should be taken into account and the severity of the risk assessed too. If you have ample income to afford higher interest rates then it comes down to your preference as to whether to gamble on variable type products, but if you simply couldn’t afford for your mortgage payments to go above current figures then not only should you be considering a fixed rate but also trying to reduce your borrowing levels asap.

The second part of the answer comes down to the difference between fixed rates and variable products, if the difference between a suitable variable product and a fixed is relatively low then even if you are a little risk averse it may be worth opting for a fixed rate. However when the difference is greater it becomes harder to say.

Let’s compare for example a 5 year deal currently on offer with one lender of 6.49% with a 25% deposit, compared to their 2 year fixed and 18month tracker product this is 3-4% higher and this means the chances of it being good value for money long term are much lower as it would require average interest rates over the next five years to be over 5% or so which is a big increase from current rates, hence I would only really recommend this scenario to someone who was really on the borderline of what they can afford and needed absolute long term security.

Many lenders are touting products with an option to switch to a fixed deal at a later date without early repayment charges, but for those who would be at serious risk of being unable to afford their mortgage if rates went up this is probably a poor option, as the reality is that fixed deals available at the time are likely to be higher than now as well.

It remains quite likely that while interest rates must increase at some point, that overall market competition will do too and to some extent increases in bank base rate are likely to be met with at least some reduction in lenders margins. Current two year fixed deals come with an average margin of about 3% over the bank base rate which would have been unthinkable three years ago, so at some point slowly but surely these differences must be eroded by competition as the market improves too.

Mortgages and concrete constructions properties

There are literally thousands of different concrete construction types which have been used in the UK and some of these are very difficult if not impossible to arrange a mortgage on.

In general it is properties from the post war era of a pre-fabricated construction type which can be difficult however even establishing which type of construction has been used can be a challenge. Most properties built after 1984 are likely to be ok as the introduction of Building Regulations established a suitable guideline for ensuring properties were not defective.

Some concrete construction types particularly those which contain structural iron or steel elements built between the early 1900’s and 1970’s have been found to suffer from concrete corrosion and either require significant work to prevent failure of the concrete or are indeed not suitable to mortgage at all, these are classed as defective types. In these construction types contaminants in the concrete react with the Iron in the steel rotting the concrete and steel beams from the inside out.

There are some very common concrete construction types such as Taylor Wimpey No Fines which should not be a problem though too so if you are looking at buying a property which is a concrete construction type you should inform your mortgage advisor at the outset and they should be able to check with local surveyors to see what construction method has been used and who if anyone might be able to lend on them.

Understanding mortgage lending to the Self Employed

There is a big difference in terms of how mortgage lenders assess the income of self employed applicants to those who are employed and receiving income on a PAYE basis, this short guide explains how income is assessed and some of the pitfalls.

You will be classed as Self Employed if you are a sole trader, in a partnership or if you own more than a set percentage of an Ltd company (typically 25%). PAYE employees who also own a significant share of a different company may be classed as having income from employment and self employment.

If you are classified as self employed the overwhelming majority of mortgage lenders will require a minimum of two years full accounts before you can be considered for a mortgage, there are certain exceptions for example where an applicant buys a share of an Ltd company with existing trading history. This means for many people that if you are considering entering into any of these types of employment then securing a new mortgage deal prior to making the switch to self employment could be a good idea.

When classed as self employed the lender will base their affordability assessment on your net pre tax profit, not your turnover. This is essentially your money taken in minus all allowable deductions and so will therefore usually be the profit figure from your tax returns.

If you are the owner or major shareholder of an Ltd Company you may well pay yourself PAYE income and dividends which is tax efficient and the two added together would be considered your profit. It is important to remember that leaving profit within the business as capital rather than drawing down these funds as dividend income will limit the maximum borrowing potential available to you. It may be worthwhile taking a “tax hit” in the accounting year prior to arranging a mortgage if the previous year’s drawings are low as many lenders will refuse to look deeper into accounts and base assessment on actual profits rather than just your personal PAYE and dividend takings.

Some lenders will base their lending figures on the last years accounts only however if your accounts figures are decreasing or have gone up and down most will take an average over two to three years.

Proof of income for the self employed will normally be either your SA302 or self assessment tax computation, or a copy of your accounts often for the last two to three years. Some lenders will request accounts certificates in these are not available. The sole traders or those submitting their own tax returns it usually pays to keep your SA302’s handy for coming mortgage applications although you can request reprints from HMRC.

Mortgage Broker Q&A – Do credit searches affect my credit score and how many is too many?

Question: I have been told that credit searches affect my credit score, is this true?

Answer: Yes – but it depends on how many have been done and by whom.

When you apply for credit most lenders will use a credit reference agency to get a credit report of your borrowing history. This credit search will leave an imprint on your report, usually just saying the lenders name, date and the type of credit application.

It is typical for borrowers to shop around when applying for credit so having three of four credit searches in quick succession is not likely to cause you a problem, however if you have lots of credit searches within a 3 month period (I would say between 7-10 or more) then your credit score may start to be temporarily affected.

This is because of an assumption that if you are trying so many different lenders perhaps it is because you are being declined by them and are franticly trying to find a deal. For this reason you should always approach arranging credit in a systematic fashion.

Find out who has the best deals first, then establish whether or not your circumstances in terms of income, employment history and property type etc fits the lenders criteria before having a decision in principle. As brokers we always assess whether you are eligible to borrow with a lender based on all other information before approaching a lender for a decision in principle.

However if you do have a lot of credit searches and your credit history is reduced this does not mean that you will permanently affected. It is simply a risk assessment measure and as such most lenders will look at the number of searches in the last 3 months. I personally fell foul of this when I was about 21 simply by changing my mobile phone contract too much at the same time as shopping around for a personal loan, but after waiting a couple of months things returned to normal.

One thing that does not apply is searching your own credit report, this either wont show up or shouldn’t be taken into account as it is not a measure of risk. People of all financial backgrounds now check their own credit reports for a variety of reasons many of which have nothing to do with struggling to raise credit and for this reason this should not affect you credit score.

If you need help working out what might be affecting your credit score contact one of our mortgage advisors to discuss your circumstances on 08454594490.

Mortgage Broker Q&A – Mortgages for Flat’s above shops and commercial property

Question : I am looking to buy a flat above a shop or other commercial premises and have been told this can be difficult, what do I need to be aware of?

Answer: Lenders always have to be aware of risks that may affect the value of a property and saleability should the loan go into default. A flat above a shop or commercial premises has several risks which a lender will consider when deciding whether to lend.

These will include the nature of the business which the flat is above; if it is something which would cause little disturbance to the owners of the flat such as a florists or estate agents it is less of a risk. However if it were a fish and chip shop for example where late opening hours and food smells may affect the ability of the lender to re-sell the property then it is likely that it may be difficult to arrange a mortgage.

Consideration will also be given to the area in which the flat is located. A flat over commercial premises in an area like Chelsea or Knightsbridge would still command a significant value and appetite for lending. However the same property in an unfashionable part of a city like Manchester or Liverpool may be much more difficult to arrange a mortgage on.

Another important factor would be the access to the property, if it has a connected access to the commercial premises then insurance would be very difficult to arrange separately and this would also restrict lending.

You should be aware as a potential purchaser of such a property of these same risks as properties which are difficult to mortgage may in turn be difficult to sell. For further information and advice on flats over commercial property call one of our mortgage advisors on 08454594490 for independent mortgage advice.

Mortgage Broker Q&A – What is a basic valuation for mortgage purposes and what other types of survey are there?

Most typical purchase mortgages and many remortgage products will include a fee for a basic valuation.
This valuation is not for the buyers benefit and doesn’t protect you in the event of a property defect or if work is subsequently required for things like damp treatment or subsidence.

You are paying for some form of valuation to satisfy the lender that the property being mortgaged is suitable security for the loan. The surveyor owes no duty of care to you as the buyer despite the fact that you pay for it.

Many borrowers believe that this basic valuation is suitable evidence that the property is in a good state of repair, and many have found out in court to their dismay that this is not the case.
Some basic valuations will not even involve entering the property it may just be a “drive by viewing” or even performed on an AVM or “Auto Valuation Model” which is a computerised average.

Many lenders will offer either a homebuyers report or a full survey as a form of extra or upgrade to the basic valuation. These survey types do offer you some legal protection and do entitle you to a duty of care from the surveyor in question.

A homebuyers report should identify major problems and structural defects, where as a full survey should be very thorough and identify any serious issues including electrical and dry rot problems etc.
If you buying a property and you want to know that the property is structurally sound then don’t rely on the basic valuation to protect to you because unfortunately it will not.

Traditional Buy to Let mortgages not the only option for larger landlords

A recurring theme when speaking with buy to let investors across the country at the moment is the difficulty being caused by the dire lack of realistic products for remortgaging or making new purchases.

With current requirements for a minimum deposit of at least 25% and interest rates beginning around the 4% mark for variable rates with deposits of 40% and over its easy to see how many think the current markets offerings are nothing more than a cynical attempt to recoup wider losses by the big banks. And with arrangements fee’s going at anything up to 3.5% I have to agree with them.

There is however another option for Landlords who hold several properties or who have a sizeable income aside from their rental. The private banking sector is increasingly taking up a larger share of this market and with potential interest rates starting from 2.5% or so above base rate and fees typically between 1-2% of the loan balance they make a very attractive proposition to the right clientele.

These lenders not only have the experience in dealing with larger loan sizes and non standard properties, but the human underwriting to look at individual cases which would not meet the standard criteria of high street buy to let mortgage lenders.

The downside is that they typically require assets of around £250,000+ without taking your main residential property into account and or an income of over £100,000 per annum. So while they could prove invaluable for those landlords with a decent portfolio gearing with 25% or more in equity or for the first time investor with a good main income they won’t provide any refuge for the many landlords who worked at maximum leverage and left themselves with less than 25% equity in the their overall portfolio.

If you have several buy to let properties on or about to come onto their standard variable or indeed of you have a significant income instead and would like to find out whether a private banking arrangement could be suitable contact speak to one of our mortgage advisors on 0845 4594490 for independent mortgage advice.

Mortgage Broker Q&A – Is it safe to use small regional lenders or would I be better protected borrowing from a larger bank?

This is a really interesting question for me as it crops up quite a lot however it’s important to remember that borrowing from a bank is not the same as depositing money into it.

Firstly on the reasons you should use small regional lenders, they are currently leading the market in terms of mortgage and savings rates and you may well find their customer service slightly less like dealing with a brick wall! There really are some cracking products being delivered by small regional lenders at the moment and there is really very little reason to shy away from them.

If you were a mortgage borrower with an institution that failed then there would be very little likely-hood of the administrators coming round with repossession orders even if the law permitted them to do so (which I am pretty sure it doesn’t but I am not a solicitor), because selling an entire loan book would be ludicrously complex and probably produce a much lower return than simply selling the book of loans to another institution, something which is in fact very common trading by Banks anyway.

Even in the event that there was no one forthcoming to purchase the loan book, the administrators would simply let the book run and pass administration to an outsourcing firm – again quite common.

The government currently in power has made it clear that it will not allow any financial institution in the UK to fail regardless of its size. The FSCS or Financial Services Compensation Scheme currently does not discriminate between the size of institutions either so as long the provider is a part of this scheme and falls under UK regulation this is not affected.

Mortgage Broker Q&A – What is a higher lending charge?

Question; What is a higher lending charge and how does it affect me as a borrower?

A higher lending charge is a fee lenders may apply to borrowing over a certain percentage of a property value.
For example a lender may choose to impose an extra charge on borrowers who borrow more than 80% of a property’s value, or perhaps more than 85% or 90% etc. Often the fee will be a percentage of the amount over this limit which you borrow.

A typical example would be a 5% charge on all lending over 80% of the property value. In this case if your home was worth £100,000 and you borrowed £90,000 you would pay 5% of the £10,000 over and above the 80% limit which would give a higher lending charge of £500.

Obviously it’s important to check how the fee is calculated as it could be based on the whole loan which would normally mean the fee could be considerably higher than the example above.

Another important consideration is what the lender does with the fee. Some lenders just charge a fee to increase their profit margin on these loans to cover potential losses if they have to sell properties undervalue at auction. However if the lender uses the fee to buy a Mortgage Indemnity Guarantee which would insure the lender against such losses, it’s important to be aware that in the event of you handing back the keys and the property being sold for less than the outstanding mortgage balance the insurer would then have the right to pursue you for their losses under the right of “subrogation”.

The FSA forced lenders to stop referring to these charges as Mortgage Indemnity Guarantee fee’s because it was worried that this gave the impression that such insurance policies would benefit the borrower as well as the lender, so be aware that if you pay this fee or have done in the past it will not protect you from the lender or insurer pursuing you for any outstanding balances should the property have to be sold at undervalue after repossession.

Mortgage Broker Q&A – Capital Gains Tax on Buy to Let or investment properties

Capital gains tax is levied on gains made on certain non exempt sales of assets at a current rate of 18%. Your main residence is effectively exempt from Capital Gains Tax through tax relief, however any second home or investment property will become liable for Capital Gains Tax from the date at which it is no longer your main home.

So if you bought a property as a second home or buy to let then it is liable from the date of purchase, whereas if you bought a property as your main home and subsequently moved to a new property letting the old one, then the old property becomes liable to Capital Gains Tax from the date of transfer however there is a 36 Month leeway given so effectively you owe Capital Gains tax on the property from 36 Months after its transfer to a buy to let.

Losses and expenses can be set off against any gain, so keep a record of all your costs as a landlord including maintenance bills etc but not including your mortgage costs (mortgage interest is offset against income tax). This means it is also worth having some form of valuation on the property at or around its 36 month as a let property to establish the value of the asset at its date of becoming liable.

You also have a personal Capital Gains Tax threshold of £10,100 currently below which no tax is due, so if you are married or in a civil partnership having the property held on a joint tenancy or tenancy in common basis will allow you to use both your tax thresholds up to £20,200. To work out any tax owed take the sale value of the asset, less any costs and applicable tax threshold and the value at its date of becoming liable the multiply by 18%.

So if you let a property worth £120K in 2005 and sold it this year for £150K with costs in the four years of £3k then you would owe £30K less £3K, less £10,100 which = £16,900 taxable gain then multiply £16,9K by 18% giving tax due of £3,042. In the same situation for a married couple where the property was held in joint names you would instead take the gain of £30K less £3K costs, and £20,200 tax exemption giving £4,800 taxable and tax owed of £864.

Capital Gains Tax is a complex area and there are other factors which may affect your tax liability, and it should be remembered that taxation policy can change in each government budget. For more information or to speak to a mortgage broker call 08454594490. Seek independent taxation advice for an exact analysis of your tax liability and guidance on tax mitigation.


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