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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.

How to predict a recession and how to end one – the definitive guide

Hello and happy new year! doesn’t it just feel great to be back in business? No? Perhaps the recession blues are getting you down then.

And on that note I thought I would begin the year with something completely unrelated to mortgages but connected to todays completion of the new world’s tallest building in Dubai.

You see there’s a lot of talk flying around about how can we ensure that this never happens again, that theres never another recession or credit crunch and that banks are never again allowed to overstretch themselves.

The answer to this question is in fact that you can’t. What goes up will in fact go down sooner or later, and growth is always followed by decline at some point down the road. Gamekeepers have known this longer than most and I first heard it put into terms by a comparison to the populations of foxes and rabits.

Fox and Rabbit populations have been recorded for centuries and it has long been observed that Rabbit populations mushroom until overcrowding causes disease to make them weaker and more vulnerable to predators like the Fox. And so Fox populations have also followed Rabbits peaks and troughs because the number of Fox’s inevitably goes up as Rabbit populations increase, but then when the Rabbits decline a lack of food for the Fox also inherantly leads to Fox populations going down too.

What’s the point of this? In the middle of the last boom I heard a theory that recessions can be predicted as they always appear to happen upon the construction completion of the world’s tallest building.

Now I had forgotten about this altogether until I heard on radio 4 this morning that the new world’s tallest building has just been completed in Dubai. The theory says that as building the world’s tallest building is a mark of prosperity then it is something that a country will only consider when the good times are rolling, and by the time its off the drawing board and into construction its pretty likely those good times are coming to an end.

So if you want to know when to sell everything, and go on an extended world tour keep an eye on those construction projects!

Now as for how to end a recession its pretty simple. Stop putting prices down and put them up instead, it’s just human nature that if prices are going down you wait to buy until their cheaper and if their going up you buy now before they get any higher – And that my friend is why you can gaurantee one thing,

It will, most definitely happen again.

Fin

Woolwich announce new low fee fixed rate products up to 75% loan to value

The Woolwich announced several new fixed rate products yesterday which herald the return of low fee sensible rate mortgage products to the market at what will surely prove to a pivotal moment in the UK’s turn from recession to recovery.

The rates which include a 2 Year fixed at 3.89% available up to 70% loan to value and at 4.09% up to 75% loan to value have an application fee of just £199 with free valuation and legal work on remortgages or £200 cash back towards legal costs if using your own solicitors. Early repayment charges apply of 3% of loan to be paid until 31/01/2012, and APR for the products is 2.8% On both.

They have also included a 3 year fixed product at a similarly competitive rate.

This is a big departure from the glut of products currently offering headline rates with either £995 or even 2% arrangement fee’s and will surely serve to kickstart the lending industry back into competitive pricing with more than just on paper rate cuts.

The products are also available on new purchases and equally competitive there although the lenders standard valuation and legal fee’s will apply on purchases.

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.

High time APR or Annual Percentage Rate interest calculations were removed from mortgage products

One of the most bewildering and confusing items on any mortgage illustration from my point of view must be the Annual Percentage Rate or APR listed on a product. APR was developed to give a comparative measure between various loans to show the overall cost of the borrowing on an annual basis taking into account a much broader range of fees and charges than the loan interest on its own.

Now that’s a good thing where the calculation makes sense, but on mortgage products in its current guise it makes no sense at all.

A simple look at the best buy tables on our website will show you that a product far cheaper during its initial interest rate term may have a much higher APR than a product with a considerably higher rate of interest. The issue is that APR is calculated over the lifetime of the loan and so will also consider the reversion rate of the product after its initial term.

There are several reasons why this is misleading;

  1. 1. Reversion rates are generally variable and not linked directly to bank base rate. In two years time a lender with a previously un-competitive reversion rate may well be leading the market and vice versa – hence it is not a factor that should play a major part in the decision making process.
  2. 2. You would generally regularly remortgage during the early years of your mortgage repayment to ensure a competitive rate of interest so including the reversion rate after the initial mortgage term distorts the picture.
  3. 3. Clever design can skew the figure. Lifetime trackers appear very competitive because they have no reversion rate, and refunding upfront fee’s affects the calculation but could cost a pretty penny if the loan never goes ahead.

APR is a system that was never really designed for mortgage contracts but has become a legal obligation when advertising them due to the confused dual regulatory system between the FSA and the Office of Fair Trading, it makes some sense on unsecured loans and very little in the mortgage market.

It is high time this dual regulation was removed and APR calculations either scrapped on mortgage contracts or replaced with something far more specific to the complex nature a mortgage product.

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.

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

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.

As always for more information about what type of repayment would be best for you and to speak to a UK mortgage advisor call 08454594490.

When will big businesses learn and switch their brains on?

It doesn’t surprise me in the least that our banks needed bailing out, not because of “casino trading floors” or “fat cat pay packets” but just simply because on a day to day basis I am confronted by the complete lunacy of big businesses and the categorical failure to look at the big picture.

Myself and colleagues once helped one of the UK’s largest Insurance companies sort out their customer service by explaining to them that it was probably a bad idea to send brokers all over the country individual notifications of a cancelled policy with no details of the reasons for cancellation and outstanding payments owed, because that meant they had to handle thousands of calls from brokers every day just to ask why the policy had cancelled and what it would cost to re-instate, information they could quite easily send on the same message. These calls were going into the same service team that dealt with their customers with an average hold time of twenty minutes.

The same insurer had an online broker quote system that allowed you put in a postcode on the first page and on the last page twenty minutes later it would dutifully inform you that it was a decline due to flood risk or area! We helped them re-develop their system but with a little logical thought from their IT team in the first place there would have been no need.

One big bank is proud to inform all brokers that they have moved to a paperless office! Hoorah! However because they insist on you faxing every document to them brokers all over the country probably aren’t enjoying a similar lack of paper of in their offices. Have they heard of the wonders of email? You can actually send a message electronically with documents attached to them, and unlike faxes the output at the other end is actually legible? You might argue you can email to a fax number, but not without an email to fax account and what’s the point anyway? It reminds me of the operation Good Guys episode where blank paper is just being faxed over from another station!

But the icing on the cake was the credit card company who after taking about seventeen security questions and proof of ID over the phone just to let me speak to them, informed me that to change my account address I would have to write them a letter. Yes because as we all know the royal mail is the most secure system of passing information available anywhere, and anyone who has my credit card can probably fake my signature but wouldn’t normally be able to guess my date of birth, place of birth, mother’s maiden name etc.

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 – Removing a party from a mortgage

Question – I have a joint mortgage currently and we want to change it to being solely in my name or my partners what do we need to do?

Firstly you need to establish whether your existing mortgage is still within any tie in period and what penalty there is if so. Then you need to check with the lender whether they are happy for the mortgage to be in only one of your names, which will mainly come down to their assessment of whether it is affordable to you as a single applicant.

They will re-assess the affordability of the case as if it was a new mortgage. If they are happy that you can afford it alone then a new mortgage contract will be required and there will be costs involved with the legal process of making the transfer of equity. However if they are not happy you will not be able to make the change without finding a lender that does believe you can afford the mortgage in your sole name. As it’s a contract the only way to make the change if your existing lender is not satisfied is to change lender and this is where it becomes important to consider any early repayment charges and whether it is best to wait until these penalties cease.

As well as affordability the lender will usually re-assess you as a credit risk and possibly the property value. If however you are considering this because of an impending bankruptcy this will not actually prevent the property from being seized which is a common myth.

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

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 TYPICALLY CHARGE AN ADVICE FEE OF £299 PAID UPON FULL MORTGAGE OFFER. SOME BUY TO LET AND COMMERCIAL LOANS ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY
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