Welcome to the brokers blog; where we discuss the latest developments, common queries, spurious sources and the sublime, ridiculous and esoteric aspects of the mortgage industry.
Probably the biggest mortgage-related question on everyone’s lips is whether to fix their mortgage and at present, it is certainly difficult to predict future 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 become very expensive.
In my opinion, whether to fix your interest rate or not is a two-part question. Firstly consider your attitude to risk and the severity of that risk.
If you have ample income to afford higher rates, it comes down to your preference of whether to gamble on variable-type products. But, if you cannot afford for your mortgage payments to go above current figures, you should not only 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 fixed deals is relatively low, even if you are a risk taker, it may be worth opting for a fixed rate. However, with bigger differences, it becomes harder to say.
Let us compare a 5-year deal currently on offer with one lender of 6.49% with a 25% deposit to their 2-year fixed and 18month tracker product; this is 3-4% higher, and that 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.
That is a significant increase from current rates, so I would only recommend a fixed in this scenario to someone on the borderline of what they could afford and needing 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 likely to be a poor option, as the fixed deals available at the time are likely to be higher then as well.
It remains likely that while interest rates must increase at some point, overall market competition will do too, and to some extent, increases in bank base rates 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.
There are thousands of concrete construction types in the UK; some of these are difficult, if not impossible, to mortgage.
In general, its properties from the post-war era and a pre-fabricated construction type that could be challenging to mortgage; however, even establishing the type of construction used can be troublesome.
Most properties built after 1984 are likely mortgageable; after this point, Building Regulations are widely considered to have delivered suitable construction methods and control of material standards.
Some concrete construction types, particularly those containing structural iron or steel, built between the early 1900s and 1970s, suffer from concrete corrosion and either require significant work to prevent failure or are unsuitable for a mortgage; whatsoever.
Classed as defective construction types, contaminants in the concrete react with the iron in the steel rotting the concrete and steel beams from the inside out.
Other construction types are classed as defective simply due to being built in large quantities with sub-standard materials; or experimental wall leaves that have performed poorly over time or failed systemically; the Large Panel System or ‘LPS’ being an example that catastrophically failed in the Ronan Point tragedy.
There are, though, common concrete construction types, such as Taylor Wimpey No-Fines, which are not usually a problem to mortgage.
If you are looking at buying a vintage property of a concrete construction type, you should inform your mortgage advisor at the outset.
They should be able to check with local surveyors and try to ascertain whether there are likely to be problems with a mortgage.
If an estate agent is advertising a property as a non-standard construction, requiring cash purchase; it is likely that the property is not typically mortgageable.
But you should not assume that any agent or vendor is aware of a non-standard construction type; this is one reason why having an independent survey, not just a basic-mortgage valuation, is generally prudent when buying a home.
There is a big difference between mortgage lenders assessment of income for self-employed applicants and those who are employed and paid on a PAYE basis.
This short guide explains how lenders typically calculate income and some of the pitfalls to be aware of when becoming self-employed.
Lenders usually class you as self-employed if you are a sole trader, in a partnership, or when you own more than a set percentage of a limited company (typically 25%).
Employees paid a PAYE salary who own a significant share of another company would have two incomes, one from employment and one from self-employment.
If classified as self-employed, most lenders require a minimum of two years of full accounts before lending; only a limited number may lend based on a single year.
There are certain exceptions, for example, where an applicant buys a share of a limited company that is a ‘going concern’.
If you are considering starting these types of employment, securing a new mortgage deal before switching to self-employment could be a good idea.
When classed as self-employed, the lender will base their affordability assessment on your pre-tax net profit, not your turnover.
That is essentially your money received minus all allowable deductions, typically the profits stated in your tax returns.
If you own or are a major shareholder of a limited company, you typically pay yourself a minimum PAYE income and dividends; 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 these funds as dividend income will limit the maximum borrowing potential available to you with most lenders. But we can help you arrange loans with lenders that consider this additional profit.
It may be worth taking a ‘tax hit’ in the accounting year before arranging a mortgage if the previous year’s drawings were low, as many lenders will refuse to look deeper into your accounts, basing their assessment on just your PAYE and dividend and ignoring excess profits.
If your profits or drawings have decreased, most lenders will work on the most recent year’s accounts; if increasing an average of two or three years is typical.
Proof of income for the self-employed usually comprises either your SA302 or self-assessment tax computations, or a copy of your company accounts for the last two to three years. Some lenders will request accountants’ certificates if these are not available.
For the sole traders or those submitting their tax returns it usually pays to keep your SA302s handy for coming mortgage applications, although you can request reprints from HMRC, or easily download these from HMRC online if you have access.
For help with your self-employed mortgage, get in touch on 0345 4594490.
Q&A; Mortgages for flats above shops and commercial property
Question; I am buying a flat above a shop or other commercial premises; I understand this can be difficult; what do I need to be aware of?
Lenders always have to be aware of risks that may affect the value of a property and its saleability should the loan go into default.
A flat above a shop or commercial premises has several risks that a lender will consider in making a loan.
These include the nature of the business the flat is above; if it would cause little disturbance to the owners (think florist or estate agent), it is less of a risk.
However, a flat over a fish and chip shop, where late opening hours and food smells may affect the ability of the lender to re-sell, would be challenging to mortgage.
The usual suspects are all varieties of hot food outlets, any kind of bar or off-license, shops with late opening hours or antisocial attributes, and more bizarrely; beauty salons and hairdressers.
Lenders will consider the location of the flat. A flat over commercial premises in an area like Chelsea or Knightsbridge would still command a significant value and appetite for lending.
But the same property in an unfashionable part of a city like Manchester or Liverpool would be far harder to mortgage.
Another issue is access; a mortgaged property must have independent access; if this is too close to the working areas of a kitchen or similar commercial activity, it is unlikely to be a compelling security for lending.
And it isn’t just flats that suffer this issue or properties with commercial premises directly below. Any commercial premises directly adjacent to a property or within a few hundred yards may present problems.
The main consideration is how it affects the desirability of a property. A haulier’s yard fifty meters from a house could limit your choice of lenders but probably wouldn’t leave you without mainstream options. A house abutting a giant scrapyard would likely be a challenge.
Be aware as a potential purchaser of such a property; hard to mortgage may mean hard to sell. And a property that might have a few interested lenders during a boom; may be harder hit by falling prices in a downturn due to a total lack of interested lenders.
For further information and advice on flats over or adjacent to commercial property, call one of our mortgage advisors on 0345 4594490 for independent mortgage advice.
Most house purchase mortgages and many remortgage products will include a fee charged for a ‘basic valuation’.
This valuation is not for your benefit; it does not protect you against a property defect or if work is required, such as damp treatment or for subsidence.
You are paying for some form of valuation to satisfy the lender that the property is suitable as security and estimate its value. The surveyor owes no duty of care to you as the buyer, even though you pay for it.
Many borrowers believe that this ‘basic valuation’ is suitable evidence that the property is in a good state of repair; many have found out in court, to their dismay, that this is not the case.
Some 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’. The latter is just a computerised average.
Many lenders will offer either a ‘home buyer report’ or a ‘full structural survey’ as an upgrade to a 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 home buyer report is intended to identify mainly major problems and structural defects with less detail; a full structural survey should be thorough and identify any serious issues in more detail.
Although, both types of report would not usually involve invasive testing or inspection of concealed areas.
If you are buying a property and you want to know that it is structurally sound, do not rely on a basic valuation to protect you; unfortunately, it will not.
