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.
One of the most bewildering and confusing items on any mortgage illustration must be the Annual Percentage Rate or APR listed on a product.
APR gives a comparative measure between various loans to show the overall cost of borrowing on an annual basis, taking into account a broad range of fees, not just the interest alone, as well as giving a more direct comparison of the impact of a daily calculation of interest versus other less favourable terms.
Now, that is a good thing where the calculation makes sense, but for 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; a product far cheaper during its initial deal may have a much higher APR than a product with a considerably higher interest rate and identical fees.
That is because the APR is calculated over the whole lifetime of the loan and will include the reversion rate of the product after its initial term.
There are several reasons why this is misleading;
- Reversion rates are generally variable and are not linked directly to the Bank of England Base Rate. In two years a lender with a previously un-competitive reversion rate could lead the market and vice versa. Hence it is not a factor that should play a major part in the decision-making process.
- Generally, customers should remortgage regularly during the early years of their mortgage repayment to ensure a competitive interest rate, including the reversion rate after the initial mortgage term distorts the picture.
- A clever design can skew the figure. Lifetime trackers appear very competitive because they have no reversion rate, and refunding upfront fees 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. APR makes some sense on unsecured loans and little in the mortgage market.
It is high time that dual regulation ceased and APR calculations either scrapped on mortgage contracts or replaced with something far more specific to the complex nature of a mortgage product.
Capital gains tax is liable for 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 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, the old property becomes liable to Capital Gains Tax from the date of transfer.
However, there is a 36-Month leeway given, so you owe Capital Gains tax on the property from 36 Months after its transfer to a buy-to-let.
Losses and expenses are offset against any gain. So keep a record of all your costs as a landlord, including maintenance bills, but not including your mortgage costs (mortgage interest is offset against income tax).
That means it is also worth having some form of valuation on the property at or around its 36th month as a let property to establish the value 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, then 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. Remember that taxation policy can change in each government budget.
For more information or to speak to a mortgage broker, call 0345 4594490. Seek independent taxation advice for an exact analysis of your tax liability and guidance on tax mitigation.
Question; I have a joint mortgage currently; 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 for early repayment may apply.
Then you need to check with the lender whether they are happy for the mortgage to transfer to a sole basis, 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 you can afford it alone, then the land registry and title will need amendment and a new mortgage contract issued.
That process will require a solicitor or conveyancer to act; you will have to pay for a transfer of equity, usually costing a few hundred pounds.
Depending on the size of the mortgage and the property valuation, it is possible stamp duty may also be chargeable. You should consult your conveyancer on this aspect, as it is a complex field.
However, if the lender is not satisfied the loan is affordable to you alone, they can refuse to remove a party from the loan. That would mean finding a different lender and paying any early repayment penalties to change if a suitable option is available.
If an early repayment penalty is due to end within a few months, you may be able to arrange this as part of a normal remortgage and defer completion until the penalty ends. If it ends more than six months from now, or if you require the release of the other party sooner, you have to pay any applicable penalty.
As well as affordability, the lender will usually re-assess you as a credit risk and possibly the property value.
If you are considering transferring a party from a loan due to bankruptcy proceedings, the solicitors will be made aware of this, and the transfer will not be possible.
As usual, if you need further information about this call 0345 4594490 to speak to a mortgage advisor about your circumstances.
Question; I intend to move out and let my property with a residential mortgage on it; what should I do, and is this ok?
Firstly, it’s a typical condition of almost all residential mortgage contracts that the property is not to be let without the lender’s consent. So you should always speak to your lender first and see what they say.
Most lenders will be relatively helpful with this; there are numerous reasons people choose to let what was once their home, and it’s a common occurrence.
Some lenders may want to change the mortgage contract to a buy-to-let type; others may change nothing until the current mortgage is out of its initial term.
A lender is unlikely to give you a positive response if you only entered into your mortgage contract very recently. If they did, few people would bother paying the higher interest on a buy-to-let mortgage and would take a residential mortgage and switch it a week later.
You will also need to look at your buildings and contents insurance; it will likely invalidate your policy if you are not the primary occupant.
Tenants are more likely to ruin a property than the owner, so your home insurance may be a little more expensive.
You also need to make sure you comply with all the regulations around being a landlord as regards gas inspections and using a secure tenants deposit scheme to avoid any litigation in the future. You should also investigate if any licensing schemes are applicable with your council.
As usual, if you need further information about this call 0345 4594490 to speak to a mortgage advisor about your circumstances.
When a mortgage broker arranges a mortgage for a borrower the commission they receive (if they take the commission as opposed to a fee) is not standardised but there is however only a limited difference from lender to lender. Typically the percentage is about 0.3 to 0.35% for a residential mortgage with good credit, 0.40 to 0.45% for buy to let mortgages, and slightly higher for adverse credit applications.
Why then are several banks, one of which I won’t name but is almost entirely government owned (guess who?) is loading rates available via intermediaries by anything up to 1% against an equivalent product available through them direct? If these lenders are proposing that it costs them more to accept intermediary applications this is farcical.
They may argue that the intermediary market would simply direct too much business to them which they don’t have funds to supply. This is plausible but I think it is actually pricing intermediary products out of the market to attract business from consumers direct who can then be goat herded into higher rate products with down valuations and clandestine credit scoring, or even lower rate products with ridiculous fee’s which are more expensive in reality. Without a broker to argue the case and guide on fee’s most people will simply accept being cascaded to a higher rate without asking difficult questions, or being declined an application having paid for valuations and the like.
I want someone to actually put the question to these banks, how is this rate loading fair practice and why is it in place? Because to the educated it seems to be the intention to get mortgage advisors out of the market so that dodgy products can once again be sold in bulk. Just look at the return of long early repayment charges on market leading rates as a sign that lenders are looking for ways to lock customers into potentially crippling mortgage rates.
