Mortgage Broker Q&A; what’s an offset mortgage?
In Q&A, we look at some of the questions mortgage advisers answer; on a day-to-day basis. Question; what is an Offset Mortgage, and how could one save me money?
Offset Mortgages have lessened in number thanks to the credit crunch, but for some people, they could still represent a very effective way to save money on mortgage repayments.
In an offset mortgage, a savings account is retained with the lender, and any balance in that account; will offset the outstanding mortgage amount.
The savings earn no interest, and none is owed, on the equivalent balance, of the mortgage.
The benefit of this is that mortgage interest rates are generally above savings interest rates, as this difference is the premium or margin the lender will make for the loan.
You are also taxed at either 20% or 40% on your savings interest (unless you don’t pay tax, but let’s assume you do if you have a mortgage).
That means that if you could get a savings rate of 3.5% gross, and your mortgage was 4.5%, for example, then the real return on your savings would be either 2.8% or 2.1% after tax.
That would mean for every £1000 in the offset account, you would be better off by either £17 or £24 a year in this scenario, and your mortgage payments could be reduced: by £45 per £1000.
But it doesn’t end there; you can usually choose for the offset either to; reduce the term of your mortgage or your monthly repayments.
If you reduce the payments but deposit the savings into the offset, the balance will increase, accelerating the reduction of your interest payments; increasing savings month on month.
But, it also can be used as a way of effectively paying lump sums off a mortgage with the added benefit that these can be easily accessed should you have a rainy day.
For more information on offset mortgages, call a mortgage advisor on 0845 4594490 for advice.
Alliance & Leicester have announced a reduction to 4.88% for their 3-year fixed rates, up to 70% loan to value with either a 1% or £995 arrangement fee.
The rate then reverts to 4.99% currently, giving an APR of 5.2%. Valuation fees are refunded on completion for a property value of up to £1 Million and would be £280 based on borrowing of £100k at 70% LTV.
Applicable fees are the lender’s Conveyancing fee of £189, Telegraphic transfer fee of £30 and early repayment charges of 3% of the loan until 30/11/2012.
Whilst this brings them into line with offerings from Abbey, it is still some .4% higher than the current products on offer from Woolwich.
As usual, always consult a Key Facts Illustration before deciding on a mortgage. For further information on this product or others, contact us on 0845 4594490 to speak to a mortgage broker.
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.
The Woolwich has announced a new tracker at 1.48% above the base rate for the first year, reverting to 2.49% above the base rate for life, giving their lowest-ever headline mortgage rate of 1.98%; currently.
The product has a minimum loan of £200,000 and a maximum of £500,000, so it is restrictive; early repayment charges are 2% until 31/01/2013, meaning it does tie you into the rate for a prolonged period.
The product has a £999 arrangement fee; based on a loan of £200,000 at 60%, a valuation fee of £415, a lender Conveyancing fee of £126, a land registry fee of £280 and a completion fee of £35, while APR is 3.0%.
The big caveat to this product is that the option to switch to a Woolwich fixed rate without penalty during the early repayment charge period, which Woolwich call “drop lock”, does NOT apply to this product.
So while its headline rate may be very tempting if there are significant rises in interest rates, particularly in the second and subsequent years of the mortgage, it could become very costly indeed, particularly as early repayment charges on a minimum loan of 200K would amount to four thousand pounds as well!
For this reason, I would recommend seeking mortgage advice about the suitability of this product if it has your interest, and as usual, read the Key Facts Illustration prior to making any decision on a mortgage product.
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. There may be a fee for mortgage advice. The amount will depend upon your circumstances but it is typically £200 or up to a maximum of 1.5% of the loan value.
Some buy-to-let and commercial loans are not regulated by the Financial Services Authority.
A big question for many first-time buyers is whether it is possible to buy a property without a deposit; in the absence of 100% mortgage products.
One way is the government’s Home Buy Direct shared-equity scheme, which allows customers to buy a house for 70% or more of its value.
The property developer makes a loan for the remainder on an interest-free basis which reverts to a low rate, such as 1.75%, after several years.
Some property developers involved in the scheme offer purchases without a deposit.
The scheme operator is repaid by “staircasing” (the owner buying a bigger share later on); or on the sale of the property, in which case they will take their percentage of the sale value.
Housing associations also run similar schemes known as “shared ownership”, where you purchase between 25-75% of a property and pay a nominal rent on the remainder; however, these may require a small deposit. Broadly both schemes are similar.
To find out more, search for Home Buy Direct on Google or for housing associations in your area.
One way that won’t usually work is the vendor reducing the sale price. Known as a vendor’s deposit, this is very unlikely to be accepted (in the present climate of declining property prices).
So pretty much all lenders will take the lesser figure for the valuation, leaving you back at square one.
People have been asking me recently whether it is the right time to fix their mortgage deal now that rates are increasing.
It is an interesting question without a very straightforward answer, but here are some things to consider.
If you are on a standard variable rate or will be soon; is it below the current fixed rates?
Many banks haven’t passed on the full rate cut and there are SVR’s out there far higher than current fixed deals; if you have a decent amount of equity in your property.
Currently, fixed rates are available around the 3% mark if you have 25-30% equity. If your current rate is above 3% then it’s well worth considering switching to a fixed deal.
If you don’t have a lot of equity or if you have any significant adverse credit, the picture changes considerably; it may be better to wait until rates are about to jump significantly.
It largely depends on how much more a month you will have to pay to fix it now.
But for those with a low standard variable, the big question is when will the Bank of England Base Rate go up, and by how much?
And while Mervin King announced that it definitely wouldn’t go up this year, it’s worth looking at inflation.
You may have noticed petrol prices rising again, and crude oil has bounced back to $70 a barrel.
This could have a sizeable effect on the Retail Prices & Consumer Prices Index, and importantly on swap rates; if you look at other commodities which filter down to consumer prices such as steel and aluminium many are enjoying a boost at the moment too.
Swap rates drive fixed deals, and many lenders have just increased their fixed rates due to changes in swap rates.
Without a crystal ball, it’s hard to know whether swap rates will continue to rise or if they may even fall again; before the bank base rate changes.
The swap rate increases are likely due to inflation concerns and the anticipated rise in base rate; so they may continue to rise moving forward.
Historically speaking a 3-4% interest rate on a mortgage is still low, so this all points to now being a good time to fix for 2-3 years as long as your circumstances suit.
