Friday July 13, 2018
Last week we talked about essential things you need to know about a mortgage. How a mortgages works, the different types of mortgages and how to pay them back. This week we move on to explain how the rates work, how much you can borrow and offer guidance on the new rules governing mortgage applications. Read on to hear more…..
How mortgage rates work – and fees explained
Mortgage rates tend to fall into a number of categories. They depend on whether you want a fixed rate mortgage or a tracker (see last week’s Blog). Also how long your initial discounted period is and how big a deposit you have to put down. Certainty – therefore long term security – tends to cost more. A longer initial deal period, say five years rather than two years, commands a higher interest rate. The rate offered on the same length mortgage then depends on what you put down as a deposit. This creates the ratio of loan-to-value you are borrowing at.
For example, someone putting down a 40% deposit might get a two-year fixed rate at 2%. Someone putting down 25% might get a two-year fixed rate at 3%. The higher your loan-to-value, the more expensive your mortgage will be. You will see lower rates on two year deals and higher ones for five years.
Mortgage rates are influenced by a number of interlinked things. The Bank of England base rate and its expected path, the rate a bank or building society has to pay savers to attract their cash, and the cost of funding on the money markets.
You need to weigh up all these factors when choosing a mortgage. If you would struggle should monthly payments shoot up, the security of a fixed rate might be advisable. You also need to consider whether you think you will save money by changing rates after two years, or are happy to pay a bit more for five years of certainty.
It isn’t just the rate you need to consider. Lenders also make money from fees they attach to mortgages. These can amount to anything up to £2,500 and can make a seemingly cheaper mortgage actually work out more expensive. It is important to add this to the total cost of the loan when comparing mortgages. Also watch out for any charges at the end of the mortgage, such as early repayment charges and exit fees.
There will also be costs for getting your property valued and for the legal process of a purchase. These can mount up and some deals that offer to pay these for you can work out well. We can advise you on these additional costs and help you to keep them as low as possible. Just click here to send us an email.
How much can I borrow?
This is the question at the foremost of everyone’s thoughts! The amount you can borrow will depend on your age and the lender’s own credit scoring and application process. Loans range up to 95 per cent of a home’s value with the borrower having to stump up the remaining amount. Many lenders are reluctant to lend into retirement, so it will be trickier to get a big 30-year mortgage at age 45 as this would push you into retirement age.
Lenders will also base the amount you can borrow on your marital status, income, any childcare costs and what it thinks your future expenses could be.
You can boost your chances by getting your finances in check. Lenders will place a big reliance on your credit score when making a decision on whether to give you a mortgage and how much to offer. It is vital that you keep a check on your own rating. Make sure you are paying off or have already cleared any other debts so the bank or building society will see that you are a reliable borrower. Don’t forget car finance – that is a big drain on salaries these days.
New mortgage rules – what you need to know
The Financial Conduct Authority’s attempt to clean up the home loans market and ultimately means two things. The first is the official shift from old-fashioned salary multiple lending to affordability calculations, but in reality many lenders have been pushing this since the financial crisis.
This means weighing up your essential spending, alongside your income and asking questions about your outgoings. A mortgage lender will look at the gap between what you have to spend each month and what you have coming in – and then do it’s sums from that.
Expect to be quizzed on habitual spending, things like feeding the family, childcare, a car loan, your energy bills and even a mobile phone or gym contract. Mortgage lenders will also need to take a stab at working out what will happen to you in the future and they will carry out what is called “stress testing” for theoretical interest rate rises.You will need to provide documentary evidence of regular outgoings.
The second big change is that all clients these days need to be given full advice on their choices and decisions. This would mean via the mortgage broker’s adviser, or a bank or building society’s own financial advice team. By coming to us at The Finance Roome you can be 100% sure you are fully advised.
Experts say the application conversation will now take two to three hours, compared to about 45 minutes previously. Make sure you leave enough time – this is one of the most important conversations you might have!