Six Tips for First Time Mortgage Buyers
Getting onto the property ladder for the first time can be a daunting experience – not least due to the massive amount of information out there when it comes to mortgages. How do you know which one to choose? What if you make a mistake? After all, this is a very big decision.
However, help is at hand. Below are six tips on how best to approach the mortgage question if you’re a first time buyer.
1. Think about what you need from a mortgage.
Believe it or not, mortgages are not just a one-way street: you need to find a system of repayments that works for you. If you don’t, you may find yourself struggling to keep up financially, which can cause unnecessary stress and worry. Similarly, if you get a mortgage that doesn’t provide what you need, you may find yourself settling for a property that isn’t right for you, which can cause problems further down the line. The key is balance – a little forethought goes a long way.
2. Don’t overreach yourself.
If you’re a first-time buyer who’s previously been living at home with your parents, you’ll need to take into account additional expenses (bills, rates, council tax, etc) when you’re budgeting how much you can afford to repay on your mortgage. Similarly, you’ll need to make sure you can afford the repayments even if interest rates rise. If you forget this, you could find yourself in a serious financial pickle later on.
3. Don’t be afraid to ask for help.
The mortgage market is confusing, especially if you’ve never done it before. Most providers offer the services of a mortgage advisor, who’s specially trained to help you work out exactly what service would best fit your circumstances.
4. Don’t just go for the first mortgage that comes along.
It can be tempting to settle for the first mortgage that seems to meet your criteria, but this is rarely the right one for you. Of the hundreds of mortgage packages out there, what are the odds that the first one you settle on is going to be a perfect fit? Pretty slim. Take a little bit more time to scout around the markets and see what’s out there. You could save yourself a substantial amount of money, and even if you don’t, you’ll have the satisfaction of knowing that you have the best possible package for you.
5. Read the small print.
No one likes doing it, but it’s important to know exactly what you’re getting yourself into – after all, a mortgage is likely to be one of the biggest set of repayments you ever find yourself making.
6. Try not to worry.
Moving house is stressful enough as it is. There’s enough support out there to make sure you don’t have to struggle unnecessarily with the question of your mortgage, and (while it definitely needs to get sorted) it doesn’t have to be the minefield that many people make it. Congratulate yourself for getting on the property ladder, and don’t forget to enjoy your new home.
Remortgaging: The Basics
There are many reasons why people look into the option of moving their mortgages to a new provider, or to renegotiate with their current lenders. Chief among these are:
- To reduce monthly repayments
- To release equity from a property
- To finance improvements
- To finance the purchase of another property
Even if you do not fall in any of these categories, it would still be a very good idea to regularly investigate whether you cannot perhaps ‘do better’ than your current mortgage arrangement, especially if you are currently on a simple ‘Standard Variable Rate’ mortgage.
Many people are reluctant to even consider the option of remortgaging since they imagine it to be a very drawn out, complex and expensive process. The fact is however that it need not take more than a few weeks. As far as cost is concerned, lenders will often waive some of the arrangement costs or valuation fees. It could still be worth your while to continue even if they don’t, as the savings that you make could quite possibly outweigh any fees or charges that you will have to pay.
If you decide that you would like to remortgage, you will have to take a few basic steps. They are:
Analyse your current mortgage: How much do you currently pay? Will you have to pay any early repayment charges if you move your mortgage? (In some cases these can be so hefty that it would be better to wait for the penalty period to expire before you attempt to remortgage)
Compile a wish-list: What are you looking for in a mortgage? Write down the specific features that you are looking for (e.g. Ideal rate, the ability to ‘offset’ your savings against the mortgage etc.). This exercise will leave you with a much clearer ‘road map’ when you start looking for deals.
Investigate as many options as possible: Compare different deals by phoning around and doing some research on the internet.
Speak to your current lender first: Once you have a good idea of ‘what’s out there’ it would be a good idea to speak to your current lender and to let them know about the deals that you can get in the market. It could be that they would be willing to match that in order to keep you as a client.
Consider all relevant fees, charges and costs before applying: It might be that some products offer a very attractive interest rate but that they will ‘sting’ you with very high costs and fees. Things to look out for (and put a value to) are:
- Mortgage Indemnity Guarantee Premiums: These are payments that protect the lender, but not you, in case of default.
- Compulsory Insurance
- Loan arrangement fees
- Booking Fees
- Valuation Fees
It is possible in some cases to get a fee-free mortgage at a higher interest rate. This could be worth your while if you are borrowing a smaller amount (e.g. under £100 000). In other cases you should tally up all the relevant costs, take into account the interest rates offered, and choose the best overall deal.
Apply: Once you have decided on your preferred lender the next step would be to apply for a new mortgage from them. Most lenders will be very helpful in guiding you through the process and your new mortgage should be in place in a matter of weeks if approved.
Summary:
- People remortgage for a variety of different reasons
- The first step to remortgaging is to analyse your current position
- This should be followed by the drawing up of a ‘wish list’ of what you are looking for in a mortgage
- The last steps are to analyse what is available in the market and then to apply to your preferred lender.
Finding that mortgage deposit
The excitement of buying a new home can be overwhelming. Unfortunately, the overwhelming amount of details to remember when buying a home and getting a mortgage can be overwhelming for a different reason. Trying to keep track of everything that goes into buying a home can be difficult. One of the most important things to remember is that when you obtain financing for your purchase, there are two type of deposits typically required. This means that you need to have funds available at the point of purchase, or have plan in place to over these payments. Finding that mortgage deposit is vital to a smooth transition into your new home.
The first type of deposit comes at the point of the exchange of contracts with the home seller. Usually, most homeowners require an upfront deposit from a buyer as a commitment to go through with the sale. The standard deposit amount is around 10 per cent. If you are purchasing a property that has a sale price of 100,000 Pounds, your down payment would like be around 10,000 Pounds.
The second typical point of deposit is the mortgage deposit. The mortgage deposit is the amount that covers the difference between the purchase price of your home and the amount of financing you are getting from your mortgage provider. For instance, if you are financing 90 per cent of your home that is purchased for 100,000 Pounds, the balance is 10,000 Pounds. If this is paid as an exchange deposit, you would owe nothing additional. However, if you financed 80 per cent, the balance would be 20,000 Pounds. You would still owe 10,000 Pounds for the mortgage deposit.
Finding that mortgage deposit is often a key step in buying a new home. These deposits are easily the biggest upfront cost to buying a new home. There are several options to coming up with the funds needed to cover these deposits. Deciding which option is best for you and your situation is important.
Here are some of the most common sources for paying the exchange and mortgage deposits:
• Using funds from the sale of your existing home if you have equity built up
• Savings you have built up in preparation for the purchase of your first home
• A 100 per cent financed purchase (Be aware that mortgages that cover over 90 per cent of the purchase price are all but extinct following the global credit crunch and those that are available often include hefty fees or higher interest rates)
Finding that mortgage deposit is critical to the home buying process, as you can see. Building up savings before a first time buy is certainly prudent. Building up equity in your existing home is also a great help when moving. It is always best to avoid borrowing more than 90 per cent of your new home’s purchase price to avoid the higher-lending charge. Because of the increased risk to the bank, lenders use these fees or higher interest rates to offset the potential losses. You will save a great deal over the course of your loan by having adequate resources to make your deposit.
Self-certification mortgages
Self-certification mortgages are loans where the lender doesn’t want to see any proof of income.
Borrowers who seek self-certification mortgages generally have income from several sources, earn variable amount of commission or are self-employed and do not have accounts to prove their income.
‘Self-certification’ means the borrower signs a declaration confirming they have income at a certain level in return for the lender agreeing not seeking proof of income.
Often, lenders will offer a mortgage at a smaller ‘loan-to-value’ than they would to a borrower who can prove their income with a reference from an employer or accountant.
‘Loan-to-value’ is the amount of mortgage the lender is prepared to advance against the market value of a property. For instance, where an employed person might be offered 90% loan-to-value against a £200,000 property, a self-certification borrower may be offered 75% - 80% loan-to-value against the same property.
So self-certification borrowers should expect to put a larger deposit down on buying a house than an employed borrower.
It’s also likely that a self-certification borrower will also have to pay a slightly higher interest rate than other borrowers because the lender considers more risk is associated with the loan.
In all other respects, a self-certification mortgage is the same as any other mortgage.
Self-certification mortgages are sometimes available through brokers to borrowers with poor credit histories. The rule of thumb is the worse the credit record; the borrower will receive a lower loan-to-value and pay a higher the interest rate. Some lenders will advance about 60% loan-to-value to people with particularly poor credit histories.
Self-certification borrowers must not inflate their income when applying for a loan. If you tell the lender that you earn more than you really do, this is a fraud offence called obtaining a pecuniary advantage.
In the past, self-certification mortgages have sparked controversy. The BBC alleged that self-certification mortgages were being abused with borrowers encouraged to lie about their income in order to get a bigger mortgage.
An inquiry by the Financial Services Authority, the industry watchdog, found that in some cases this was true but was not a widespread problem.
Many buy-to-let mortgages for landlords buying investment properties are self-certification mortgages.
Instead of basing the loan amount on the landlord’s income, the lender has a formula for working out maximum borrowing against the rent received for a property. Different lenders have different formulas but they are generally based around ‘rent cover’
‘Rent cover’ means the rent received each month should be 125% or more of the mortgage repayment at the lenders standard rate.
For example, if the mortgage payment is £400 a month, the rent received should be at least £500 per month.
Summary
- Self certification mortgages are designed for people who can’t prove their income, especially self employed
- Don’t overstate your income to obtain a self-certification mortgage.
- Self-certification borrowers generally have to put down a bigger deposit and pay a higher interest rate than employed borrowers
- Most buy-to-let mortgages are self-certification mortgages worked out on the property’s monthly rental income rather than the landlord’s income
Remortgages explained
Most people find that the single biggest expense of their life is a mortgage. After all it is a giant loan taken out to buy a house, which involves borrowing, say, £100,000. Some people wrongly believe that once you are on a mortgage it’s impossible to change it, but the reality is you are free to switch to remortgages supplied by different providers if you feel you are losing out with your current deal. A few simple adjustments can even make someone over £100 a month better off.
Remortgages can be quite difficult to understand however, and this can put some people off researching the process properly. But to give an example if someone has a repayment mortgage of £100,000 pounds and is paying six per cent interest, switching halfway through a 25 year deal to a five per cent interest mortgage could save somebody a tidy sum of money. There is also nothing to stop someone switching more frequently, perhaps even every two or three years.
Not only can remortgages save you money they can also help to raise cash if your house has risen in value. Jumps in prices in the last decade mean people’s houses are still worth more than what they paid for them. So, remortgaging essentially involves putting the difference in your pocket.
Remortgaging can also be used by people whose circumstances have improved. Someone might be on a much better salary that when they took out the home loan, or may have inherited a large amount of cash. Maybe they want to increase their repayments but their current deal does not allow them to. Changing to a new home loan may help them do this.
A catch with remortgaging is that you will probably have to pay costs when you break off from your loan provider. Remember it is important to work out your figures and to make sure your new deal you will end up saving you more than you spend on changing it, otherwise there’s no point in the switch. In simple terms you are likely to have to pay a first fee to leave your existing provider, and also a fee for joining the new one.
Those on certain deals will have to pay early repayment charges, and may also have to pay a kind of release charge or mortgage exit administration fee. These are designed to cover administration costs, and have come under some scrutiny from the Financial Services Authority (FSA) - remember to check that what you are quoted to leave is the same as in the small print of your original mortgage wording.
Finally the arrangement fee for your new provider can vary from a few hundred pounds up to over £1,000. Some will let you incorporate the charges into the home loan, but remember this will also incur interest. Another thing to look out for with remortgages is whether or not your new provider will be prepared to pay your legal fees, which will apply even if someone doesn’t want to move house when setting up new product.
Six Tips to Help When Buying a Second Home Abroad
A lot of people see buying a second home aboard as an impossible dream, and one that’s well out of their reach. However, this doesn’t have to be the case. Here are a few tips to make owning your own little piece of foreign property a lot more attainable:
1. Choose your location wisely.
Before you make any major plans, your first consideration should be where you want to move. Start with the country. Can you imagine making another nation your second home? Do you like to travel to different places when you go on holiday, or would you be happy to spend a good chunk of your off-time in one place? If it’s the former, you may be better not buying a property at all. Similarly, consider your ability to fit in. Do you speak the language? Can you afford regular enough trips out to make it worthwhile? Similarly, make sure you know the region will suit you. Would you prefer a touristy area, or somewhere a little further from the beaten track? Pick a location that meets your needs, or you’ll likely struggle to find a home you like.
2. Prepare to double your costs.
Unless you’ve recently come into money, you’ll likely be getting a second mortgage to pay for your new property. Combine that with the payments you’ll have to make on both your old and new house on a regular basis (council tax, maintenance fees, utility bills and insurance, for example), and you could be looking at a considerable increase in your monthly outgoings. Set a budget, and make sure you can afford a second home.
3. Check regional differences.
France, Spain, Cyprus, Italy and Bulgaria all have regionally-specific additional taxes and fees that need paying for people hoping to buy a home abroad. Do the research, and be sure to factor these in when you’re working out your costs.
4. Go during the off-season.
It’s all well and good thinking you want a home abroad when the weather is fine and the place is swarming with friendly faces, but trying going back at different times of the year. After all, one of the benefits of owning your own home abroad is being to go there during all seasons, so it’s a good idea to make sure you like the area all year round. What’s the use in having a house you can only enjoy for a few months of the year?
5. Decide how long you see yourself being there.
You don’t have to keep your holiday home forever. However, how long you plan on staying in one location may determine what kind of property you go for. If you plan on being there for more than twenty years, stamp duty, mortgage application fees, solicitors’ fees, valuation and surveyors’ costs will likely only be a small percentage of your total expenditure. If, on the other hand, you plan to hold the property for ten years or less, they’ll make up a much larger chunk. As a result, you might want to consider going for a newer property, rather than a fixer-upper, as you’ll likely have less money free to play around with after you pay the necessary fees.
6. Consider your exit.
On the off-chance you’re not blissfully happy with your new home, make sure there’s an easy way out. Check the reselling laws for your region of choice, and ensure that – should the worst come to the worst – you can resell without paying too much in the way of taxes.
Property investment mortgages
Property Investment mortgages can be used to buy one extra property or a number of different homes by way of an investment. Some people wait until the housing market flattens, and then use finance to buy a number of properties in the assumption that prices will go up in future and return them a profit. The most common kind of investment mortgage is the buy to let mortgage, which allows someone to purchase a home and rent it out, with the income used to pay off the mortgage.
Buy to let mortgages are available from high street lenders, although their availability may go up and down depending on the financial climate. The traditional expectations will be that you are able to rent out the property for a fee large enough to cover mortgage repayments, associated costs, and then leave you with a reasonable profit.
Even with the housing market suffering, buy to let mortgages remain popular because the slump in sales means more people are looking to rent rather than buy. This means there is a market at which to aim your rented property. Just as with other types of mortgages, lenders will carefully examine any application before approving a loan. Generally speaking a bank manager will expect to see you buy property which is expected to go up in value rather than down. The bank’s expectations of the property are not just designed to protect themselves as if you default on the loan, they suffer. Therefore it is in their interests to make sure you are taking on property investment mortgages which suit you.
Some providers will even ask that you do not market the house privately, but use a professional estate agent. This can even be part of the conditions of getting the loan. Other common conditions include that a landlord does not rent the house to someone who is receiving state support and does not have a job. This might seem extreme and even somewhat intrusive, but again is really only designed to ensure the risk of you falling behind with repayments is minimised. Someone who has a very low income may fall behind with the rent quite quickly, and no rent means less money to pay back the mortgage.
Note that a big deposit will normally be required for property investment mortgages, normally about a quarter of the value of the property. These mortgages are also different to traditional home loans in that they involve working out all the added extras. For example, owning a property which you rent carried responsibilities and you will be expected to pay out towards maintenance costs, you will also need a buildings insurance policy, and there are tax implications. Even if you are only buying a home to do it up and sell it on, you need to think carefully about how you intend to fund any improvements before putting it back on the market. As with other loans - you will have the usual options of fixed interest rates, capped interest rates, and variable rates, among others - the main thing could be to ensure you balance existing commitments with your new investment venture.
Short guide to mortgages
Mortgages are a way of life for many people buying a home in the UK. The British in particular seem to have a particular tendency towards buying a home at the earliest opportunity, and funding this usually means going to the bank for a loan. In this sense a mortgage is essentially a generic title for a loan used to buy a house. But the market can be quite confusing to somebody who has not explored it before, and all the different products available can be baffling.
To get a mortgage you will normally need to provide a deposit, ie a certain slice of the value of the house you want to buy. So say someone is buying a house worth £100,000, and they are applying for a loan following a 10 per cent deposit, they will need to put up £10,000 to begin with. Some providers have been known to offer 100 per cent mortgages, ie the entire total of the home value, but these tend to be relatively rare, and can even disappear from the market completely during difficult credit times.
With any home loan, the bank reserves the right to repossess the property from you if you cannot keep up with their mortgage repayments. However, this is usually a last resort after a bank has tried other methods of reasoning with you, and it will normally only be attempted when it is quite clear you are never going to be have to pay the money back. However, it is extremely important to keep up with repayments as repossession is a stressful and life changing event. Therefore it is important to get a mortgage you can deal with.
Most mortgages are repayment-based, involving paying back the total amount in instalments plus interest. There are sometimes a limited number of products available which involve only paying back the interest, meaning someone must put aside capital to eventually pay for the house.
Many variations of mortgage products relate to the interest rate. For example, a variable rate mortgage allows someone to pay back the money with an interest rate which goes up and down according to the base rate set by the Bank of England every month. In contrast, a fixed rate mortgage involves an interest rate which stays the same for a set number of years, perhaps two to five, before the rate then changes and goes on to a variable one. Fixed rate deals have proved popular with people who are buying a home for the first time and are getting used to the burden.
There are also capped rates, which involve an interest rate which is flexible but never rises above a certain percentage or ‘cap’. While banks are all too happy to offer somebody a mortgage with an attractive initial interest rate, it is perhaps worth paying close attention to how mortgages will be worked out after this period ends because home loans are typically large and lengthy commitments.
Finding a good remortgage
Finding a good remortgage is a question of finding a new mortgage that suits you better than your existing mortgage. This might be a question of a desire for greater flexibility in the way you manage your mortgage, it might follow moving home, it might be needed because an existing mortgage repayment term is coming to an end, or – for many homeowners – will be a question of optimising the cost of the mortgage repayments each month.
The one big problem – as anyone with even half an eye on the financial pages of the press can tell you – is the dire shortage of funds available to the mortgage market these days. Combined with the rapid slowing down of the housing market generally, this has made life for first-time buyers especially difficult. Indeed, the Council of Mortgage Lenders reported – in the Daily Telegraph newspaper on the 15th of January 2009, for example – that only 12,400 loans were advanced to first-time buyers during the whole of the month of November, the lowest total since the Council began assembling such figures in 2002, and 57% down on the same month the previous year.
Relatively speaking, those more interested in finding a good remortgage are rather better off. The Council of Mortgage Lenders also reported that 52,000 remortgages – worth a total of £7 billion – were advanced to borrowers during November 2008, although this was admittedly 25% less in terms of both volume and value than in October.
The overall shortage of funds available for mortgage lending may in fact be favouring applicants for remortgages since these borrowers represent a known risk to the lender. There is a history of regular repayments, made on time, and, in the case of those who have owned their property for a number of years, likely to be a relatively comfortable equity stake in the property. Remortgages, therefore, offer a relatively good risk for the nervous and cautious lending market.
Borrowers like these, in the market for finding a good remortgage, have a number of options. If they are coming to the end of a fixed rate term, their mortgage is likely to revert to the lender’s standard variable rate by default. Following the recent drastic reductions in the Bank of England base rate – to it’s lowest ever of just 1.5% – standard variable rates of even the cash-strapped mortgage lenders have had to reflect at least some of this reduction. Standard variable rates, therefore, might actually represent a more attractive move now than in the past for some borrowers.
Yet others, who have witnessed successive reductions in the base lending rate and who anticipate the possibility of still further reductions might prefer a tracker mortgage, with an interest rate fluctuating in line with the base rate itself. When looking for a tracker mortgage, however, borrowers should be aware that some will have written into them a “collar” which effectively prevents the mortgage interest rate falling below a certain minimum. In this event, the borrower might not get to enjoy the full benefits of a reduction in base rates below a certain minimum rate.
Finding a good remortgage for some borrowers might also be seen as an opportunity to swap a relatively inflexible mortgage for one that offers the chance of varying the monthly repayments – by increasing the repayments made or reducing them at other times – within certain limits, according to fluctuating personal circumstances. For such borrowers, a flexible mortgage could prove attractive.