Mortgage questions answered by an expert
- 13 March 2011
- From the section Business
Mortgage borrowing has hit another downturn.
And no wonder. Banks and building societies still do not have much money to lend. They want only the most creditworthy customers. And typically they ask for deposits of at least 20% of the purchase price.
How things have changed in the past three or four years. Back then, lenders were almost throwing money at potential borrowers.
Plenty of people still want to borrow to buy a home, though. We asked for your questions about the current state of the mortgage market.
Here, Andrew Montlake, of mortgage brokers Coreco answers a selection of your queries.
Q1. My girlfriend and I are looking to buy our first house. We are both 30 and have saved £170,000 for a deposit and have another £30,000 to cover stamp duty and other buying costs. Our combined salary is £120,000, which is just above the average for London. We both have clean credit histories. We are interested in buying a detached property out of London around the £650,000 mark. Do you think a bank would lend us the near £500,000 we would need? James, London
It is always good to begin with a positive response. The good news here is that you should be fine to borrow the amount required. A tip would be to keep the loan-to-value (LTV) ratio to 75%, as you would then obtain better products.
In general, lenders will lend about four times joint income, so a loan of around £480,000 looks realistic and some lenders, dependent on credit score, will be able to lend slightly more.
Obviously, look carefully at the monthly payments to check you are comfortable with them and, if looking at a tracker product, what would happen if rates were to increase by 2% in the next two years.
Q2. What would be the best advice you can provide to a first-time buyer with a 30% deposit seeking a £250,000 mortgage? Thelm, UK
The key is the word you used in the question: advice. I would always recommend that any first-time buyer spent a bit of time researching the market online. Speak to your existing bank, but then you could speak to an independent broker to piece it all together.
They will hold your hand and make sure you completely understand the different types of mortgages, the exact costs, fees and potential pitfalls, and provide full advice and a recommendation.
The good news is you should be able to access some very good products with your 30% deposit and, dependent on your specific requirements, a good fixed rate will enable you to budget accurately over the initial period of the loan, so you have no nasty surprises.
Q3. My girlfriend and I are looking to buy a house in 18 months, when we hope to have a deposit of around 12% of the house value. I read every week how hard it is to get a mortgage right now. Are things improving or are we going to be very disappointed in a year and a half? Gareth, Manchester
I would be positive about this, Gareth. Lenders are slowly becoming more comfortable and this has been seen in the growing number of products available with either a 10% or 15% deposit.
As competition seeps back into this sector, I suspect we shall see rates become more competitive as well. We are already hearing some positive noises from lenders around this, with some interesting new products hopefully about to launch.
Unless something unforeseen happens, I expect this to continue and by the time you come to buy, the mortgage market should have "normalised". I would always recommend a 10% deposit is put down, at least, and the act of saving is also good practice for budgeting when paying a mortgage, so you are on the right track.
Q4. I am currently on a pretty good variable rate, but worried my monthly payments will rise considerably if my lender rapidly increases their interest rate. Would now be a good time to switch to a fixed rate or have all the best deals vanished already? David Wall, London
It is true David, that fixed rates have increased over the past couple of months as expectation of a rate rise grows. However, there are still some competitive fixed rates around. In fact, some lenders have recently reduced some of their fixed rates slightly.
I have always believed that for many people, paying a little more on a fixed rate now could save many a sleepless night in the future and this is especially true in today's environment.
Rates rising by 2% or more in the next two to three years is a very realistic prospect and fixed rates are still historically low. So in my view it is definitely worth looking at your options now, before rates do actually rise.
Q5. I cannot decide whether it would be better to get a fixed rate deal, say for three years, or to go for a tracker. The latter is obviously a much better rate at the moment and the repayments would be less, but I cannot decide whether it is better to play safe in case rates rise significantly. Any advice? Charly Harris, Surrey
The simplest way of looking at this is taking the tracker payments and seeing what effect a 1%, 2% and 3% rise has on the payments. If these rises would not be too much of a squeeze, then potentially a tracker product may prove a good option.
If, however, you very quickly start to struggle, then opting for a fix on day one could save considerable stress. Too many people try to beat the market when actually they should just look at what they are comfortable with, from a risk point of view.
There are, however, lenders who offer tracker rates with the option of fixing into any of their fixed rates at any time without penalty, which may enable you to have your cake and eat it.
The only downside with this is that there is no guarantee that that particular lender has the best fixed rate at that time, but it does give a certain sense of security.
Q6. I am a 25-year old man and still live at home with my parents. Since I left university, I have not been able to afford to move out due to high rental costs, bills and so on. I have been saving, but it is so hard and I have only £6,000 savings. My annual earnings are £18,000. What is the highest mortgage loan I am likely to get based on this? Nick, UK
As someone who also did not move out of home until past 25, I know the feeling. It is still very difficult for first-time buyers and generally speaking, lenders will look at between four to five times your income as a lending capacity.
This does depend on an afford ability calculation as well, which takes into account your monthly earnings and outgoings. If you have loans or credit card debts, this will reduce that figure.
The real issue for first-timers at the moment is the deposit, as most lenders require at least 10% and many are therefore reliant on the good old bank of mum and dad to top them up. I would keep saving and perhaps review the situation again next year, when the market may have improved slightly.
Q7. My husband has lived and worked in the UK since 2002. However, we are unable to get a mortgage simply because he is not British. This seems very unfair when he contributes to the economy. Anne Donnelly, Crondall, UK
I would be interested to know what nationality your husband is, Anne, as this should not be the case. As long as a foreign national has permanent rights to remain in the UK or an appropriate working visa, there are lenders who should be able to assist.
There are potentially issues around credit scoring, but if your husband has a track record in the UK since 2002, then I would be surprised if the foreign national part is the only reason.
Many of our clients are not British and for the most part, apart from some politically sensitive countries, they have no problem obtaining a loan.
Q8. What is the current situation for buy-to-let mortgages? We would expect to put down about a 25% deposit. Do we need to save more or are there some reasonable deals available? Jan Wilmot, Bedfordshire
Buy-to-let mortgages are starting to enjoy something of a renaissance this year, with more lenders looking at moving back into this profitable area. As with standard mortgages, the best deals are at the 60% LTV banding, but there are decent products available with a 25% deposit.
These are improving all the time and we have even seen a return to 85% LTV lending on buy-to-let properties in recent weeks. Watch out for higher than normal lenders' arrangement fees on these products, however, when comparing rates.
Q9. I am looking at buying an investment property. Can I still use the equity in my current home to raise the money for the investment property? Paul, Manchester
In general, yes you can, Paul, obviously subject to your income being able to justify the increased borrowing on your main home. Most lenders allow you to release equity on your main home for any legal purpose, although some lenders do have differing restrictions.
You may be able to do this simply with your existing lender or it may be more cost effective to remora to a new lender. Just double-check any potential penalties on moving your existing loan to another lender. Make sure you investigate both avenues.
Q10. I am currently self-employed and have managed to build a deposit of about £30,000 on annual pre-tax earnings £70,000. As I have only been self-employed for 24 months, will this have any effect on being granted a mortgage? In addition, if my earnings reduce, would I have to inform my mortgage lender? Scott, Cardiff
Being self-employed for two years is no issue in regard to obtaining a mortgage. There are now lenders that will consider people who have been self-employed for 12 months, as long as there is a strong track record of employment.
If you know your income will drop in the short term, I would be extremely cautious about the amount you want to borrow. While you do not need to inform the lender if your income drops at a later date, there is a duty of care to inform them if you know there will be a considerable change in the very near future.
I would base your borrowing on your future anticipated income, therefore, safeguarding your lifestyle and decreasing the risk of running into trouble when making the monthly repayments.
Q11. Is it a good idea to remortgage now for 4.99%, five-year deal, or to wait for sometime more for better deals? I am currently on 4.24% standard variable rate. Pras Kane, London
Without knowing the rest of your details, Pras, it does depend on your levels of affordability. There is no guarantee that better deals will suddenly appear, especially once the Bank of England has actually increased rates. Whilst competition is coming back to the market, this is a slow process and does not seem to be doing enough quite yet to offset product increases.
I have always thought that any five-year fixed with a four at the start is good when comparing historically, so the answer is: it depends on whether you can afford to take the risk and wait.
Rates will increase by more than 0.75% over the next year in my opinion, so on the face of it, taking a 4.99% fix for five years while on a 4.24% variable now removes any doubt. The potential downside of waiting for a rate that will realistically only be slightly lower seems to me to be a risky strategy.
Q12. I am thinking about buying a property, but I am worried that prices will drop and I will be left in negative equity. I know I would be OK in the long term, but I am worried that if I needed to move again in a few years, due to changing family or job commitments, I would not be able to sell my property. Do you think I would be better to stay in rented accommodation for the next few years? Will Best, Kibworth, Leicestershire
This is a very common question at the moment and some of the answer lies in the area where you are looking at buying. Although I expect property values generally to dip slightly in the short term, I do believe prices will strengthen again over the medium term - the next three to five years.
Quite simply, the supply of housing has not kept up with demand and, whilst there will be regional variations, I still think this year will prove to be a good year to buy.
Of course, you need to think carefully about your likely lifestyle changes and take careful advice before jumping in, but in all honesty, no-one can accurately predict what will happen in the next few years.
If you have a good deposit, budget accordingly and buy for the right reasons, then I see no reason why you would be ruing the decision in future.
Q14. I am coming to the end of a five-year fixed rate deal and I am interested in the concept of an offset mortgage. We usually carry around £5,000 to £10,000 of spare money in various savings and current accounts and seem to get little or no interest on them, so to me, it makes sense. Are they something you generally recommend? The mortgage would be around £120,000 on a house valued today around £200,000 to £220,000. Nigel Speers, Portadown, Co.Armagh
Offset mortgages can be a very useful tool, especially in today's environment when savings accounts are paying so little. They are slightly more expensive than conventional products, so I would normally suggest to make them worthwhile at least 10% of the mortgage amount should be held, but utilised correctly, an offset mortgage really can make a tremendous difference.
Not only is the sum held on deposit offset against the loan amount, so the interest or the term of the mortgage is reduced, but the amounts paid in remain liquid and are not limited in their protection to just the government guaranteed level. Also, if there is in effect no interest received, then there is no tax to pay on that interest.
The issue is that many who are seduced by the offset mortgage, then do not actually utilise the benefits fully, so they may as well have taken the cheaper standard options.
Q15. Are there any mortgages out there which require just a 5% deposit? Dr Grove, UK
At the moment, mortgages that require just a 5% deposit are extremely rare. There are a handful of lenders who offer this, but it tends to be for existing customers only, who they are looking to help out. I would therefore speak to your current lender first of all, as they may be one of the lenders who are able to assist.
There are other lenders who offer some interesting products if you can get some parental help. But really, if you can wait for a 10% deposit, then that will enable you to have a much wider choice of lenders and products, reducing your costs.
Q16. I hope to sell my current property soon, which is co-owned, and wish to purchase one by myself. I can probably borrow £125,000. I also have an endowment policy which is due to mature in 2017 and was due to pay £55,000, but it is expected to fall short of this. Can I use this policy as collateral to borrow even more? Or should I stick to what I can safely afford, with the interest rates being at rock bottom? Paul Edwards, Kenley
The quick answer to this, Paul, is to stick with what you can safely afford. With rates at historic lows, stretching yourself too much now could lead to problems in the future, when rates are potentially much higher than they are now.
Look upon the endowment policy as a savings policy separate from the mortgage.
It may well prove to be a very useful bonus in 2017, when a welcome lump sum can be used to pay down a good chunk of the mortgage and reduce your exposure further. If it is this close to maturity, you may well have paid most of the charges with which many endowments are front-end loaded.
Q17. Do you think the Bank of England interest rate will rise to above 2.75% by the end of 2013? I am trying to decide on whether to go for a tracker or fixed rate mortgage for two years. Louisa Rhodes, London
Now here is a popular question, Louisa, and one for which I shall turn to my crystal ball. At the moment, if you ask 10 different economists this question, you will probably get 11 different answers, so with that in mind, my views are pretty simple.
I think inflation is a serious potential issue for the UK and will be harder to tame than some believe, especially as we move into an economic recovery over the next couple of years, together with other global pressures such as oil and commodity prices.
I therefore do think that the Bank rate will rise, albeit slowly at first, starting in May of this year and, barring any serious unforeseen event, reach between 2.5% and 3% over the next two years.
I also believe there could be a possibility that Bank rate will have to rise further towards the end of 2013. So I think there is a very good chance that Bank rate will be at 2.75% before the end of 2013, and possibly even by the end of 2012.
Q18. I am a single working mum and already have a fixed rate mortgage, which I took out five years ago with my then husband. To keep the family home, I agreed with my ex-husband that he would stay on the mortgage, as I do not earn enough to raise the funds on my own. I have for the past three years paid the monthly mortgage payments in full. I now have to decide on a new deal as this one comes to an end at the beginning of June and I am really confused. I do not know whether a fixed rate or tracker rate mortgage is the best for me. Mandy, Dorset.
Your situation is a very common one, Mandy, and at first glance it looks to me like a safety-first approach is best.
I would look at one of the competitive fixed products around now and make sure you can budget accordingly. A five-year fixed rate could be good value now and perhaps cheaper than the five-year rate you have been paying up until now.
From what you have told me, and what I believe will be a steady increase in Bank rate over the next few years, lying awake at night before every potential rate change announcement will not do you any good at all.
Take independent advice and go through your budget thoroughly, then compare what your lender will offer you with other lenders on the market. Knowing what your payments will be each month for the next few years will help you budget effectively without worrying about any nasty surprises.
Q19. I am one of Cameron's entrepreneurs. I bought a successful restaurant 16 months ago. My question is how do my mortgage prospects, in terms of availability and costs, compare with one of my employees? Guy Stead, Newcastle
A great question, Guy, and a simple answer. Unfortunately, in theory, your employees will have more choice, as all lenders will lend to those with a steady salary, as long as they have a good credit score, at between three to five times their incomes.
As an entrepreneur, I would guess you potentially have a more "difficult" income position, having just opened your own business.
The good news, however, is that there are still some lenders who understand how entrepreneurs like yourself work and if you have a good accountant, plus a solid year's accounts, you can still obtain some good products - just not as many as your employees.
Q20. I took out a 10-year fixed rate mortgage in September 2009, fixed at 5.29%. There is a penalty of a whopping 7% if I redeem the mortgage. Would it be reasonable for the mortgage company to waive this 7% charge, being that they have already made a fortune out of me and the base rate has never been anywhere near 5.29%? Anon
Unfortunately, this is not so simple. Although rates have since fallen, lenders price their products, including fees and potential redemption penalties, at the time they are taken out.
In other words, it may be that they "bought" a tranche of money to lend out at the time for a certain cost. This means they may not be making the amount of money you believe they are.
On the other hand, you could be spot on. It is always worthwhile speaking to your lender to see if they are happy to come to some arrangement. However they are under no obligation to do so, as presumably they will argue that these penalties and risks were clearly pointed out to you at the time.
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