Key Things to Know and Understand
The credit crunch had a huge impact on the cost and availability of mortgages but this might be about to change.
In the last 10 years we have seen some of the lowest mortgage rates of interest offered, but this might be about to change as the Bank of England raised its Base rate of Interest. If this hasn't already started to confuse you with all the jargon being floated around then some of the points below may help you to understand some of the more important parts of the mortgage process.
Here is a quick guide to some of the more common phrases thrown around by analyst sand advisers:
Standard Variable Rate (SVR)
The SVR - or standard variable rate - is the normal interest rate at which lenders offer a home loan, without any discounts or deals. This is the rate that you naturally transfer onto when your current fixed rate or tracker rate finishes. You are no longer tied under contract to the lender when you reach this rate
A lot of borrowers are finding that by allowing their mortgages to expire onto the SVR they are now paying less than when they were tied into their lender
Early Repayment Charge (ERC)
This is a financial penalty that the lender will place against an applicant if they try to redeem their mortgage whilst still tied to their current promotional product. This penalty phase normally coincides with their 2/3/5 year rate end or it could be applied if the applicants tried to overpay too much from their mortgage balance (normally more than 10% of the loan balance per annum).
Capital Repayment and Interest Only Mortgages
There are 2 main types of mortgage available on the market.
Capital Repayment- Is the traditional type of loan mortgage. You would take out a loan amount and your monthly repayments would constitute a portion of loan and a portion of interest repayment every month. At the end of your mortgage loan term your mortgage would be fully repaid.
Interest Only- Normally this type of lending is now only available on Buy to Let Mortgages or where the borrower can place a hefty deposit and prove they have the capacity to repay the Interest Only Loan from another source.
This type of mortgage differs in the fact that you will only repay the interest that is generated from the loan and none of the capital that is borrowed. The payments are therefore lower but you will not be reducing the balance on the loan at all - You will need to have another form of repayment for the loan or switch to a repayment solution.
Part and Part- Again, mostly not available for residential lending. Is not a common mortgage and is exactly what it says. It is part Capiutal Repayment and part Interest Only. The client may not be able to budget for a full repayment mortgage but would still like to be able to reduce the loan taken out. With a Part and Part (P+P) they are able to take a percentage of the loan on P+P and part of it on repayment. This means they can reduce one portion of their loan while the other part stays reasonably low cost
Fixed, discounted, tracker...
Common types of mortgages rates can include:
Fixed rate -, when the interest rate is fixed for a period of time. In the current market with unstable mortgage rates, most people seem to lean towards a stable rate of interest and repayments to protect themselves against the uncertainty of interest rate rises. commonly available from 2, 3 or 5 year terms. Usually, the shorter the term, the lower the rate available
Trackers - are linked to a rate not set by the lender, such as the Bank of England's base rate. This type of rate will fluctuate with the raises or reductions in the Bank of England Base Rate. There is no guarantee that your rate and repayment of the mortgage will remain stable from month to month
Discount - Normally based against the lenders own Standard Variable Rate. The lender will usually give a discount from this rate - often quoted as SVR minus ?.??% to give a lower rate payable. This rate is at the mercy of the mortgage lender. They can adjust this rate at any time and not just when the Basnk of England adjusts their rate.
The term will have the biggest impact on how much your mortgage will cost you. Most First Time Buyers tend to look at the longest term they can find and this can end up costing them tens of thousand of pounds extra in interest repayments. By simply reducing the term by a few years will mean a slightly higher monthly payment to the lender but will save thousands of pounds at the end of the term.
Using a typical lenders variable rate available at present the examples below show how much extra a mortgage can cost you - Assumed that the rate will remain constant throughout the term, however it would be expected that you would review your mortgage on a regular basis.
Total to pay on a £100,000 mortgage over 25 years at 3.99% throughout = £158,463
Total to pay on a £100,000 mortgage over 30 years at 3.99% throughout = £171,940
Total to pay on a £100,000 mortgage over 35 years at 3.99% throughout = £185,992
Total to pay on a £100,000 mortgage over 40 years at 3.99% throughout = £200,312
Source: Trigold Mortgage Sourcing - December 2017
The loan-to-value ratio represents the level of equity in a property. For example, if a house is worth £200,000 and it has a mortgage of £100,000 on it then its loan-to-value ratio is 50%.
Lenders prefer to lend on products with a low low-to-value propositions as this represents the least risk. Most First Time Buyers do not have access to large deposits and this often means you might be borrowing 90% or 95% of the purchase price. This is considered High Risk and the lenders show this risk with higher rates of interest.
It is advisable for anyone buying a home to raise as much deposit for the purchase as possible to reduce any potential interest rate hikes the lender may impose
Stamp Duty Land Tax (Stamp Duty)
In the Autumn Budget, it was announced that Stamp Duty Land Tax (Stamp Duty) would be abolished for all First Time Buyers up to a purchase price of £300,000. This would likely mean that the vast majority of First Time Buyers in Northern Ireland will not now pay stamp duty. Those that do purchase above this price will pay 5% Stamp Duty on the value from £300,001 up to their purchase price.
For Home Owners, there is little change and the rates are applicable as below.
From £0.00 to £125,000 = Zero SDLT Liability
From £125,001 to £250,000 = 2% liability of value above £125,000 to purchase price
From £250,000 to £500,000 = 5% liability of value above £250,000 to purchase price