Mortgages and property

The guides listed here provide information on mortgages and interest rates, investing in property and insurance policies for mortgages. Our calculators will help you estimate how much you can borrow and whether a repayment or investment mortgage might be more suitable.

Types of interest rate

The interest rate

The interest rate element of the mortgage is the most important. This is for one very simple reason.

It can change, and in doing so it may upset your household budget.

It is vital to understand that while you may buy a house today with a mortgage costing £400pm for example, interest rate changes could reduce that, or increase it.

In the past these changes have taken place very quickly. Just a few years ago the property market was very strong, and people were really pushing to get onto it. Some of them are now in negative equity (i.e. their mortgage is more than their house is worth).

For buyers this means that it is important to buy on the basis that it will be a home for a reasonable period of time, at least 2-3 years. In a flat market the transaction costs on buying/selling could eat into any profit you might hope to make, and since they would not be offset by gains made on the property, it might be better to rent. Talk to your mortgage adviser.

Also, if maxing out your budget on a mortgage, give serious consideration to a fixed rate mortgage for the first few years to protect you in the event of interest rate rises.

To see how rate changes could affect you use the interest rate calculator. You should note that rates are currently low (when compared to most of the past 25 years). If rates of 10-12% within the next few years would be unaffordable then be careful. Also experiment with rates of 8 - 9% - if they would be unaffordable within the next 3-4 years be very careful.

Types of interest rate contract

With the vast range of mortgage products available it might seem that you can almost pick and choose the rate you want to pay. One of the ways in which a mortgage adviser helps you is to sort through them and find the right one for you. While the interest rate is part of that equation, it is not the whole story. The overall structure of the contract is also important. Broadly speaking all good offers have to be paid for in some shape or form, and the question is do the advantages outweigh the disadvantages?

Floating/ standard/variable market rate

You borrow at the lender's normal rate of interest. No bells, no whistles and, normally, no early repayment charges if you want to move. The rate will vary as the market changes.

A 'Tracker' (changes in line with specified rate)

It follows a named interest rate in a fixed way, e.g. Bank Base Rate +1%. There may be early repayment charges on moving, depending on the deal.

Loyalty rate mortgages

Existing customers who meet the lender's criteria may be offered a discount to the standard rate.

Fixed interest rate

The rate is fixed at an agreed rate and for an agreed period of time. Your payments are not affected by either increases or decreases in the market Interest Rate during the agreed period.

When the fixed period ends you may be expected to stay with the lender and pay the full Standard Variable Rate for a further 1-3 years. If the lender has a reputation for being expensive with regard to its standard rates this would be something to take into account.

Early repayment charges can also be very high should you wish to break the agreement, and this is another area to assess. If you fix for 5 years and rates fall, you might want to switch to a lower rate. You are likely to find doing so very expensive, because of early repayment charges.

Because no one knows what future interest rates will be, fixed interest rates are best used when either they represent an attractive offer and way of saving money in the short term, and where the risk of losing out through downwards rate changes is one worth taking, or when you are concerned that rates may move upwards and that this would cause you serious problems with your budgeting.

Discounted interest rate

You get a discount on the standard variable rate for a given period – typically 2-5 years. If you decide to break the agreement, expect to face an early repayment charge during the discount period, and possibly beyond it. Be sure you understand the charges before signing.

Capped rates

These are mortgages that place an upper limit on your mortgage rate while still allowing you to benefit from reductions in interest rates.

Complex offers

Some schemes really are quite complex, and what may be given on one hand (a low interest rate) may be taken back with the other (an application fee).

Offset mortgages

These are mortgages where the lender offsets any interest on your savings deposits against the interest due on your mortgage.

They are popular but they are not for everyone. However if you have significant funds on deposit (which should not be invested elsewhere for the longer term), and the institution offers both a good deposit interest rate AND a competitive interest rate, then the package can be attractive. Your mortgage adviser can assess this for you.

Special cases

Lenders are very inventive in what is an increasingly competitive market. The attractiveness of such offers would depend upon your situation.

All such offers need to be very carefully evaluated given your own particular circumstances.

Debt consolidation mortgages

These can be ideal for the right type of person – which is someone who has gone through a tough time but is now financially stable and confident, whilst not being considered suitable for normal mortgages, for example they are self-employed and have turned their business round, or they got into trouble after redundancy but now have a new and stable career.

But they can be a very expensive mistake indeed for the person who has a lot of unsecured debts to credit cards, car loans, utilities etc and who has not dealt with their fundamental problems. All too often they convert a bunch of creditors who would each accept a “whatever you can afford” payment into a single creditor who can, and will, force the sale of the house.

Summary

Selecting the right type of interest contract is a complex area, and the role of a mortgage adviser is to help you find the mortgage that suits your needs.

Think carefully before securing other debts against your home.

Your property may be repossessed if you do not keep up repayments on your mortgage.

The early repayment charge

It is very important to understand what, if any, charges, might apply should you wish to change your mortgage in the early years.

Early repayment charges can range from none at all, to 6 months interest, through to even larger sums.

Broadly speaking, the better the deal, or the longer the period of the deal, the greater the early repayment charge.

Early repayment charges do not have to be a problem, so long as they are understood at the outset. If the lender and the deal are competitive then it may be worth taking - even if the potential early repayment charges are high - as the assessment suggests you are unlikely to trigger them.

Assessing any early repayment charges that you may be subject to is one of the areas in which you will need assistance.

Your property may be repossessed if you do not keep up repayments on your mortgage.

The higher lending charge

Some lenders may ask for an additional fee from those wanting to borrow a high percentage of a property's value, in order to cover the higher risk that they may not get all their money back should something go wrong.

In practice it is just one more factor in the mix – some companies will market a low rate but have a high higher lending charge (HLC), while another will promote the fact that they have no HLC but may charge a higher rate.

A mortgage adviser's job is to identify the best overall package for you, and HLCs are just part of that process.

Your property may be repossessed if you do not keep up repayments on your mortgage.

The repayment of capital

There are many ways to actually repay the capital you borrow.

You can pay some of it back each month, slowly reducing the amount you owe (a repayment mortgage), or set the money aside in an investment such as an ISA, which can be used to repay the capital at the end of the term (an interest-only mortgage).

The amount you have to save, or the rate at which you repay the debt, depends on the term of the mortgage and, (if you are using an investment) the growth rates actually achieved.

The repayment route is the safest as you can be sure that the mortgage will be paid off at the end of the term, provided all payments have been made in full and on time.

Alternatively, with the interest-only route, an investment may be used to generate a fund with the aim of paying off the mortgage and generating a surplus. However, if growth is lower than expected there may be a shortfall. The investment route cannot normally offer a guarantee of debt clearance, as the value of the investment can go down as well as up and you may not get back the full amount invested.

We have created a range of useful calculators to help you explore the options open to you.

When using these it is best to be conservative in your assumptions about growth. For your information the Financial Conduct Authority's maximum allowed growth rate for official projections of tax efficient investments like ISAs is 9 per cent per annum.

Part of a mortgage adviser's role is to help you choose the most appropriate method of capital repayment.

Your property may be repossessed if you do not keep up repayments on your mortgage.

Property

At present property is something you should buy when you want to live there for at least 2-3 years*. If viewing as an investment (and there are good deals to be done), be very conservative in your income assumptions and borrowing, while assuming that interest rates will be somewhat higher than at present.

*In a flat market transaction costs - sales, legal, stamp duty etc - won't be recovered through price rises, and owning property can tie you to a location, making it harder to move for work etc. If you are not currently a property owner, renting may be more sensible than rushing into the market, at least until you are sure you are settled somewhere.

Property is a very popular form of investment, which we will look at after these words of warning:

If your house is worth more than when you moved in, it is NOT a sign of financial genius. It is a testament to the potential benefits of gearing an investment, especially in a rising market, as has been typical of the past few decades.

A mortgage is a mechanism by which people break the first law of investment – it is borrowing to invest. That’s a story that normally ends in tears, but with houses it usually doesn’t. The reason is simple, when you borrow to buy a house you end up with a place to live in. You might have a mortgage, but you don’t have any rent to pay.

A mortgage also allows gearing. If you have £20,000 and invest it, and the market rises 10% you have a £2,000 profit. If you have £20,000 and you borrow another £80,000, and the market goes up 10% you make a £10,000 profit (before payments in respect of interest on the loan which would be due).

This is all well and good when it’s your own home, but many people then think that they can extend that into other property areas, or get a generally over-optimistic view of property as an investment (and thus make poor decisions).

Ways to invest in property with a view to making money:

Property development

Many people may have looked at a run-down building in their area and thought something along the lines of with a bit of effort that could be worth a bundle. And they’d be right. The tricky part is to add more value than the cost of renovating it.

This is not an article about property development, but it is worth noting that if you borrow to buy, then time is money and every month you delay is another few hundred pounds lost profit, and that the key to successful development is planning the works to minimise costs, and working with conservative figures (especially regarding the expected sale price).

Landlord rental

Previously a bit of a disreputable profession in which gouging owners let their properties fall apart while threatening to break the arms of tenants so much as a day late with the rent. This business has seen a bit of an image makeover courtesy of the buy-to-let mortgage.

This is not an article about being a landlord, but if you are attracted by buy to let what you need to know before you think about mortgages is what can I realistically expect to make in rent; how many vacant periods are normal; and how hands on will I be - very, or should I get an agent?

The Financial Conduct Authority does not regulate some forms of Buy to Lets.

Property shares/funds (and Unit Trusts etc)

Each of them is different - some will be all about residential development (housebuilders), others seek to build rent generating portfolios of commercial or retail properties, and others are more new development oriented.

Be fully aware of the investment strategy of your choice, and ensure that it matches the market sector you seek exposure to.

You may have difficulty selling this type of investment when you want to, at a reasonable price, and in some instances it may be difficult to sell it at any price. The value of investments can fall as well as rise and you may not get back the amount you originally invested. Past performance is not a guide to future performance.

Your property may be repossessed if you do not keep up repayments on your mortgage.

Real Estate Investment Trusts (REITS)

Real Estate Investment Trusts (REITS) are funds that enable investors to gain exposure to the property sector, in particular the "rental portfolio" sector (as opposed to the development/construction aspects).

REITs assets must be mainly investment property and their income must be mainly rental income. Note that the sector is important in making an investment decision - domestic, commercial, specialist (e.g. pubs) etc are all options, so ensure that the REITs portfolio meets your desired exposure.

REITs distribute their income on a tax free basis but such income is treated as income from UK property in the hands of the recipient.

In our opinion, REITs have their place as an appropriate vehicle for many people, in so far as rental property income should be part of their portfolio, and/or they have income as a key need in regard to their investments. However, careful consideration should be given to the risks associated with such funds before investing.

It is also the case that charities derive useful benefit from REITs, in that the income will be tax exempt for them.

The value of investments can fall as well as rise and you may not get back the amount you originally invested. Past performance is not a guide to future performance.

Insurances for mortgages

You may need insurance as part of your mortgage - either within the deal, or as an advisory addition - and we can arrange whatever you need in the way of life, income, or critical illness cover.

The normal insurances to be considered are:

This is also a good time to consider your position in regards to income protection. This may be provided via your employer or, if not and if you have no cover, you may wish to arrange some yourself. This provides income to pay your bills while you are too ill to work.

Your property may be repossessed if you do not keep up repayments on your mortgage.

Equity release

These are lifetime mortgages ('equity release') and home reversion plans. To understand their features and risks ask for a personalised illustration.

These are schemes by which people are able to release some of the equity in their home without leaving the house.

Before going any further, let us just say that if you need additional income then usually the most sensible and financially efficient option is to sell your house and buy something smaller, more manageable and cheaper to run, investing the difference to produce an income. This is especially true if your property would be hard to manage if you became weaker or infirm in later old age.

Other alternatives worth investigating are that of renting out a spare room(s), which can provide tax-free income or, (for larger properties) the conversion of part of the house into an apartment and renting that out.

Lifetime mortgages and home reversion plans may not be suitable for most people, so you should consider the terms, conditions and risks very carefully.

The two main types of scheme are:

For both types of arrangement you are normally responsible for the upkeep of the property (including expenses).

Your property may be repossessed if you do not keep up repayments on your mortgage.

Equity Release refers to home reversion plans and lifetime mortgages. To understand the features and risks, ask for a personalised illustration.

Equity release is not right for everyone.

It may affect your entitlement to state benefits and will reduce the value of your estate.

Never enter into any of these arrangements without consulting a financial adviser.

Endowments

These are policies which combine life cover with investment.

They were widely used to repay mortgages. The method was that the borrower would borrow the money on an interest-only basis, and take out an endowment which would provide life cover for the term of the mortgage, and a lump sum at the end to repay the loan and, hopefully, additional growth so that the lump sum produced a surplus over the loan amount.

This involves an inherent assumption of likely investment growth by the policy provider, and for many years the conservative assumptions meant that people not only paid off their mortgage, but often had a sizeable surplus. There is, of course, always a risk that the target amount will not be reached if investment growth is less than expected.

In recent years the economic fundamentals have changed, and the risks inherent in this approach have become more apparent. Many people did not appreciate the nature of the risk and that the policies were not guaranteed to repay the loan when the policy matured.

Furthermore, for those who wish to take that risk, there may be more tax-effective ways of doing so, (e.g. a combination of an ISA for the investment element and a term assurance or a decreasing term assurance for the protection element).

Endowments should only be used for mortgage or loan repayment by those who appreciate that there is a risk, but don’t want to (or cannot) utilise the other ways of reaching the same position, though they can result in lower monthly outlay and can be helpful in the early years for people who expect to move house frequently. Should there be a shortfall in the maturity value of the investment vehicle to meet the outstanding mortgage amount then you should ensure that you have adequate funds available to repay the loan when required.

You should NOT stop or otherwise alter any existing endowment without discussing it with a financial adviser.

Your property may be repossessed if you do not keep up repayments on your mortgage.

The value of investments can fall as well as rise and you may not get back the amount you originally invested. Past performance is not a guide to future performance.

 
 

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