Cheapest Uk Mortgage

Reverse Mortgages – Get The Money You Need – Part 2 Of 4

To recap part 1, Reverse Mortgages are loans that allow you to borrow back the equity in your home. If you are 62 years of age or older, they are a way to borrow against the equity in your home to provide you with tax-free income. Probably a good idea if you’re a senior who needs cash for medical care, to maintain your standard of living, or for other reasons.

So, what are some of the disadvantages of Reverse Mortgages?

- They are even more complicated than conventional mortgages and the consequences of various options might not be always up front.

- They may be relatively expensive compared to other alternatives.

- Although the money you receive is tax-free, it may affect your eligibility for “need based” public assistance benefits such as Medicare, Supplemental Social Security Income (SSI) and MedicaidMediCal.

- Reduces the equity you have in the property which could cause a potential negative impact for your heirs.

- This source of funds is often not well understood, even by real estate and legal professionals. (Check out their experience before accepting their advice.)

In general, what types are available?

- FHA-insured mortgages – Home Equity Conversion Mortgage (HECM).
- Lender-insured.
- Uninsured.

Each type differs in the amount you can borrow, how the proceeds will be paid, and allowed expenses such as interest, closing costs and other fees.

Here are some things to think about before getting this financing :

-How much money do you need?
-Is there another way to get the money you need ?
-Will a Reverse Mortgage make you or your partner ineligible for any government benefits – now or in the future?
-Do I qualify for this kind of Mortgage?
-How much can you borrow ?
-How much will it cost you in fees and interest to borrow this money, even if you don’t have any out-of-pocket expenses?
-Will you have to sell your house before you die to pay off the loan ?
-If you die, and your spouse is still living in the home, will he or she have to leave or pay it all off ?
-Will the loan become due and payable if you go to a long-term care or nursing home?
-What will your heirs or you have left after the loan is paid off?
-Are there any early-repayment penalties?
-What are your obligations, such as property maintenance, property taxes and insurance?

Seven important things to do before you make a decision :

1. Decide how long you expect to stay in your home. These loans are relatively expensive for the first 2-3 years, so consider other options first.

2. Consult with a HUD-approved Reverse Mortgage counselor before you apply. This information service is usually offered free of charge. A counselor can help you decide what kind of financial help you need and what type is best.

3. Decide if you really need it. Another type of loan may be a less costly solution to meet your financial needs.

4. You might want to Include your family, especially grown children, in the decision-making process. It’s good to get a general agreement among your heirs that going ahead with this type of mortgage arrangement is okay with them. Remember, you may be reducing their inheritance.

5. Shop around for the best deal. It may affect how much money you get immediately and in the long-term, how the money is paid out, how much you pay in interest and other charges, and so on.

6. Determine if your Mortgage affects your eligibility for “need based” public assistance benefits you may receive.

7. After you have considered all the facts, does getting a reverse mortgage make you happy ? If yes, that’s a good sign. If you’re not sure, best to examine all of the alternatives again.

That’s all for this week. In Part 3 next week we’ll talk about frequently asked questions concerning reverse mortgages – stay tuned !

Reverse mortgages can be a great solution for seniors who wish to remain in their home but are having difficulty making their monthly payments and meeting other financial obligations. If you own your own home and is 62 years of age, the bank will actually pay you money so you can stay in your home, rather than the other way around. It is crucial to collect and understand as much reverse mortgage information as possible before deciding on whether to take out the loan.

Your home must be a single family residence in a one to four unit dwelling, a condominium or some type of manufactured home. While ccoperatives and most mobile homes are not eligible for this type of loan. The home must be at least one year old and you have to first meet with an authorized counselor.

The loan can be obtained as a lump sum payment, a fixed monthly amount or as a line of credit and the money can be used for just about any purpose such as paying property taxes or medical bills, home repairs and improvements, paying off credit cards or just daily living expenses.

The approval of loan amount depends upon your age, the amount of equity in the home, its appreciated value and current interest rates indications.

The reverse mortgage loan does not require you to pay anything until you sell the home, permanently move out, or pass away. Your loan could also become due if you do not maintain as agreed or you fail to pay property taxes/ hazard insurance and if if the last surviving borrower does not occupy the home for 12 months in a row due to illness.

The fees involved in a reverse mortgage loan are quite similar to those you would incur with a regular mortgage. These include origination fees which cover the lenders operating expenses and are currently capped at the greater of $2,000 or 2% of the maximum FHA loan limit. Apart from that you will be required to take out a mortgage insurance and pay an appraisal fee. Other costs include fees for credit reports (usually under $20), flood certification, closing and title search, document preparation, recording, courier, pest inspection and a land survey. In addition, a monthly service of $30-35 per month will be charged.

Your counselor will be your principal guide to getting correct information on reverse mortgages and should be consulted for advise before making final decisions.

More than 25% of homeowners are paying for their homes with an interest-only mortgage say the Abbey. The reason is obvious their monthly payments are much less. For example, a 125,000 interest only mortgage at an interest rate of 5% and repayable in 25 years time, costs 525 per month – but on a repayment basis the monthly cost rises by 210 to 735 per month.

Understandably, this level of cash saving has proved highly popular with first time buyers struggling to get the feet on the property ladder and others working on a tight monthly budget. But there’s a time bomb lurking. 37% of homeowners with interest only mortgages are failing to save any money for repaying the mortgage when the mortgage capital eventually becomes repayable at the end of the term.

The Financial Services Authority (FSA) is concerned about this problem so last year they ushered in new rules requiring lenders to seek evidence from new borrowers about the steps they’re taking to repay the capital. And it won’t be sufficient for the borrower to say that they intend to repay the mortgage by selling the property. From now on, the FSA is likely to judge any new mortgage that is granted as being miss-sold unless the application includes details of a verifiable repayment vehicle which is likely to generate sufficient to repay the mortgage. And, if the figures don’t stack up, the lender will be in hot water with the FSA.

The ideal type of repayment vehicle they will be looking for will be an existing personal equity plan (PEP) or an Individual Savings Account (ISA). Even the 25% tax-free cash from a personal pension plan (PPP) will be acceptable. But borrowers will have to provide evidence to the lender that these financial arrangements are in position just saying you intend to do it won’t wash!

From reactions so far, we can see that individual lenders are interpreting the FSA’s rules in different ways. For example, take the Nationwide Building Society: their new rules say that you won’t qualify for an interest only mortgage if you plan to repay using an inheritance or are relying on future pay rises. Even if you intend to fund your repayment investment from bonuses rather than from regular income, you’ll still be required to show that the bonus scheme exists and that the expected level of savings from bonuses are realistic.

However, the Nationwide Building Society will agree an interest only mortgage if you aren’t a first time buyer, the mortgage you want is less than two thirds of the new property’s value and you have at least 150,000 of net equity in your existing property.

Lots of mortgage advisers seem to agree that interest only mortgages should only be used as a last resort when income is tight. That’s because whichever investment vehicle the borrower uses to repay the mortgage, the investment returns are never guaranteed and it could fail to deliver sufficient capital at the end of the term to fully repay the mortgage. This means there’s an element of risk involved. Therefore, many advisers prefer to be sure and recommend a repayment mortgage where there is absolutely no risk of a shortfall.(They may have in mind the desirability of avoiding any risk exposure within the advice they provide although this is covered by their professional indemnity insurance!)

Having said that, some advisers will acknowledge that an interest only mortgage can be useful if the borrower plans to simply shelter under the mortgage’s lower repayments as a temporary stop gap of say four or five years, and then switch to a repayment mortgage. Of course, the FSA will still expect the borrower to provide evidence to the lender that a suitable investment or savings plan is in place prior to the borrower releasing the interest only mortgage.

However, in our view, if advisers do recommend an interest only mortgage, they should recommend a scheme where the borrower can make penalty free overpayments. With such mortgages, the borrower is only committed to paying the monthly interest, but as and when spare capital becomes available, money can be paid in to reduce the outstanding mortgage. There are plenty of mortgages available like this. Most allow the borrower to repay at least 10% of capital each year, penalty free, but please check the details before you sign up for the mortgage.

Offset mortgages represent one of the biggest mortgage innovations seen in recent years. Six years ago there was hardly an offset mortgage to be seen. Now they and the current account mortgage, to which they are closely related, account for £10 out of every £100 of new lending.
What’s more, one of the UK ‘s large lenders believes that 25% of existing mortgage holders would be better off with an offset mortgage. So if you’re in the market for a mortgage you need to know what they’re all about. Otherwise you could be missing out.
Firstly, how does an offset mortgage work?
The basic idea is that besides borrowing money from the mortgage lender, you also run savings or deposit accounts with them. Then you are charged interest not simply on what you have borrowed but on what you have borrowed less the balance in your savings and deposit accounts. So, if you had an offset mortgage of £100,000 and had £20,000 in their savings account you would only be charged interest on the difference, £80,000. In these circumstances, no interest is paid on your savings the interest is offset.
It doesn’t sound like a ground breaking idea where’s the benefit?
Quite simple. Whilst the full benefit of your savings is reflected in a lower interest charge on your mortgage account, legally you have not received any interest. If you have not received interest you can’t be charged tax on the interest. Step away Mr Taxman!
This means that offset mortgages are especially attractive for higher rate taxpayers who would otherwise pay-away 40% of the interest they receive in tax.
Consider some figures. If you had a £100,000 mortgage paying a competitive rate of 4.69% plus £20,000 on deposit, how would the figures work out? Well over a typical 25 year mortgage, without offset you would pay £85,351 in interest but with offset you would pay just £41,998 that’s a saving of £43,353. What’s more you would repay the mortgage five years and eight months early. That’s because the monthly repayments are based on the full mortgage debt before offsetting is taken into account so borrowers are effectively overpaying their debt each month.
And doesn’t Mr Taxman look sorry! In theory, a standard tax payer saved £9,538 in tax and a higher rate taxpayer a whopping £17,341 in tax.
Flexibility can also be a major advantage. You can typically pay off capital without penalty, underpay and take payment holidays so long as you’ve made sufficient overpayments throughout the years.
Too good to be true where’s the catch?
Historically borrowers have had to pay a higher interest rate for the benefit of an offset mortgage. But the good news is that with banks and building societies fighting for a bigger share of the offset market, offset interest rates are falling.
This means that you need to look carefully to ensure that the apparent tax savings you could make are not eliminated by the slightly higher interest charge. Quite honestly this is not an easy calculation so it’s best left to your professional mortgage adviser.
But as a guide, a standard taxpayer needs around £20,000 in savings behind a £100,000 mortgage to make the offset deal better value than a traditional mortgage. For a higher rate taxpayer the savings requirement drops to around £10,000. (These figures are based on a typical 4.69% fixed offset rate, compared with a typical 4.49% rate for a tracker.) These figures will change as interest rates vary and, in all probability, as the cost differential between an offset and a traditional mortgage closes.
Not all Offset Mortgages are the same!
As you would expect, with the offset lenders fighting for your business lots have added bell and whistles to the basic concept. Free property valuations and free legal work are relatively common. Then some banks will include your current account in the offset calculation, some lenders enable two nominated savings accounts to be offset, some will even agree an additional borrowing facility with a cheque book that can be used at any time.
On the interest rate front you’re bound to be offered a low starting rate fixed for six or twelve months. You might also be offered a tracker which is below the Bank of England base rate for six months and which only rises above after six months or a tracker which exactly tracks base rate plus a tiny premium for a few years. There are lots of variations.
The interest rate can also depend on what percentage of the house valuation you want to borrow. For example, one lender is currently offering 5.6% if you are borrowing less than 50% rising to 6.45% for up to 99%.