Posts Tagged ‘Lenders’

Second Mortgages or a Further Advance

Tuesday, April 19th, 2011

If you are a homeowner and in need of some extra cash, one possibility you could consider is taking out a second mortgage. If the present value of your house exceeds the amount you paid for it (your mortgage total), then you have equity that can be used to borrow more money. This is basically a loan that is secured on your house and is sometimes termed a further advance.

Finding Another Lender?

You can approach your existing lender for a second mortgage, or shop around for a lower interest rate. Its likely your second mortgage will be for a lesser amount of capital, but will nevertheless be subject to higher interest rates and possible charges. This is because it represents more of a risk to the lender the lender takes a second charge over your property, which means that if the debt was recalled and your house repossessed, they would be second in line after your main lender to receive their debt.

For What Purpose?

Secured loans and second mortgages are popular with people who want to raise extra funds for example if you want to carry out home improvements or set up in business and need capital to get going. Although it can be a good way to find a cash lump sum fast, be aware that you are eating into the investment that your property should be. You should make sure that you have planned for the extra cost of repayments beyond what you initially were bound to. If the mortgage term will last into your retirement, will you be in a position to keep up the repayments?

Understanding The Small Print

While there are any number of lenders offering second mortgages, before you commit yourself to one you should be totally clear about the terms offered. Although there may be a special offer or discounted period of low interest, often these will revert to a higher rate after the set period once again, you need to take the long term view rather than the short term. Also, your equity can provide a security cushion so that if market prices fall, you will avoid the negative equity gap taking out a second mortgage means you will lose that safety feature. (This is where the phrase mortgaged up to the eyeballs is particularly apposite.)

You should also take into account any other costs that you may incur arrangement fees, a re-valuation survey, additional payment protection etc.

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Regulations Tighten On Interest Only Mortgages

Tuesday, March 15th, 2011

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.

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Offset Mortgages. A dream for well off homeowners.

Tuesday, March 8th, 2011

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%.

Like so many things, whilst the basic concept is simple, it then gets complicated! This clearly underlines the need to talk things through with an independent mortgage adviser. It’s their job to ensure you get the right type of mortgage and the best deal.
If you have savings, there’s a big chance they’ll recommend an offset mortgage.
*Indicative figures correct as at November 2005

Michael Challiner has 15 years experience in financial services marketing at senior level.

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No Cost Mortgages

Tuesday, March 1st, 2011

When you are dealing with mortgages, it is important to check twice the calculation as well as the English when the lenders specify the word No cost Mortgages.

The fact is that no cost mortgage means it will cost something, now the question arises in your mind how much it cost the answer is the cost depends on what kind of mortgage you plan to go. There are two types of basic cost involved while getting mortgage, In one type of cost the lender cannot control that includes the appraisal cost, filing fees, title search, attorney fees etc, and the next type of cost is the lenders cost that is loan application fees, credit check, admin fees and processing fees etc, with out which nothing is possible.

To few lenders no cost means they do not want any cost from their pockets, all the cost will be added in the loam amount, for instance the loan cost is 5,000 and you plan to borrow 150,000 in this case the 3,000 gets added up with the loan, and ultimately you will be borrowing 1,53,000 that is with interest for the entire amount. In this case when you take 30 years loan at 6.25% rate interest the monthly interest with principal is 942.05 and the interest is 18.47, which is 18.47 per month more than 923.58 you would make on 153,000. You may not realize you are paying interest for 3,000 every month until you clear the entire amount, in addition to that this 3,000 wont be paid off till the 20th month of mortgage well into the subsequent year its only after 19th payment that the principal you owe will reduce below 150,000 to be exact 149,948.25.

How does this sounds to you, this is the way no cost mortgage works, you pay accumulated interest on unpaid balance of the loan every month and to pay off the 3,000
You would be paying 18.47 besides the interest you pay for 1,50,000. So if you have paid that 3,000 from your pocket you would be paying the interest with principal for the actual amount you are borrowing, just by the word no cost mortgage you dont start paying the loan until your loan reached 20 months.

In some cases you may not pay any cost in the beginning but you will end up paying with closing cost and sometimes the lender will take in charge of paying all the cost like application fees, commission, attorney fees and then in turn charge the borrower with high interest rate.

By this time you could get a clear idea how much it will cost you for no cost mortgage
No cost loans are very expensive, just because its convenient that you dont spend a penny from your pocket it is better, in a long run it cost you more than to spend from your pocket, so it is important to remember that you are not really saving money by opting for no cost mortgage.

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Interest Only Mortgages FSA Makes Move To Protect Homeowners

Tuesday, November 23rd, 2010

Interest Only Mortgages FSA Makes Move To Protect Homeowners

Abbey recently stated that over 25% of homeowners decide to take out an interest-only mortgage. It’s not hard to see why the monthly payments are significantly less, just look at this example based on a 25 year 125,000 mortgage at 5%. The interest only mortgage will cost 525 per month – but the repayment mortgage is 735 per month an additional 210 a month that’s a lot of money!

At the root of the issue are the first time buyers they simply can’t afford the repayment mortgage, so take the interest only option as an easier way out. However, the interest only mortgage must be accompanied by a suitable savings vehicle to cover the outstanding capital at the end of the mortgage term, and it is this that many are failing to do as many as 37% in fact.

Now the Financial Services Authority (FSA) has stepped in, concerned that many homeowners will face a shortfall at the end of their mortgage term. It is now necessary for lenders to see firm evidence from new borrowers that they have set up a savings vehicle to cover the capital. Previously, borrowers just had to state their intention, for example, they would sell the property to raise the capital. However, that will no longer be good enough. The lender will need to see a proper plan set up they are not allowed to set you up on an interest only mortgage without that proof. If they did, they would be going against regulations and would be penalised by the FSA.

The lender will now need to see proof of a personal equity plan (PEP), an Individual Savings Account (ISA), or evidence that 25% tax-free cash from a personal pension plan (PPP) will ultimately cover the outstanding capital. It will no longer be good enough to say that you will set it up you must show that you have already sorted it out!

In the short time that the new regulations have been in force, individual lenders are already making their own interpretations of the rules. The Nationwide Building Society is not allowing borrowers to use a future inheritance, or future pay rises as a basis on which to set up an interest only mortgage. Similarly, expected bonuses will not be good enough either, not unless you can prove that you will definitely be receiving them. Bonuses based on performance can’t be guaranteed, so would not count.

People that already have their own home will not be subjected to the same rigorous checks however. As long as you are borrowing less than two thirds of the new property’s value, and you have 150,000 of net equity in your current home, then Nationwide will accept you as a customer.

On the whole, mortgage advisers will not recommend interest only mortgages, agreeing that they represent too much risk. Repayment mortgages guarantee that all monies owed are paid at the end of the term, but a separate savings vehicle could fail to live up to expectations, and you could end up with a shortfall. Most mortgage advisers will recommend a repayment mortgage to bypass that risk.

On the other hand, the interest only mortgage is a useful short term solution, and if you can assure your mortgage adviser that you intend to switch over to a repayment mortgage as soon as you can afford to, they may well support your decision. Even in this case however, you will still need to provide the same details as if you were intending to stick with it for the full term. You simply won’t be able to get an interest only mortgage without providing the right paperwork.

The best all round solution is to get an interest only mortgage that allows you to overpay. So if you find that you have some extra capital, you can put it onto your mortgage, and reduce the capital. These types of mortgage are widely available, and many allow you to repay 10% or more in a single year. Of course, if you can’t afford it, then you don’t have to at least you have the choice. Just make sure, before signing up, that you can overpay without penalty.

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Fixed Rate Mortgages Know Your Rate!

Tuesday, October 12th, 2010

Nothing is ever certain in the world of finances, and theres no way of predicting how the market will change in the future. However, if you want to be able to plan your budget precisely, then a fixed rate mortgage might be the right option. The repayments will be fixed for a set period of time usually between the first one and five years of your mortgage, so you can be sure that any rises in the interest rate will not affect you. The term the rate remains fixed can be as long as ten years.

Fixed rate the pros

For those on a tight budget, it can be useful to know exactly what will need to be set aside each month for mortgage repayments. Also, it can be a good move to fix your rate when the economy looks like its about to change and interest rates rise. If, from studying the market, you anticipate that rates are set to rise in the near future, then taking a fixed rate now could mean you will save money over the next few years. Even if the Base Rate set by the Bank of England rises, you will be protected, at least for the term that your payments are fixed.

Fixed rate the cons

If the market changes and interest rates fall, you could lose out on a reduction in rates. Fixed rate mortgages are often set at slightly higher rates than the cheapest deals. Be aware of redemption penalties and clauses that tie you to your mortgage these can last much longer than the fixed rate period and you may find it prohibitively expensive if you want to change lenders or pay off your mortgage.

Thousands of people spend a lot of time studying the economy, and even the financial experts who predict market conditions often get it wrong. Its impossible to foresee how interest rates will change although you may be able to apply common sense to a certain degree, there is no guarantee that a fixed rate mortgage will beat the SVR five years down the line. Ultimately, you have to make the best decision you can based on the situation as it stands.

You should also check to see if the fixed rate mortgage is portable this means that if you want to sell up and move house during the tie-in period, you can transfer the mortgage to your new property without incurring any penalties.

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Bad credit mortgage offers an opportunity to become a homeowner

Tuesday, August 24th, 2010

Bad credit mortgage offers an opportunity to become a homeowner

The companies who are specialised in offering bad credit mortgage are trained and they know how to help people get a mortgage with imperfect credit. Even if you have less than perfect credit , you will always find a lender out there who is willing to help you arrange a mortgage so that you can own a home .You have to make an extensive search for a mortgage lender who specialises in offering mortgage for people who have less than perfect credit .

The easiest way to do so is on the Internet. Just type in the search box bad credit or adverse credit mortgage , you will find thousands of companies just waiting to offer you a bad credit mortgage plan for a home of your own even with inappropriate credit score. Before applying for a loan, you might have to pay off some smaller bills and credit card bills. This will definitely improve your credit score.

It is always recommended that you should approach to brokers and intermediaries. They are in better position to search for you. They do not charge any fees from you as they get their commission from the lenders only. These brokers and advisors will always know the best way to get you financed and they will also arrange best rates for you.

Bad credit mortgage companies will not only help you to get you into a home of your own, they can also help you to repair your credit score. Make sure that you pay your payments on time and you will see your credit score rising a bit more every month.

So, no matter how low your credit score is, you can always search and find a bad credit mortgage that will help you to buy your own home.

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Adjustable-Rate Mortgage Payment

Tuesday, August 17th, 2010

People are asking if home loans in newspaper ads showing astonishingly low rates are for real. These ads are what we call adjustable-rate mortgage payments.

Loans with an adjustable-rate mortgage payment type usually have low rates only for a short time. Rates of adjustable-rate mortgage payment are adjusted on a regular basis, usually after the first year is over. This means that the interest rate and the amount of the monthly adjustable-rate mortgage payment may vary, going either up or down.

With adjustable-rate mortgage payments, there is little chance of you knowing what your future monthly payment would be. Some types of adjustable-rate mortgage payments have limits to the interest-rate increase. When an adjustable-rate mortgage reaches a certain percentage, the interest rate will no longer increase for the duration of that period. But at the end of that period, the adjustable-rate mortgage payment will vary once more.

Determining whether or not an adjustable-rate mortgage payment is the right type of loan for you usually depends on your financial situation. Also, it depends on the type of adjustable-rate mortgage payment you plan to make. Adjustable-rate mortgage payments have characteristics that might ultimately prove risky in the long run. Because the dynamics of interest rates in the market are never certain, the amount of your adjustable-rate mortgage payments are uncertain as well.

Adjustable-rate mortgage payments generally have lower initial interest rates compared to fixed-rate mortgages. This makes an adjustable-rate mortgage payment more affordable and easier on the pocket. Adjustable-rate mortgage payments may also help you qualify for a larger loan. This is due to the fact that lenders sometimes decide to extend a loan provided that your current income is steady and your adjustable-rate mortgage payments for the first year are up-to-date.

Another advantage of having an adjustable-rate mortgage payment type of loan is that it could turn out to be less expensive in the long run. With an adjustable-rate mortgage payment, the chance of interest rates going higher is equal to its chance of going lower. Now here in also lies the risk of having an adjustable mortgage payment.

When it comes to having an adjustable mortgage payment, there are no guarantees. It is either the interest rates will lower down or it will rise up. Lower interest rates mean lower monthly adjustable-rate mortgage payments. Higher interest rates mean higher monthly adjustable-rate mortgage payments for you. There is no middle ground. Adjustable-rate mortgage payments are basically a trade-off you exchange more risk for lower rate with an adjustable-rate mortgage payment.

But despite this, there are some ways to circumvent the risks and increase your chances of landing a good investment in an adjustable-rate mortgage payment. Below are some questions you need to consider:

Is there a possibility that my income will rise up enough to cover higher adjustable-rate mortgage payments should interest rates go up?
Is there a chance that I might take on other sizable debts like a loan for a car or school tuition in the near future?
Will my adjustable-rate mortgage payments increase even though interest rates remain the same?
How long do I plan to own this home? (If you plan on selling soon, an increase in interest rates should not be a problem for your adjustable-rate mortgage payment.)

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Adjustable Rate Mortgages and Negative Amortization

Tuesday, August 10th, 2010

For many borrowers, adjustable rate mortgages are an attractive means of qualifying for a home. Fewer borrowers realize the potential negative amortization problems these loans can create.

Adjustable Rate Mortgages

Adjustable rate mortgages are very popular with home buyers. The popularity arises from the fact the initial interest rate on such loans is typically much less than one finds with fixed rate loans. As a result, home owners can squeeze into homes that they might not otherwise be able to afford with fixed rate mortgages.

The potential risk with adjustable rate mortgages is well known. A borrower runs the risk the interest rates will increase over the years, resulting in financial hardship when month mortgage payment amounts go up. If the rates and payments go up to much, the borrower can run into serious problems trying to make payments and may even lose the home.

To overcome the fear of rising rates, many lenders use caps on rate increases to entice home owners. These caps essentially limit the amount the monthly payment can increase for any fixed time period. For many loans, the period is one year and the rate increase is one percentage point. While this makes borrowers feel more secure, there is one little thing lenders fail to point out.

Negative Amortization

On many adjustable rate mortgages, the caps apply only to the monthly payments due on the loan. The caps do not apply to the actual interest rate being charged on the loan. This situation leads to a financial disaster wherein you are making the monthly payments, but actually seeing the principal of your loan increase. This situation is known as negative amortization and should be avoided at all costs.

Negative amortization is best explained using good old credit cards for an example. If you have credit card debit, and everyone does, you know that making the minimum monthly payment may not make a dent in the total balance. In fact, it may be less than the interest charged for the month. This becomes apparent when you receive the next bill and your balance has increased! Welcome to the world of negative amortization.

On an adjustable mortgage, you need to read the fine print to full understand how any caps apply to your loan. Whatever you do, try to stay away from negative amortization whenever possible.

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