The death of the 100% mortgage

100% mortgages were very popular amongst first-time buyers in the last couple of years, and the banks were very happy to lend up to five times someone’s salary. While it meant more people could get on the property ladder, it is clear in retrospect that this was a car crash waiting to happen and a major contributor to the latest recession. Now, the average deposit for first-time buyers is thought to be somewhere between the 20 and 30% figure, even capping 40% in order to secure the better deals. Result: falling house prices but no-one can get on the ladder due to the renewed and belated prudence of the lenders. It’s a tough time out there.

Mortgage traps – Introductory offers masking SVRs

For those who have weighed up the options and think they can afford a mortgage, there are a few key things to be mindful of. Obviously, the point of a mortgage is that you have to pay it back – so this is where all the lender deals come in; how much you pay back a month; How much time you spread your payments over, and so on. Whatever type of mortgage you’re looking at, and however good the interest rate or deal is from your lender, be sure you understand one key thing: the Standard Variable Rate (SVR). This is the standard rate that lenders will charge you outside of any offer they may be running. This is the rate you will pay once any introductory discounts are finished. The Standard Variable Rate is worked out by your lender based on the Bank of England’s base rate. Commonly, the lender’s SVR will be between two and four percent higher than the base rate but this will vary from lender to lender so you need to be mindful. The SVR will follow the peaks and troughs of the base rate so if the base rate is low, your mortgage repayments will be lower and, unfortunately, vice versa.

So when you’re wading through lender’s offers, make sure you are balancing the ultimate Standard Variable Rate, post offer, with the benefits gained by the introductory discount taking into account the tie-in period and any overhanging redemption penalties that may be associated to your deal.

Mortgage interest rates

In addition to the Standard Variable Rate mentioned above, where your repayments will fluctuate with the Bank of England’s base rate, you can choose from additional options such as:
Fixed rate mortgage: fixing your interest rate for a set period i.e. your rate does not fluctuate with the base rate which gives more security when the base rate exceeds your fixed rate but you don’t get the benefits if the base rate troughs. Terms are generally fixed in two to five year periods.

Discount mortgage rate: a variation of the SVR which gives you a discount for an agreed period of time on the lender’s SVR. Generally, the larger the deposit or house price, the larger the discount you will be eligible for. Your monthly payments will still fluctuate in line with the base rate but the discount will remain the same.

Capped interest rate mortgages: another SVR variation, where your interest rate is ‘capped’ so that it cannot rise above a certain percentage when the Bank of England’s base rate increases. The benefit being that you get the perks of the lower base rate but have the security of not being subjected to the higher rates.

Base rate tracker mortgages: this tracks the Bank of England’s base rate with a constant differential set by the lender, usually between 0.5% and 1% higher than the base rate. Base rate trackers are generally for a fixed term but can be for the whole mortgage period. You benefit from the Bank of England’s base rate lows but can suffer the highs repeatedly. The base rate percentage differential will be based on your homes ‘loan to value’ (LTV) i.e the size of the mortgage as a percentage of the value of the property. Low LTVs will get you a low base rate tracker interest rate whereas high LTVs will mean your interest rate differential will be higher.
Before signing up to any of the above you should always check whether your lenders charge an early redemption penalty, overhanging redemption penalty and whether there are any application fees associated and so on.

Other types of mortgage

In addition to those listed above there are other types of mortgage that you will come across including:

The cash-back mortgage: this is where a lump sum is paid to you once you have completed your mortgage. Generally the amount repaid is between one and twelve percent which is agreed between you and the lender at the start of the mortgage. Fees and early redemption penalty charges commonly apply to these mortgages.

The flexible mortgage: by its very nature, you can make flexible payments into this mortgage – underpayments or overpayments. Each lender has different rules about how many underpayments you can make or you could find yourself crippled by interest if you underpay regularly. It’s possible to take payment holidays or even borrow money back depending on the lender, but the real benefit comes from the opportunity of being able to pay off your mortgage early thus saving yourself a lot on interest repayments. Where you are higher risk to the lender, interest rates will be higher – a feature of flexible mortgages.

Current account mortgage: this combines a flexible mortgage as above with a current account. Effectively, your income gets paid into your current account and is partially used to pay off you mortgage. Your lender sets your borrowing limit like an overdraft and at the end of each month once all income and expenditure is accounted for, the balance will be put towards your mortgage. The interest rate will fall as more payments are made. Features of the flexible mortgage apply i.e. overpaying, underpaying, payment holidays etc.

Buy-to-let mortgage: this involves using your rental income to pay off your mortgage each month. Once the mortgage is paid off, the property is yours in its entirety. You could keep it as a rental property, pocketing the income or sell it on. Buy-to-let mortgages are similar to regular homeowner’s mortgages but the risk assessment takes into account the rental income and potential of that income once the mortgage is paid off. As such, you may be able to borrow more money. However, you are at risk if you find yourself without tenants for a sustained period of time.

1. Spend less, save more!
OK, so this is going to take a while but you have to start somewhere. It is surprising how much spending is surplus when you scrutinise it. Are you renting? Could you rent somewhere cheaper for a while? How much would that save you in a year? That’s just one example, but when you look at your spending activity, really try to think about what you could rein in on without making yourself too miserable. Even tricks like taking a set amount of cash out with you for your nights out and NOT taking your card (we’ve all done the £50 withdrawal at the end of the evening!) could save you a surprising amount each weekend.

2. Put your savings where it counts.
Apathy is a main reason banks keep their customers; the perceived hassle of moving banks puts us off! Have a look around for the best savings interest rates and follow the deals to make your cash grow faster.

3. Have you got other savings?
It might be that you have ring-fenced your savings for different things. If you have a pool of savings outside of your deposit, consider the money you will save by getting a better interest rate on your mortgage against any returns you are currently getting on your cash in a savings account.

4. Consider relatives
It’s never easy to ask for help, and particularly difficult to ask for money. However, the only way many people get a foot on the first rung of the property ladder is to ask their parents for a loan. Make sure you have agreed a time period by which you will pay them back and have set amounts as to what this will be each month. This will help avoid any uncomfortable conversations that may arise from either party. You can offer to pay them back with interest, but remember this could be considered as an income to the lending party and could be open to taxation!

5. Get a bank loan
This is a tricky one as effectively you are opening yourself up to more debt. However, if you do the maths carefully enough and find that there is an advantage to getting a loan to boost your deposit AND that you can pay back the loan and mortgage repayments together, then go for it.

6. Look outside the box
There are some housing foundations that are set up to help first-time buyers into the market. These may revolve around part-ownership or government-assisted mortgages with the opportunity to buy the property in full at a later date for example. Have a look around in your area to see if any schemes exist, you may be pleasantly surprised.

Why remortgage?

Most obviously, you would remortgage in order to save money. By switching your mortgage to one with lower interest rates you will be reducing your monthly outgoings and potentially saving significant amounts of money in the long term. What may seem like tiny tweaks in the interest rate could have a huge accumulative effect so it is always prudent to look across the long term when you are assessing your repayments. If your goal is to free up money each month in the short term, you may wish to switch to a longer term mortgage i.e. spreading the length of time that you have to make your repayments will reduce your monthly amount.

Debt consolidation

A good reason to switch mortgages might be to take advantage of their lower interest rates in comparison to other loans. Rolling all debts into one low interest remortgage could ultimately save you money and take the pressure off.

Equity release

A key reason to remortgage is to release the equity that might be locked up in your home. In the time that you have owned your house, it may well have increased in value, exceeding the value it was originally mortgaged on; you’re in positive equity. If you want to release this money, be that for holidays, home improvements, retirement or such like, you can switch mortgages to release a cash lump sum or regular income while staying in your home. The amount of equity you release is up to you.

Lenders will often offer remortgaging packages to migrate their customer bases onto different products, show value or perhaps even keep you for longer! They may suggest a fixed rate mortgage at a time when there is a lot of fluctuation in the base rate to offer more security for example. Whatever the reason, make sure you carefully weigh up the benefits of remortgaging - it can be a great way to free up more money to help you enjoy life now, as long as you keep one eye on the future.