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Whether you are a first-time buyer, moving home or just re-mortgaging, there is a vast range of deals available from the hundreds of lenders in the UK. Taking a loan is a massive financial commitment that none of us can afford to get wrong. If you are not ready for a big commitment just yet, you can opt for a bridging loan and buy yourself more time until you can afford a standard mortgage.
It is a loan borrowed to buy property or land. Most run for 25 years but the period can be shorter or longer. The loan is ‘secured’ against the value of your property until it’s paid off. If you can’t make your repayments the lender can repossess your home and sell it, so they get their money back.
You pay only monthly interest with the loan amount staying the same. This mortgage is harder to obtain because you need to show to the bank how you plan to repay it at the end. It can be done through disposal of the property, pension lump sums, endowments and savings.
You pay interest and a certain amount of the loan each month; thus the debt reduces gradually until repaid in full. The repayment period can as long as 35 years; normally it must end before your 70th birthday. In most cases this is the preferred route.
The world of residential mortgages has mane pitfalls and nuances. We will try to make a brief introduction to enable you apply for a mortgage with confidence and make an informed choice.
Many mortgage holders opt for this option and take out a new mortgage without actually moving home. They do it for a variety of reasons including:
They can do it for any type of mortgage, i.e. fixed rate, tracker, etc. Best time to think about re-mortgage is usually 6-8 weeks before the initial rate period finishes.
The interest rate is fixed for two, three and five years (some are offered for 1 and 10 years) and cannot be changed during that period, no matter what Bank of England Base and LIBOR rates are. When your fixed rate no longer applies, you have to move to the Standard Variable Rate of the lender. That’s the best time to try and have a new deal either with the same lender or re-mortgage with a new one.
You are offered a discount off the lender’s Standard Variable Rate for a period of 2, 3 or 5 years. It is subject to movement, either up or down.
A tracker rate follows the movements of different interest rates, usually the Bank of England Base Rate or LIBOR, and moves up or down with them. You can secure a deal for 2, 3 or 5 years, or for the term of the mortgage.
The main thing here is that you can use the money you have in your savings and/or current accounts to help you reduce the mortgage balance on which you are charged interest — the more money you have in your savings the more you save on your loan. When savings rates are not attractive, an offset mortgage can make your savings work harder for you. But basically it can be beneficial at any time, not just when interest rates are low.
The beauty of it is that you get a lump sum in cash at the start of your mortgage (it may be a fixed amount or a percentage of the mortgage). You might need it to get going with refurbishments and buy furniture; however, this mortgage is not always available and the interest rate is normally higher than average.
This rate is similar to a tracker or a discounted rate in terms of movement, but it cannot exceed a certain maximum rate. For example, you have a 5% capped rate. The interest you will be paying can be anywhere between 0% and 5%, going up and down, but it can never go over 5%. When the capped rate period finishes, normally after 2, 3 or 5 years, you switch to the lender’s standard variable rate.
It is another way to keep your monthly payments at an affordable level if the Bank of England rate rises. In essence, you start with a tracker rate and then can switch to a fixed rate if, or when, the Bank rate hikes. It means you can fix your rate at a comfortable level and make repayments that suit you. Many lenders don’t use the “drop lock” term when they offer this option. The best thing is to search among tracker products and see if the option to fix is available.
Before choosing a residential mortgage, make sure you understand your borrowing type and needs.
First time buyer — a person who has never had a mortgage before.
Home-owner — a person who owns his/her own home either with or without a mortgage.
Re-mortgager — a person who owns a property with a mortgage and is looking to refinance.
Large loan borrower — someone who is looking to take out a mortgage over £500k.
Shared owner — a person who cannot afford to buy a home outright and purchases just a share in a property through a mortgage. At the same time, a housing association or local authority buys the remaining share on which you pay a rent. Gradually, you buy further shares of the property until you have bought enough shares to own the property outright.
This will depend on how much you can put down as a deposit, how much you earn and how much you can afford to repay each month. All lenders have different lending policies and it is vital to be able to match borrowers with the right lender and the right mortgage.
With the assistance of Government schemes such at the New Buy Deal, it is now possible to borrow up to 95% of the value of a property. Unassisted, most lenders will go up to 90% LTV.
Since April 2014, new regulations require lenders to assess borrowers on their ability to repay the loan now and in the future. In some cases, this has made it harder for people to get a mortgage and whilst this is frustrating, the rules are there to protect the borrower.
Assessing affordability is often referred to as stress-testing. Lenders will ask for comprehensive details of your income and expenditure. Essentially, they deduct a base line of costs, typically your regular monthly bills and then apportion a sum of what’s left to the monthly mortgage payment. They will also stress test your ability to pay the mortgage if rates go up. In order to do this many apply a notional rate of 5-7%.
So, if you are thinking about getting a mortgage, it’s worthwhile looking at your monthly outgoings.
It also plays an important role in taking out a mortgage. Most mainstream mortgage lenders like to lend to borrowers with good, clean profiles, so it’s always worth double-checking yours to ensure that is as clean as possible. You can request a copy of your profile from a number of agencies including Equifax and Experian. That’s not to say you can’t get a loan if you have adverse credit but it’s likely that you will be offered a higher rate.
They enable you to access capital quickly, in some cases you can get a principle offer with you on the very same day. Let’s have a look what differs bridging loans from a standard mortgage.
Bridging loans are meant only to ‘bridge’ the gap until when you can afford longer-term finance, for example, your standard mortgage. Therefore, banks will typically offer a maximum duration of up to 36 months before the money has to be repaid.
It is much quicker to apply for a bridging loans than for a standard mortgage, allowing you to take advantage of a property bargain.
Despite these differences you should remember that a bridging loan is still a loan and if you fail to keep up repayments, the property could be repossessed. You need to remember, that repossession process for a bridging loan can be much swifter than repossession on a regular mortgage.
You should also note that bridging finance costs roughly the same amount to arrange as a regular mortgage.
The term can be from one day to a year or in some instances even more, depending on the provider. Typically, you would have the loan for a few months.
As you might expect, it’s an expensive option, though competition has brought the costs down a little. The borrower usually pays monthly interest. Rates typically start at 0.75% a month, rising to 1%-1.5%. While companies have their published rates, these are often more negotiable than standard mortgage rates.
A lot will depend on your “loan-to-value” (how much you are borrowing as a proportion of the property’s value) and whether or not you have exchanged contracts.
These can vary greatly. Typical example will be when you pay a 1-2% arrangement fee, plus a £500 administration fee and legal fees (minimum £500) for all residential first-charge lending.
You will also need to pay attention to the exit fees — nowadays most bridging loan companies don’t impose them, but some still do.
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