Mortgages...are they worth the hassle?
Mortgage rates at an all time low, First time buyers being encouraged onto the market by the “Help To Buy ISA,” and renting premiums driven to a five year high.
All directions point to “Debtsville” via “Mortgaging.” Considered to be at the helm of the 2008 financial crisis, what is being done to prevent this happening again? And is it even a suitable option for YOU?
The most important thing to remember, is that a mortgage is a loan secured against your property – and failure to pay this loan results in your property being repossessed.
Fixed Rate Mortgage
The mortgage rate stays the same for a specified period. This is beneficial when trying to budget, however, if interest rates go down, your payments will stay the same, and there are invariably high early exit fees.
The mortgage rate will track the Bank of England base rate, usually with the rate at 1% above or below the Bank Of England Base Rate for a specified time, or occasionally, for the term of the loan.
Standard Variable Rate
Every lender will have its own SVR that tends to mimic the movements of the Bank of England Base Rate, however the lender can change its rate whenever it wants to, regardless of the Bank Of England Base Rate.
As a LandLord, your only option is a Buy-to-Let mortgage.
Salary over £25,000 per annum
Your maximum age varies between 70 and 75 when the mortgage term ends
Good credit record
Higher interest rates than standard mortgages
Usually a minimum 25% deposit is required
Most BTL mortgages are unregulated
If you sell your property at a profit, you are liable to Capital Gains Tax
How much can I borrow?
Rental income needs to be higher than 25-30% of your mortgage payments (which can prove difficult in areas such as London where rental yields are low)
Interest only mortgages are far more acceptable than in other areas of the mortgage market, however you still need a plan to pay off the capital at the end of the term.
First Time Buyers and Everyone Else
As a buyer wanting to live in their property, you have more options:
1) Interest only (increasingly hard to find): you only pay the interest on the loan
2) Repayment mortgage: you repay part of the capital as well as the interest on the loan
3) Combination mortgage: you have the option to switch between the above two options.
Save between 5% and 20% as a minimum deposit
Affordability – the bank will stress test your ability to make mortgage repayments, but it is still advisable to create a budget for yourself
You need to be able to provide evidence of your income
Owning your own home
Taking out a loan, on which you have to pay interest
The property market can go down as well as up, so you could end up in negative equity
How much can I borrow?
“LTV” – this is the loan to value ratio that a mortgage company will offer, ie 80% would mean that you could borrow up to 80% of the value of the property. This will vary for each individual, but it is worth noting that with a 40% deposit, you will start to receive a preferential interest rate on your loan.
How does an interest and capital mortgage work?
You borrow money to purchase a property. You make monthly payments. At the beginning of the term you chiefly pay interest and a little of the capital, towards the end of the term, you mostly pay off the capital on the property and very little of the interest.
So What is being done to prevent the second sub-prime mortgage crisis?
There was a Mortgage Market Review (MMR) with an overhaul of the rules in October 2012. The purpose of this review was to ensure that the mortgage market was more sustainable and efficient for those taking out mortgages. The way that this has been done, is to restrict the high-risk lending and borrowing that made mortgage payments questionably affordable for those making the mortgage payments.
The result of the MMR for the consumer, is that it is more difficult to take out a mortgage, the LTV tends to be lower, and the questions by the bank or institution lending the money, are more stringent. Whilst trying to buy a property, this can prove frustrating, however, ultimately, this is the way that the banks can safeguard their money that they are lending to you, as well as safe guarding your home from repossession owing to failed mortgage payments.
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