There may be fewer mortgage deals around and lending criteria may be stricter, but it’s still vital that potential buyers get some good advice before making a decision.
Zoe Dare Hall
03 Sep 2010
The mortgage landscape has changed dramatically in the last couple of years, with fewer deals available, higher deposits required and lending criteria stricter than ever. But there are still enough options around to mean buyers need some good advice before they make a decision.
The first choice to make is whether to opt for a fixed rate or variable rate mortgage.
A fixed rate suits those who need certainty and it makes budgeting easy. You know exactly how much you have to pay every month for a period of time – usually one, two, three, five or 10 years.
A variable rate – or tracker – mortgage suits those who can cope with rate rises. “Interest rates are at historic lows of 0.5 per cent at the moment, but it is important to remember that rates will rise at some point. Could you afford your mortgage if they do go up?” asks Melanie Bien, director of Private Finance.
Which type of mortgage you choose comes down to your attitude to risk, “especially with interest rates being so low,” adds Malcolm Waldron, Regional Financial Director of Kinleigh Folkard and Hayward estate agents. “Fixed rate mortgages may be more suitable for the more risk averse, but they typically come with an initial high monthly cost. Variable rate mortgages can be riskier as they are more likely to be affected by the fluctuation of the Bank of England base rate.”
The choice you make is crucial as you will be tied in to that mortgage for the deal period and will most likely have to pay a penalty if you decide to switch to another mortgage before that period is up.
“Generally in the current market, trackers are priced lower than fixed rates, with interest rate rises likely in the next three years,” comments Nick Walter from Liquid Financial Management. “It is easy to be blinded by a headline rate, but it is important to be aware that the lowest rate is not always the cheapest rate.”
The next decision is whether you want a repayment or interest-only mortgage. With the former, you pay some interest and capital each month. With the latter, you pay only interest.
“If you opt for an interest-only mortgage, you must consider how you will repay the capital at the end of the term,” says Bien. “Several mortgage lenders have recently cracked down on interest-only mortgages so these are more difficult to obtain. You may need a bigger deposit, may be charged a premium on the rate and will have to prove what investment vehicle you will be relying upon.”
In any circumstances, it is wise to speak to an independent mortgage broker who can best assess your individual situation. “Although some lenders only offer deals direct to the public, an independent broker who can look at the whole market will recommend a direct-only deal if it is the right mortgage for your circumstances,” says Bien. “If you are struggling to get a mortgage, have complicated income streams or are in a contract race and need to move quickly, you can’t beat a broker.”
The next key issue is deciding how much you can afford to borrow. While lending has undoubtedly become far tougher in the last two years, recent research from Unbiased.co.uk suggests that people’s perceptions of what mortgage products are available is lagging behind the reality.
“While we haven’t returned to a period of ‘easy credit’, there is now a much higher quantity of affordable mortgage deals in the market place,” says Karen Barrett, Chief Executive of Unbiased. “But many mortgages are not offered through independent advisers, so although it’s a good idea to talk to one, you should also go to a mortgage broker and check out the latest deals from banks and building societies.”
Banks may lend up to five times your salary, assessed on an income multiple of a single or joint salary. “But this is based on a credit scoring system. Bonus, commission, overtime or secondary incomes can be taken into account, but not in their entirety,” says Nick Walter.
If your income is too low to secure a mortgage, you can enter into a mortgage agreement with someone (usually a parent) acting as a guarantor. “It requires a lot of trust in the buyer as this could affect the guarantor substantially if a payment is ever unpaid,” says Walter.
Once you know the amount you are able to borrow, you can then calculate the total you can afford with the amount of deposit you have. “The bigger the deposit, the better the chance of having a mortgage agreed,” Walter adds. “Currently, the majority of people under 30 require a deposit to be supplemented by a family member. Where this isn’t possible, there are alternative options such as shared ownership, where you buy a percentage of the ownership of a property, requiring a much lower deposit.”
There will also be the lender’s fees to take into account – and these are often added to your mortgage amount, unless you request otherwise. Lower fees may look attractive, but they may disguise a less cost effective interest rate over time, so make sure your adviser shows you the difference between all available options.
