A Little Research to Get the Right Loan for You
As Easter heralds the start of the house-hunting season, clued up house buyers could ensure they don’t pay over the odds for a new house by simply carrying out a little research.
With the mortgage usually the single largest monthly outgoing for most households, ensuring you get the best deal for you could mean actually having spare cash at the end of each month with which to enjoy life.
“ Buying a home is one of the most expensive purchases you will ever make. Shopping around for the right mortgage for your circumstances, and using an independent broker with access to all the deals on the market, is a savvy move and makes life easier,” says Melanie Bien, associate director at independent mortgage broker Savills Private Finance.
For most buyers the first thing to do is to find out how much you can borrow. This will allow you to start looking at properties in your price range.
James Cotton, of independent mortgage brokers London & Country, said: “ You should know how much you can borrow and what it will cost you. Having a good grasp of your finances will give you confidence when it comes to making an offer on a property.”
Traditionally, lenders used to be rigid on how much they would lend homebuyers. For a joint mortgage application you could borrow 2.5 times your salary and for a single buyer that figure would be 3 to 3.5 times salary.
Recently, however, lenders appear to becoming more flexible in how they determine how much they will lend to homebuyers. For instance, some will now take into consideration your monthly outgoings and ability to meet repayments.
Nick Gardner of broker’s Chase de Vere Mortgage Management, said, “ Those that lend on ‘affordability’ include Alliance and Leicester, Halifax and Bank of Scotland.
“ Most other lenders stick pretty rigidly to income multiples but some are willing to stretch these than others. Northern Rock will lend up to 5.9 times income, buy you need to earn more than £100,000, have a good credit record and take a five-year fixed-rate mortgage. Others will lend more than their published multiples if you have a large deposit – loans of less than 75% of the value of the property tend to attract the most generous terms.
“ Again, other lenders treat different cases differently – Bank of Scotland will give professionals higher multiples because they think their earning potential is greater.”
When it comes to affordability home-loans, lenders want to see good credit ratings. According to Mr Gardner, “ They look at your outgoings – personal loans, credit cards, school fees for example, then they take a view on how much of your take-home pay you actually need to run the rest of your life, and how much you can afford to pay in, mortgage repayments.
“ Lenders assess affordability in different ways, but some people get loans of five or even six times their incomes.”
Your monthly repayments will largely depend on your mortgage type as well as amount borrowed and the rate of interest. A repayment mortgage, for instance, will mean higher monthly repayments than an interest-only mortgage, as you will be paying off capital as well as the interest each month.
With an interest-only mortgage, you won’t be reducing the capital of the mortgage and you will be expected to clear the balance at the end of the mortgage period. It would therefore be prudent to invest, for example, in unit or investment trusts in order to build up a lump sum to pay off the capital.
Currently the mortgage market is awash with many different types of mortgage with the most common being discounted variable-rates, fixed rates and capped rates.
According to Ms Bien, “ Variable-rate deals tend to be cheaper than fixed-rate deals but it is important to assess whether you need the certainty of set monthly repayments – if you do, you will need to opt for a fix. If not, and you can afford to be wrong – that is, if rates move up rather than down you will still be able to afford the mortgage repayments – a variable rate may be better.
“ It can be tempting to opt for a deal with no or low fees. But it is important to work out the total cost of the fees plus interest to ensure you don’t end up paying significantly more over the longer term.”
According to independent comparison website, Moneyfacts, fixed rate mortgages have started to rise.
Rachel McKay, mortgage analyst at Moneyfacts, said, “ Over the past few months we have seen many lenders tweaking their fixed-rate two and three year ranges, mostly with minor rate increases of 0.1 percentage points. However, over the past week we have seen several lenders step up a gear, increasing rates on three deals by up to 0.31 points.”
One way to reduce monthly repayments is to increase the mortgage term. Some lenders offer 40 years or more, but while this reduces monthly payments, it raises the interest.
Brian Murphy, of the Mortgage Advice Bureau, said, “ Stretching the mortgage term to lower repayments is a risky business which could leave a serious mortgage problem well into retirement.”