/ Mortgages: what do I need to know?
I'm thinking of taking the plunge and buying my first home up here in Scotland. Currently I know nothing about mortgages except for the fact they can be quite complicated so can you good people of UKC help guide me through the maze?
Do your homework so it's no longer complicated, your library, bookshop & larger newsagent will have books/magazines.
Look at the best buys in the newspaper personal finance sections.
Be on the electoral roll, keep (& pay) all your bills, keep your payslips.
Agreed! Renting = buying someone else's property for them. Why spend you money buying someone else's property for them when you can spend your money buying your own property?!
> I'm thinking of taking the plunge and buying my first home up here in Scotland. Currently I know nothing about mortgages except for the fact they can be quite complicated so can you good people of UKC help guide me through the maze?
Hate to do this... thought twice about it ... then thought, "sod it, I'll do it anyway"..... Mortgage paid off on Saturday!
But many years ago when it all started I did have a number of lodgers/house shares to help with the payments, fellow climbers, all from the same club. All these guys now have their own places, mostly with families.
Initially, the financial bit is a bit of a pain, fortunately,the wife is an expert on personal finance, which helps. But,in the end it's worth it. Do the research and go for it. Best of luck.
There is a free guide here:
Its done by www.moneysavingexpert.com who are a reliable source of information for finantial and consumer rights information. (no i am not affiliated).
and then stuff like this
Only annoying thing is that I can't do anything until my existing lease is up. It is surprising how cheap Edinburgh is if you're willing to venture out of the centre.
I'm not a registred independent financial advisor, so none of the below is "advice; just commentary and opinion. I'm a chap off the internet you've never met and so you shouldn't put weight on what I say.
I have bought and sold quite a lot of houses over the years however, for myself and relatives. The majority of these have involved mortgage finance, at least initially.
So, mortgage 101.
Your variables are:
- interest only vs repayment
- variable or fixed (variable includes tracker)
- offset vs standard
- direct or brokered
- amount of deposit
Your choice is driven by:
- your acceptance of risk (personal situation and attitude)
- your need for flexibility (personal situation)
Because "personal situation" is a fundamental component of *both* the core drivers, I can't tell you the answer. All I can do is expand on things that influence those choices and expain the variables.
Interest only means that you pay just the interest on the sum you've borrowed each month with no contribution to paying back the debt itself. It means a lower monthly payment... but at the end of the morgage you will still owe the full debt. The lender will ask you how you are planning to fund the big one-off capital repayment at the end of the loan. If you don't really know, then this might not be the way forward. However, I have only ever taken interest only loans. I know how I will finance them and I will cover the final payment either by sale of the property or by paying down the debt at the time that suits me.
Repayment means that your payment each month includes the interest owing and a bit of the total debt. This would mean that the next month you pay a little less interest. The sums are worked so that the payment stays the same but the amount that goes to repaying the debt goes up over time.
Variable means that you take whatever changes happen to interest rates. Fixed (usually for 1,2,3 or 5 years) means that the interest rate is constant for that period. Fixed rates buy you certainty - you know how much you will be paying. Financially it's a bet on how rates will move. The banks are much better placed to asses this than most borrowers - so going for a fixed rate because you think you'll make a killing on predicting interest rates is probably not a winner. It buys out the risk of rates escalating above your affordability. I would avoid fixes unless you are buying at the limit of affordability. Conversely, if you think it can't happen, interest rates hit 15% in the 80s, having bene 5% the year before..
Offset means that your savings get offset against the loan, so you pay interest on a smaller sum. Generally I'm emphatically against these - the notionally attractive savings interest on a small (relatively) amount of savings is massively overwhelmed by a slightly worse than market rate being applied to the whole of the balance of the loan. The exception is where you wish to buy flexibility. A true offset (more below) is like a big overdraft facility, but at reasonable rates. Do this if you only need to borrow £100k, but can get mortgage for £200k and offset £100k savings and may need the additional £100k at reasonable rates down the line.
Direct or brokered is just about how much hand-holding you need. The internet will give you all the comparisons and a middleman always gets paid. However, if you're not sure and about to commit to a £X00,000 debt, then a broker is not a bad choice. However, 99 times of 100 they will end up recommending a deal you can get online. A couple of mortgage providers don't go on the comparison sites, including HSBC/First Direct (who are at the moment quite competititve), so trawl.
Now to risk. The main issue is fixing or not.
Is your employment secure? How long could you manage? If base rates increased how would it bite?
Flexibility is more about being able to pay off capital and withdraw funding if required. Personally I'd shun anything that didn't allow overpayments. A bonus at work, death of a relative, sale of an asset - all would be fine candidates ot reduce the debt (and hence the repayments).
In my view the banks over-egg the impact of deposit (but, hey, that's just me). If you can put down 40% of the purchase cost, they are massively protected - if you miss payments and they are forced to sell it is very unlikely they will lose out. So getting as large a deposit as possible is a good idea (but not borrowing to do so unless you have a very well worked out grand plan). If you are near a deposit boundary it is worth waiting a small while and being able ot put down more - it will be abundantly repaid in the reduced rate.
I'll paint two scenarios in summary:
1. First time buyer. Stretched to get 10% deposit. Joint mortgage requiring both salaries. Suggest: Fix for longest period available on repayment basis.
2. Trading up. Almost 30% deposit, payments ok but possible other obligations in future. Suggest: variable offset interest-only and strive to get to 30%
That should give the naysayers something to get teeth into! Hope it helps
PS. First Direct/HSBC have a good deal for #2 (IMHO)
PPS. The funny thing about the repayments is that the first few months feel really tight, and then you readjust and it becomes ok
only problem being u still owe 100k at the end of the loan period eg 25 years,(quite a gd way of getting on the property ladder if money is tight, and u can always change it to a repayment mortgage later on when financially better off.
Thanks to everyone for your replies particularly JJL for the detailed post. Very helpful indeed.
So for example it may be 5% int with no fee, 4.5% on £1000 fee and 4% on £2000 fee. Assuming you are in a position to pay the mortgage fee (rather than lump it into the mortgage) google 'mortgage calculator' and there is a BBC one thats quite good.... you can put in mortgage size and rate and it tells you what the interest only and repayment monthly amounts would be. From that you can figure out what the best deal is for the period you are likely to run the mortgage (i.e. if you take a 2 year fix in all likelyhood you will be re-mortgaging again in 2 years to get another 'good' deal rather than go onto whatever the mortgage reverts to once the fix ends.
And on that - mortgage brokers and banks make a lot of money on fees etc relating to a cycle or regular re-mortgaging - so while getting a great deal for 2 years may be critical (i.e. makes thinsg affordable in first few years) looking to the longer game and eventually getting onto something thats good enough that you don't have to change regularly may work out better.
Generally you get a fix for 2 to 5 years and after the fix you go onto either 'base rate plus x%' or 'SVR' which stands for 'standard variable rate'. I had an old mortgage (long fix pre-dating financial crisis) - and it was set to go onto base plus 0.75% once the fix came to an end so that is currently 1.25%. Nowadays, the bank involved move all of their fixes onto SVR which is a rate they can make up and pluck out of thin air.... so at a time when base rate is 0.5%, 2 year fixes are say 3 to 4% or so, their SVR is up at about 6% I think..... so be aware that in most cases, whatever your fix goes onto, you probably will not want and you may well re-mortage every 2 or 3 years until finally you get a long term deal thats good enough to stick with or you get 'lucky' in some way vs what is common market practice at the time. They come along and say 'hey, SVR is 6%, but for only a £1,000 fee you can drop onto another 2 year fix at 4%.... worth doing but not as worthwhiel as if you can avoid teh fee every coupel of years - so look to teh long game whenevr finances settle down enough to allow you to look at anything other than 'the lowest cost over teh next 2 years I can possibly get....'
Also - watch out for offers of more credit - a few months/years into mortgage you will get flyers from them offering you more money - do not take if you can possibly avoid - many are effectively small loans but tied to your property - which means that isntead of say defaulting on a car finance plan and loosing the car if things get bad.... you default on the 'car loan' and loose the house. All an attept to drwa you in, feed you more credit and worse, get you to dip into any collateral that is building up in your house meaning that you take longer to pay it off at a higher rate than you intended and by drawing down gains you never build up a big %age in the house that would mean lower rates (bigger deposit) in a few years when you trade up or simply remortgage. If they keep offering you more and you take it and spend it you are spending all your gains and costing yourself more in long run. Sure, secured on house lending may be cheaper than a standalone loan but it has risks and continual drawdown of 'property gains' is one reason why many are in such a mess at present. If you think a new car will cost you £5,000 plus £300 per month and a big lump of interest it doesn't look attractive if money is tight, or just an extra x per month on the mortgage it suddenly looks attractive but costs an arm and a leg in the long run as that car that lasts a few years is lumped onto a 20 year plus loan and interest is paid for all that time....
... There's stuff like this that dropped 10.000 this week ...
Which is one of the reasons why renting is a preferred option for some people.
Google Karl's mortgage calculator or similar and have a play. You can find all the figures to plug in on moneysupermarket. The mortgage lady at my bank is really useful for talking through ideas with although she can't offer offical advice. First time I got a mortgage I paid a financial adviser 100 pounds to advise me. I used this to check what I understood about the process.
Only 2 things to add to the above:
You don't *have* to have a 25 year loan. If you can afford it get a 20 or less.
If you can't afford a 20 year mortgage now make sure over payment and early repayments are not penalised.
Lots of good advice, but too late for me as my mortgage paid off :)
Only bit of good advice I was given is don't ask a financial adviser over 50, to advise you how accummualte enough money to retire at 50.
They can get that desired return by charging a fee, lower/fixed interest rate and penalties or by charging no fee, higher interest rate & no penalties. Hence a certain bank will offer you very different looking deals all with the same APR.
If they're lending to high risk or low deposit they get the desired return by charging higher interest/APR to cover potential defaults.
If they're lending to low risk or high deposit the get they design the loan conditions to get the same desired return with a lower interest/APR.
When houses are surprisingly cheap there's always a reason. If they're cheap in Craigmillar my guess is either folk are worried about getting killed or they're worried about getting flooded.
To add to the comments about interest only, if you're considering this option, think of it as renting off the bank, as that's essentially what you're doing. Though with an option to purchase at a backdated price if you wish.
The big trouble is that, in a poor economy, the backdated price may be higher than the one at the end of the term. It also means you don't have the investment in a house at the end. So I would say that if you can't afford repayment, you can't afford to buy. Interest only is to me only good for getting through a lean period.
While you may be happy living in that area, in a flat that size at the moment you have to remember that your circumstances will most likely change in the future.
If you buy in a part of town that is undesirable you are relying on someone as open minded as you are to buy your flat in the future. These buyers are rarer. Unfortunately it takes a long long time for an area to loose a reputation.
Always buy the worst house in the best road, not the other way around.
Consider resale value. It took me 18 months to sell my flat in a nice part of a nice town because there were a few things about it that I thought were fine, but it turns out most people didn't. (I would never buy leasehold again.)
Don't even consider interest only. Banks aren't really selling them to FTBs anymore anyway. It's mostly a buy to let market with high deposits.
Google London and country- independent (and free) mortgage advisors. They wil help you find the best deal but most importantly answer any questions and explain everything you want to know.
No such thing as a free mortgage advisor, they will take commission on what you purchase, if anything.
Nonetheless, it *may* be a service worth paying for. Just don't forget you are paying for it.
they are paid by the mortgage povider- but we got our deal through them, wnet direct to the mortgage provider to se eif it would be cheaper and it was more expensive- our friends used them to and found the same thing, different deal and bank too. So free to us and the best deal we could find. Definitely a service worth going for. They are also vey clear about how they are paid when you speak with them, and there is no onligation.
All decent IFA's will tell you how they are getting paid. 5 years ago, you could get very good advice because almost all mortgages paid a fee to the IFA. Unfortunately, a lot of the high street banks are offering excellent deals but will not pay out and so you have to do an independent search over and above what your broker will offer to ensure you get the best deal.
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