First Mortgage Support

By: Michael Challiner

After you scraped together a modest deposit for your new home you may think you’re home and dry. Think again. On top of there’s the surveyors and solicitors to pay. Then the government want a slice. You’ve got to pay stamp duty at 1% of the property’s price (if the house costs more than £250,000 the rate of stamp duty increases – see the information at the foot of this article). Phew! You’re lucky you’ll just make it – you’ll be a homeowner at last!

Then out of the blue the mortgage lender sends you a new bill – another £1,500 please Sir. They’ve called it a Higher lending Charge (HLC) and it’s charged if you borrow more than 90% of the value of the house. About 75% of all mortgage lenders charge it and £1,500 is about the average they ask for.

And guess what – they money you pay won’t benefit you in any way whatsoever! Not one jot. You’re being charged for a form of protection insurance that protects the mortgage lender, not you. The HLC pays the lender if you default on your mortgage, your property has to be repossessed and the sale proceeds are less than the outstanding balance on your mortgage. In theory the HLC then pays out the shortfall to the lender but in practice many lenders carry the risk themselves so the HLC is just an extra fee to offset a higher lending risk.

But an HLC doesn’t let you off the hook! If your home is repossessed and there’s a shortfall, you still have to pay the shortfall back to your lender - they’re sure to chase you for the money.

Whilst most of the lenders who charge HLC’s will readily agree to add the charge to your mortgage, that’s little consolation. In any case this means that you’ll end up paying interest on top of the charge. Then, over a 25-year term, your HLC will have cost you closer to £2,700!

In our opinion HLC’s should have died out with the dinosaurs. If a lender is worried you’ll default, they shouldn’t have lent the money in the first place. And with all today’s hi-tec credit checks and the risk based assessments used to process your application, you’d think the lenders were doing enough to protect themselves. In any case you may also end up paying a small interest premium for a 90% plus mortgage – so in practice you’re being charged twice for the same risk!

The Nationwide Building Society, who incidentally do not charge HLC’s, recently reported that during the last five years £1 billion has been charged in HLC’s by some 800,000 borrowers. It also found that just over 500,000 were first time buyers – largely youngsters struggling to buy a home. We believe that HLC’s are just another money making ploy for the mortgage lenders. By the way, the Higher Lending Charge used to be called a Mortgage Indemnity Guarantee, but they are all the same - only the name is different!

We think it’s time for the Office of Fair Trading to open up the box and take a look inside in the same way as they did with credit cards. The OFT recently ordered many credit cards to reduce their charges by up to 40%. A bit of that magic would do wonders for Higher Lending Charges!

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By: Michael Challiner

After last years crisis of confidence the buy-to-let market is again booming. Earlier worries that interest rates were on the up and property values would crash are firmly behind us. So, fuelled by rising rental yields confidence, landlords have been snapping up new properties and remortgaging for cheaper deals.

In the final three months of last year, rental incomes increased by an average of 3.3%. At the same time the rental yield, income as a percentage of the property’s value, edged up from 6.42% to 6.45%. The latest report from the Council of Mortgage Lenders (CML) also shows that the value of new buy-to-let mortgages increase by 47% in the second half of 2005 over the preceding six months whilst the number of these mortgages rose by 39%.

Indeed, we expect the boom to extend throughout 2006. It will be powered by the steady increases in house prices, a healthy demand from tenants, especially the first time buyers who remain priced out off the property ladder and a glut of cheaper buy to let deals.

Mortgage lenders are happy as well! Industry figures show that buy-to-let mortgages are now a safer bet for them than homeowner mortgages. According to the CML, percentage of arrears in buy-to-let mortgage is now lower than that for homeowner mortgages - and the arrears trend for buy-to-let is improving whist for homeowners it’s getting worse.

Not surprisingly, the mortgage lenders have responded by relaxing some of their lending criteria and aggressively promoting buy-to-let again.

In the past, buy-to-let lenders have required monthly rental income to exceed mortgage payments by 30% – so if a mortgage was costing £750 per month, the rental income needed to exceed £975. But now several lenders have relaxed this criteria. The reason’s not just the improved risk profile. Over the last six or seven years, house prices have risen faster than rental income yields, making it increasingly difficult for landlords to meet the +30% criteria. So now the lending average is closer to +25% although Northern Rock and a few others are happy to lend where the income simply equals the mortgage payment.

Simultaneously we have seen a trend for lenders to increase the percentage of the property’s value they will lend on. Whilst 75% used to be the maximum level, the average is now closer to 85% with Northern Rock lending up to 87% and GMAC being prepared to stretch to 89%.

Interest rates on buy-to-let have also fallen. 4.75% is available from the Mortgage Trust on a three-year fix whilst 4.79% is available from the West Bromwich Building Society fixed for a two years. Both these deals incur a 1.5% arrangement fee. On the West Bromwich deal, when you recalculate the interest rate and include the arrangement fee amortised over two years, the equivalent rate rises to 5.54%.

Arrangement fees should not necessarily be a problem for landlords whose prime concern is cash flow. For these landlords it can be worth paying a large fee to obtain a low headline interest rate. That’s because the rental income/mortgage payment calculation is based on the headline interest rate and this reduces the rental that has to be charged in order to meet the lenders income criteria.

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By: LendingTree Editorial Staff

Interest rates can affect the type of mortgage you choose and dictate when it’s wise to make a change. Here are a few of the factors that can be affected by a swing in interest rates:

Choosing a mortgage
When interest rates are rising, a fixed-rate mortgage is usually a good choice, since it locks in the current rate and protects you from the higher rates to come. When rates are falling, an adjustable-rate mortgage (ARM) becomes more attractive, as its interest rate changes periodically (usually every one, three, or five years), allowing you to benefit from the new, lower rates.

Some people choose an ARM even when rates are rising. This is because the interest rate on an ARM is substantially lower — as much as two percentage points lower than that of a 30-year fixed-rate mortgage. That means you’ll pay less until mortgage rates have increased a full two percentage points. After that, you’ll pay more than a fixed rate.

There are also hybrid ARMs, which have a fixed rate for a certain time period — typically three to 10 years — and then become adjustable. (A 5/1 ARM, for example, has a fixed rate for five years, after which the interest rate is adjusted annually.) Hybrid ARMs can be the right choice if rates are likely to rise in the short-term but then flatten or fall. However, these long-term trends can be difficult to predict.

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By: John R. Blakefield

There seems to be an endless choice of mortgages and rates available to the home buyer consumer. It is always great to have options so you can specify a mortgage that is perfect for your financial situation. However, it can get tricky deciding between the many options.

I have attempted to put together in one place, information on the top 9 mortgages that are used for home buyers to finance their homes. Although these are common mortgages and terms that you will see from a financial lender, remember that these mortgages are almost always negotiable, especially if you have pulling power with good credit and a large down payment. Never agree to a mortgage or financial commitment, no matter how tempting, if it falls out of your range of financial comfort. Address all options and choose what is right for you.

1. Fixed Rate Mortgage

A fixed rate mortgage, like the name implies, maintains the same interest rate throughout the entire life of the loan. You can get this fixed rate mortgage usually in 10, 15, or 30 year terms. The time can be negotiable with your specific lender to fit your needs. This type of mortgage is good for the home buyer who wishes to know how much the house payment will be every month because it is fixed and if the home buyer is planning on living in the home for 10 years or more.

2. One Year Adjustable Rate Mortgage

Adjustable rate mortgages, or ARMS, have interest rates that change according to financial indexes often dictated by the current market. This means that your payment can increase or decrease according to the change in the index. This can sometimes offer instable payments so the home owner must be prepared for changes of either an increase or decrease in amount.

With the one year ARM, the interest rate changes every year according to the index for the entire life of the loan. This can be good for the home buyer who wants to risk getting the lowest rate possible at the expense of risking a higher rate and higher monthly payments if the index changes accordingly. The rates are usually offered on the lower end due to the risk that the buyer is carrying. If you enter into this type of fluctuating loan due to financial status, you can always re-negotiate terms or refinance later and get a better deal and more stable loan.

3. 10/1 Year ARM

With this mortgage, the interest rate remains the same for 10 years and then starting the 11th year changes every year according to the index the lender chooses to base the interest on. This mortgage is good for those who may move in 10 years and want to enjoy a stable payment plan while they are living in the home.

4. Balloon Mortgage

Balloon mortgages are considered a little higher risk because at the end of the life of the loan, there can be a large payment as the loan is due in full. The life of the loan is negotiable; however 3, 5, and 7 year balloons are common. The home owner will pay at a stable interest rate for the life of the loan, then at the end of the term, all the remainder of the loan must be paid in full. The home owner must be prepared for this final, possibly very large payment.

This mortgage is good for those who want to live in the property more than the life of the loan, who want to pay the mortgage of quickly, who like stable monthly payments, or who plan to move before the life of the loan, in which the loan can be assumable and passed to another buyer.

5. 7/1 Year ARM

Like the 10/1 ARM, this mortgage simply has a different life term. The interest rate remains steady for 7 years and then starting the 8th year the interest rate will change according to the index, causing the monthly payment to change every year after. This mortgage is good for the home owner who plans to live in the home for 7 years and likes stable payments. It is also good for the home owner who wants to move within 7 years and has options in case he or she chooses otherwise.

6. 30 Due in 7 Mortgage

This mortgage is like two fixed rate mortgages put together. It is also known as a 7/23 two-step mortgage. The interest rate and monthly payment remains stable for 7 years and then on the 8th year, the interest rate changes according to the current rates. This interest rate and payment will remain the same for the life of the loan. This mortgage is good for those who plan to live in the home for more than 10 years and wants to risk the interest rate going either higher or lower at the 8 year mark.

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By: Michael Challiner

Abbey recently stated that over 25% of homeowners decide to take out an interest-only mortgage. It’s not hard to see why – the monthly payments are significantly less, just look at this example based on a 25 year £125,000 mortgage at 5%. The interest only mortgage will cost £525 per month - but the repayment mortgage is £735 per month – an additional £210 a month – that’s a lot of money!

At the root of the issue are the first time buyers – they simply can’t afford the repayment mortgage, so take the interest only option as an easier way out. However, the interest only mortgage must be accompanied by a suitable savings vehicle to cover the outstanding capital at the end of the mortgage term, and it is this that many are failing to do – as many as 37% in fact.

Now the Financial Services Authority (FSA) has stepped in, concerned that many homeowners will face a shortfall at the end of their mortgage term. It is now necessary for lenders to see firm evidence from new borrowers that they have set up a savings vehicle to cover the capital. Previously, borrowers just had to state their intention, for example, they would sell the property to raise the capital. However, that will no longer be good enough. The lender will need to see a proper plan set up – they are not allowed to set you up on an interest only mortgage without that proof. If they did, they would be going against regulations and would be penalised by the FSA.

The lender will now need to see proof of a personal equity plan (PEP), an Individual Savings Account (ISA), or evidence that 25% tax-free cash from a personal pension plan (PPP) will ultimately cover the outstanding capital. It will no longer be good enough to say that you will set it up – you must show that you have already sorted it out!

In the short time that the new regulations have been in force, individual lenders are already making their own interpretations of the rules. The Nationwide Building Society is not allowing borrowers to use a future inheritance, or future pay rises as a basis on which to set up an interest only mortgage. Similarly, expected bonuses will not be good enough either, not unless you can prove that you will definitely be receiving them. Bonuses based on performance can’t be guaranteed, so would not count.

People that already have their own home will not be subjected to the same rigorous checks however. As long as you are borrowing less than two thirds of the new property’s value, and you have £150,000 of net equity in your current home, then Nationwide will accept you as a customer.

On the whole, mortgage advisers will not recommend interest only mortgages, agreeing that they represent too much risk. Repayment mortgages guarantee that all monies owed are paid at the end of the term, but a separate savings vehicle could fail to live up to expectations, and you could end up with a shortfall. Most mortgage advisers will recommend a repayment mortgage to bypass that risk.

On the other hand, the interest only mortgage is a useful short term solution, and if you can assure your mortgage adviser that you intend to switch over to a repayment mortgage as soon as you can afford to, they may well support your decision. Even in this case however, you will still need to provide the same details as if you were intending to stick with it for the full term. You simply won’t be able to get an interest only mortgage without providing the right paperwork.

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By: John R. Blakefield

The dominating and most popular interest rates used when considering a mortgage are fixed rate and adjustable rate mortgages (also known as ARM or variable rate mortgage). Choosing the type of interest rate for you should be used based on personal criteria and what it is you want to achieve with your monthly payments.

Adjustable rate mortgage are loans that a borrower pays an interest rate on the loan amount that changes based on specific indexes that the lender chooses. Lower monthly payments are offered at first then the monthly payment might be higher or lower based on the interest rate of the index at that time. The adjustment period, or the period between the change of interest rate may be decided between you and the lender. However, the adjustable rates often change based on a six month, one year, three year, five year, or even seven year period.

Adjustable rate mortgages are a good choice for those who may be in the following positions. You should choose an adjustable mortgage rate if there are unpredictable interest rates, making a fixed rate difficult to obtain or if you are willing to bear the risk for the possibility of the interest rate increasing and are rewarded by an initially lower rate. The person who chooses this type of rate must realize that interest rates do change often, and if they go up, your payment may be higher than the original rate dictated, and may be lower if the interest rate decreases.

It is important to prepare yourself for these possible changes in the market so a monthly payment that is considerably higher or lower after the adjustment period does not come to a shock, whether positive or negative, to your personal finances.

So how exactly is this adjustable rate mortgage determined? The original interest rate may be chosen based on an index, or a publicly published financial index such as treasure securities or national or regional average costs of funds of savings and loans associates. A margin is then added to the index determining the interest rate. The margin is usually the lenders’ profit above the financial index.

If the original interest rate is offered at an extremely low rate, then the lender may be offering you a discounted rate, which temporarily maintains your monthly payments low for a specific introductory period then changes according to the index rate and adjustment period.

When considering an adjustable rate mortgage, it is important to compare the terms, which may include, the index that is being used to determine the rate, initial change cap, the periodic cap, lifetime cap, what the margin is and if the margin is variable or constant over the life of the loan, and if you have the option to convert your loan to a fixed rate loan at a future time.

Caps are limits that are set on the interest rates of the loan. They are always available to the borrower and are expressed in the following fashion: 2/2/5. The first number is the initial change cap, which is the limit set on the interest rate for the first adjustment period. The second number is the periodic cap, which is the limit set on the interest rate for every subsequent adjustment period. And the third number is the lifetime cap, or the total limit set on the rate for the life of the loan. It is often set at 6% for the first mortgage but may vary depending on the loan. Of course, the lower the numbers the better for the borrower. Always be sure to ask the lender this information so you can make an educated decision on if the specific adjustable loan is going to work for your financial situation.

A fixed rate mortgage is a loan where the interest rate remains the same for the life of the loan. The initial interest rate is often higher than an adjustable rate, but produces stable monthly payments. A fixed rate mortgage is good for those who want to always have the same monthly payment and don’t want to risk having a higher monthly payment or benefit from a lower monthly payment that an adjustable rate may produce.

When considering a fixed rate loan, it is important to look at the terms which may include interest rates, monthly payments and fees. A fixed rate loan is simpler than an adjustable rate loan, but still you must look at the interest rate, the margin, and any fees or points that you may have to pay the lender in exchange for borrowing the loan amount. Always ask about fees and points because they may not be clearly outlined or expressed when first considering a loan. Or, they may need to be added to the interest rate directly advertised to the borrower. You do not want to agree to a fixed rate loan, and then be surprised by a fee or points that were not added originally, but were disguised in small print.

Recently, a “hybrid” adjustable rate mortgage has developed. This “hybrid” rate has an introductory rate for a two year period, or three, five, or seven year period, then becomes a six month adjustable rate mortgage after this time period, rather than every two years. This specific rate is good for those who are planning to move within seven years, or simply want to live in a more expensive home that may beyond his or her abilities to qualify for a fixed rate loan, or live in an area where home values rise quickly.

With both adjustable and fixed rate mortgages, you should compare other terms such as prepayment penalties or due on sale clauses. Prepayment penalties are fees that are paid to the lender for paying the loan before the life of the loan is finished. The lenders are, in essence, earning what they would if you paid the interest for the rest of the life of the loan beyond the date when you paid the loan in full. A due on sale clause simply states that the borrower must pay off the entire loan if he or she sells the mortgaged property. These terms may or may not be part of the mortgage, but it is important to know every aspect of your mortgage, whether or not it is a fixed rate or adjustable rate mortgage. This can save you the costs of choosing a mortgage that is not right for your personal situation.

About the Author:

John R Blakefield is a mortgage and real estate specialist. For more information, articles, news, tools and valuable resources on home mortgages or investment loans, refinancing, debt solutions, visit this site: http://www.scourtheweb.com/mortgage/.

By: Charles Kirkendall

In recent years property values have soared, while investment returns have been modest. This has created a situation where a lot of seniors are finding themselves in the position of being house rich and cash poor. These cash strapped seniors are looking for ways to increase their retirement income while continuing to live in their homes. These retirees find that their options are limited, and in most cases require them to risk their home. Enter the reverse mortgage, which can provide many advantages over these other less desirable options.

No Payments With Reverse Mortgages

The biggest advantage of a reverse mortgages is not having to make payments as long as you continue living in your home. In fact, this is the number one reason that seniors choose to borrow reverse mortgages. Almost 80% of reverse mortgage borrowers use a reverse mortgage to pay off their current loans in order to eliminate their house payments. Let’s say you owe $50,000 on your first mortgage and borrow $80,000 with a reverse mortgage. This would pay off and eliminate the payment on the first mortgage and provide you with $30,000 to use as you please.

Live in Your Home as Long as You Like

The second advantage of reverse mortgages is the ability to live in your house as long as you like. The great thing about this is the amount you owe on the reverse mortgage can never be more than the house is worth. Let’s say you live to 115 and have selected to recieve a $300 a month payments for life from the reverse mortgage. The amount received from the reverse mortgage payments could be substantially higher than the value of your home, yet the amount owed will still only be the value of the home. In this situation, FHA insurance will cover the difference.

Reverse Mortgage Withdrawal Options

Another advantage of reverse mortgages is the different withdrawal options that a you are able to choose. These options include lump sum distributions, line of credit, monthly payments, or any combination of these three. So if you were eligible to borrow $100,000 on a reverse mortgage you could select to receive $30,000 up front to cover current expenses, and hold the rest as a line of credit that you can use whenever you need it. This flexibility of reverse mortgages can significantly improve you financial independence during retirement.

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By: Michael Challiner

99.9% of mortgage borrowers raise the money they need to buy their home in pounds sterling and pay the prevailing UK based interest rate. But it does not have to be that way……..

Whilst by its’ own historical standards, the UK’s domestic interest rates are low, they are still significantly higher than in the Eurozone, America, Switzerland and indeed, Japan. Therefore, you can currently borrow the money you need in Euros, $ dollars, Swiss Francs or Yen, secure the debt against your house in the UK and pay a much lower rate of interest.

The following 3 month money market interest rates illustrate the extent to which UK interest rates are ahead of other parts of the world:

Sterling £ 4.64%

US $ 4.48%
Eurozone 2.46%
Switzerland 1.03%
Japanese Yen 0.12%

(Source: 3 month Money Market Rates, Financial Times, 9/12/05)

But don’t expect to borrow money for your mortgage at these 3 month Money market rates. You will have to pay a premium for borrowing in an overseas currency. Nevertheless, if interest rates remained as they are now, there will still be significant interest rate savings to be made.

So why are less than 1% of UK domestic mortgages taken out in overseas currencies? The answer: there are extra risks.

Interest rates could buck historical trends and narrow the gap between sterling based rates and the rates for the currency in which the mortgage has been borrowed. This would reduce the interest rate saving and indeed, at some stage, could make the interest rate more expensive than for a standard £sterling mortgage.

But by far the biggest risk lies’ in changes in exchange rates. If you have borrowed in say, Yen, you eventually have to repay the loan in Yen. That would be fine if the Yen/Sterling exchange rates were frozen together – but they aren’t.

If sterling strengthened against the Yen, then you would have to convert less sterling back into yen to repay the loan than the sterling value of the money you initially borrowed. That would be great, an interest rate saving and pay back less than you borrowed. But if sterling fell against the Yen the reverse happens – you end up paying back more capital than you borrowed. So in this context, an overseas mortgage becomes a currency bet that sterling will not fall against the currency you borrowed. In other words you have converted your mortgage and what is probably your biggest personal liability, into a currency speculation. And secured your home against it! You could win but it’s not for the faint at heart!

Another point to be aware of is that you’ll need a deposit of at least 20% for your house purchase in order to qualify for a foreign currency mortgage.

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