Lecture 13 - Brrowing Mortgages Flashcards
Mortgage lending July 2016
£118,253 Average mortgage size for households with mortgages £26,562 Average first time buyer deposit £1.31 trillion Outstanding mortgage lending £220,000 Average house price for first time buyers
Mortgage lending
Repayment mortgages: monthly payments cover interest and capital so that the borrower has repaid the loan by the end of the period
Interest only mortgage
Borrower repays interest each period but the capital borrowed remains the same. Typically combined with another financial product
Endowment insurance
- an endowment mortgage
These are subject to more stringent penalties, higher interest rates, and insurance requirements
Gained a poor reputation because of mis-selling
Mortgage interest rates
Standard variable rate
- no long term deal
- end up on this after your special arrangement until you remortgage
Tracker
- follows the Bank of England base rate
- Base rate +2.5%
- can be limited time (then SVC) or as long as the mortgage
Discount mortgage interest rates
Temporary reduction off the SVR
can have a tracker discount
Tie in period
If longer than the discount then at the mercy of the lender
Fixed
No change in the rate you pay for 2,4,5 years
Popular
Capped interest rates
Usually quite a high level
The rate won’t go above a set level
Cashback
Get some cash with the mortgage
Generally higher rate of interest
Have tie in periods
Current account mortgage
Mortgage of £100,000 and £3,000 in your current account
Interest calculated on £97,000
Make a standard payment every month
Can payoff early
Need to be organised
- can be permanently overdrawn
- if earnings are lumpy, then a good option
- self employed putting an amount for tax aside
Offset mortgage
Savings, current and mortgage kept separate
Amounts in the savings account are offset against the mortgage and interest charged on the remainder
Newer mortgages
Pluses of mortgages
Flexibility
Tax efficient
-Interest received would have been taxed
Interest on savings is lower than that on borrowings
Can overpay and payback early reducing total intensity payments significantly
Negatives of newer mortgages
Often higher rates than more traditional mortgages
Need to be organised
Not offered by all lenders
- sign of low level of competition
You can make extra payments and so payoff early with other mortgages
Mortgage model
Use the model to find out how changes affect the payments Interest only vs repayment Interest rates Length of mortgage Offsets
Key questions of all mortgages
How often is interest calculated? - some are just annual and ignore monthly repayments until the anniversary date - redemption penalties - how long are you tied in for Option to overpay Payment holidays At what cost
Mortgage related insurance
Building and contents
- standard requirement of lending process
- sinking with loan or fixed to value of home
Mortgage indemnity
- reimburses lender for difference between mortgage value and the selling price of the home as part of a repossession
Life assurance
- payoff outstanding mortgage liabilities
Payment protection insurance:
Critical illness cover, accident insurance, sickness and unemployment insurance
Take into consideration existing cover from insurance and employment provisions
Where to buy a mortgage
Go to a bank/ building society
- they will sell you their product
Mortgage broker - bigger choice Whole of market They'll make money off of you - advisors not instructors Internet
Mortgage costs
Interest Arrangement fee Survey valuation fee Legal fee Stamp duty tax The more expensive the house, the higher the rate
Re-mortgaging
Moving your mortgage
Much more common than changing banks
Can be in a good negotiating position if your credit is good
Can increase the mortgage or just look for a better deal
When your fixed rate deal ends, may want to find another
Buy to let mortgages
Objective is for the rental income to cover the monthly mortgage payments, all other costs
Taxation:
Net rental income is treated as Ordinary Income for taxation purposes in the same way as individual’s salary
Capital growth in the value of the property is subject to Capital Gains Tax
Viewed as high risk for the lending institution
Deposits: typically subject to higher deposit requirements in relation to owner-occupied mortgages
Borrowing summary
Consumer credit provides a mechanism for transferring future income to current purchases
While it carries the benefit of increasing current consumption, debt needs to be repaid and can cause future financial problems
The annual percentage rate provides a measure across different borrowing products that compound interest at different points in time and are subject to different charges
Consumer credit may be open or close-ended
Level of interest rates are determined by
The BOE’s requirement to manage inflation
Competition on the lending market
The ability of banks to raise money
The perceived risk of the borrower
