Mortgages Flashcards
(37 cards)
What 5 factors affect an individual’s borrowing capacity?
Arranging a mortgage
- Income
- Employment status
- Liabilities
- Amount of deposit
- Credit history
How is a borrower’s income assessed against loan value?
Income
Since 2014 lenders use additional factors to consider the affordibility of the loan for the borrower:
* It is no longer just based on a multiple of income
* However, this is still a general guide
How many years income history is assessed of the borrower?
Unsecured income?
Two to Three
* Generally, unsecured income is excluded from assessment, however, if this income has been received for 3 or more years it may be included.
How do lenders typically assess the borrower’s ability to pay?
Ability to pay
Lenders base the amount of meny they are prepared to loan on ability to repay not just a multiple of income. This includes:
* Other loans or liabilities
* Basic living expenses.
What are 6 types of income/renumeration that may be considered by lenders in support of a mortgage application?
Evidence of income
- Salary/Wages
- Bonuses (guaranteed and non-guaranteed)
- Commission
- Overtime (both guaranteed and non-guaranteed)
- Income from investments
- Part-time income.
What will a lender require a evidence of earnings for employed and self-employed borrowers? ( 3 for each)
Employed
* P60
* Wage slips
* income reference - employer’s letter
Self-emplyed
* Audited accounts - usually three years
* Accountant’s letter
* HMRC confirmation
What forms of liabilities are typically taken into account when assessing borrowers suitability? (name 7)
- Credit card balance
- Hire purchase agreements
- unsecured loans and unsecured bank overdrafts
- Mortgages on other properties
- Outstanding tax bills
- Maintenance payments
- Any other payments made that are regular in nature.
Amount of deposit - What does this affect?
- Greater deposit = Lower borrowing amount = lower interest payments
- Greater deposit also typically gives lower interest rates
- Lenders are usually willing to accept a minimum deposit of 5% of the valuation of the property.
What are the 6 main costs in arranging a mortgage?
- Arrangement fee
- Legal fees and conveyancing
- Stamp Duty
- Higher lending charge - One off charge for loans in excess of 75% of loan/value (typically 6-8% of amount above 75%)
- Survey fee
- Land registry and search fee
What is an arrangement fee?
Typically applies to fixed rate, discount or other products with beneficial options and will tend to attract an arrangement fee from the lender which is usually non-refundable.
* Do not normally apply to standard variable rate mortgages
Lenders use fees for two reasons:
* It shows commitment from the borrower
* The fee offsets some of the administration costs, improving profitability.
What is conveyancing and what is a typically amount that solicitors charge?
Conveyancing is the legal transfer of land ownership from one person to another.
* Solicitor may charge 1% of the purchase price.
Stamp duty land tax - a puchase tax levied by the government. What are the rates and thresholds? (Not first time buyers)
- Up to £250,000 = 0%
- £250,001 - £925,000 = 5%
- £925,001 - £1.5m = 10%
- Above £1.5m = 12%
For additional properties, there is no 0% rate threshold:
* Up to £250,000 = 5%
* £250,001 - £925,000 = 10%
* £925,001 - £1.5m = 15%
* Above £1.5m = 17%
First time buyers and SDLT
As of 2023/2024, first time buyers will pay no SDLT on properties valued at £425,000 or under. This is reducing to £300,000 in 2024/2025.
- They pay 5% on properties from £425,001 and £625,000.
- Above £625,001, normal SDLT rules apply. This will also reduce to £500,000 on April 1st 2025.
What is the Higher Lending Charge (Mortgage indemnity Guarantee Premium)
This is a one-off insurance premium, which is usually required by the lender where a loan is in excess of 75% of the property value.
Typically the charge for an MIGP will be calculated at between 6 – 8% of the loan amount over 75% of the value of the property.
Help to Buy: shared ownership - What is it? What are the conditions?
- Allows individuals to own a share of a home.
- Owners pay rent on the remaining share.
- A bigger share can be bought when affordable
The scheme is available if:
* Household earnings are under £80,000, or £90,000 in London.
* First time buyer, or used to own a home but cant afford one now, or is an existing shared-owner looking to move.
The property will be a leasehold
Help to Buy: equity loan - What is it? What are the conditions?
No longer available
* The home must have been newly built and valued up to £600,000.
* Buyers could not sublet.
The Government lends up to 20% of the cost of the newly built home (40% in London), so the buyer needs a 5% cash deposit, and a 75%/35% mortgage to make up the rest. The 20%/ 40% equity loan is interest free for the first five years.
Help to Buy: ISA - What is it? What are the conditions?
No longer available as of Nov 2019, though they can still be paid into. Superceeded by the LISA.
- 25% bonus from government.
- Initial Deposit: Up to £1,200 in the first month.
- Monthly Deposit Limit: Up to £200 per month.
- Bonus Eligibility: Minimum balance of £1,600 to qualify for a government bonus (£400 minimum bonus).
Help to Buy: LISA - What is it? What are the conditions?
Lifetime ISA - savers receive a 25% from the government for every £ deposited. The funds held in LISA can only be used to purchase a first home or for retirement.
- Maximum bonus = £1000 per tax year (By savings £4000)
- Contributions can be made up to age 50 and receive this bonus
- LISA can be cash or S&S.
- Retirement = post 60
- Property must be valued at £450,000 or less.
- LISA must have been open for 12 months to receive bonus.
Mortgage repayment methods - Capital and Interest (Repayment)
- Loan set for a set period
- Monthly payment consists of part interest and part capital.
- The capital repayment element increases towards the end of the term.
- As repayments are made, borrower’s equity increases, and loan decreases.
- Loan period can be extended to decrease monthly payments.
- Life cover can be arranged for the balance of the load - decreasing term assurance
Default recommendation from SJP
Mortgage repayment methods - Interest Only
- Usually set for a specified period
- Borrower repays mortgage at the end of the term as a capital sum
- Lender will require a suitable repayment vehicle be set up alonside the load, historically, this was an endowment plan but now, ISAs are more likely.
- Life cover needs to be arranged to cover the loan, if a non-life product is used for loan the repayment.
- It is possible for a mortgage to be set up on a part capital and interest, part interest only basis.
Higher risk mortgage areas - 5 times the lender will require special attention to affordablitly, income, and outgoings.
- Debt Consolidation
- Sub Prime Mortgages
- Buy to Let Mortgages
- Right to Buy Mortgages
- High loan to value Mortgages
Considerations by lenders for BTL morgages.
Size of deposit
* Most lenders require 20%-50% of the purchase price. Specialist lenders can be more flexible.
Borrower’s employment, income/earnings
* Some lender’s require a £40,000+
The potential rental income from the rented property
* Many lenders want the potential rental value to be 20-30% above the mortgage repayment.
Interest rate options - 10 options.
- Fixed
- Standard variable rate
- Capped/collared
- Low start
- Deferred
- Flexible
- Cashback
- Discounted
- Base Rate Tracker
- Offset Mortgage
Fixed Interest rate - Explain
Interest rate remains the same throughout an agreed term.
* No interest deferment on fixed rate mortgages
* The lender’s standard variable rate will come into effect at the end of a fixed period
* An Early repayment Charge may be payable if the loan is redeemed before the end of the fixed rate period - this may be significant and are typically higher than other forms of interest arrangement
