Entries Tagged 'Mortgages' ↓

The redemption penalty clause is often hidden away in the small print of the mortgage deal. Pay off your mortgage early, and it may come back to haunt you.

The consumer lobby claims that redemption penalties are nothing more than shackles on property-buyers freedom to get the best mortgage value. But the financial thinking behind imposing them is clear cut: the twin pressures of competition and borrower demand have forced lenders to offer products at interest rates which bring in low revenues per loan. In order to make a realistic profit, they need borrowers to remain with them for as long as possible. The function of the early repayment penalty is therefore to persuade the borrower to stay put, or face a substantial charge for changing lender.

Why not scrap redemption penalties?

To abolish these penalties altogether, would narrow a borrower’s choice, with less lenders willing to offer low interest rate loans.

Over-hanging penalty clause

Some redemption penalty clauses persist even when the interest on the loan has reverted from the discounted rate to the standard variable rate. This is known as an “over-hanging penalty clause”. Due to growing pressure from consumers, the number of mortgage products offered with an ‘over-hanging’ penalty clause appear to be declining.

Always read the small print!

A Bridging Loan is a loan that is taken out to solve a temporary cash shortfall that may arise when buying a property or business, or perhaps paying for a renovation. A typical example would be a requirement to pay for a new house before moving out of the present one (due for example to delays in exchanging contracts). Or a bridging loan may be needed when buying property at auction.

As these loans are more risky for the lender than the usual loan, bridging loans are more expensive, and should only be used where they can be repaid within 6 months or so.

How they work?

In the case of buying property, a Bridging Loan is normally secured by getting a mortgage on the new property, and taking out a second mortgage on the property being sold. In this case the loan will depend on a positive valuation of the relevant properties.

Lenders will usually allow Bridging Loans of up to 65% of the value of the properties - minus the value of any existing mortgage. But this will depend on the lender. Shop around for best deals. It is usually possible to borrow between £25,000 and £500,000 as standard. Larger loans are possible but may take slightly longer to arrange.

Where to get a bridging loan?

It is often possible to obtain a Bridging Loan from a bank, or alternatively, from a specialist bridging lender. The specialist lender is usually preferable because they are geared up to process loan applications very quickly. They can often transfer the funds within a few days of the application being received. The average would be a week or so - depending on how long the conveyancing takes to complete.

Activity in the bridging-loan market is small scale, especially during a property boom when there is rarely a problem with selling a home quickly. But when the market slackens off, more home owners are forced to consider these loans.

Types of bridging loan

There are two main types of bridging loan; the ‘closed’ bridge and the ‘open’ bridge. A closed bridge is only available to homebuyers who have already exchanged on the sale of their existing property. Very few sales fall through after exchange, so lenders are happy to offer closed-bridge financing.

An ‘open’ bridge is taken out by buyers who have found their ideal property, but may not have put their existing home on the market. A lender will require a considerable amount of supporting information. It will also insist on there being substantial equity in the existing property. Most lenders put a 12 month limit on an open bridge. After that, they will probably renegotiate as long as interest payments on the loan are up to date, and the property has not lost significant value due to the prevalent market conditions.
Interest rates

All bridging deals involve high interest rates. Usually this rate is equivalent to the Bank of England bank rate plus 2% to 2.5%. There will also be an arrangement fee amounting to 0.5% to 1.5% of the value of the loan. Some lenders charge higher rates of interest and lower arrangement fees. There are also specialist lenders that are faster at issuing the cash, but borrowers can expect to pay a high price for this service.

What are they?

A 100% mortgage is a mortgage where 100% of the value of the property to be purchased is borrowed. In other words, the purchaser is loaned 100% of the property value. By way of example, if a house costs £200,000, a 100% mortgage would be £200,000.

In general, the bigger the deposit that is placed on a property, the better the mortgage terms. Deposits of 10%, or more, facilitate access to lower interest rates. 10% deposits also offer the flexibility of lower monthly loan repayments, or even a shorter mortgage term.

The problems with getting a 100% mortgage are:

• It will probably cost more than an 80% or 90% mortgage due to a higher rate of interest being charged

• The borrower may get tied in to the mortgage deal with heavy early redemption penalties

• If property values fall rather than rise, then borrowers will find themselves in a state of negative equity. In other words, the property will be worth less than the loan covering it

• A mortgage indemnity guarantee policy may have to be taken out at extra cost

For many first time borrowers a 100% mortgage is the only option.

Credit crunch

Due to the “credit crunch” 100% mortgages are few and far between. Borrowers will be charged a larger “higher lending charge” (HLC)) premium than if they put some of their own cash towards the purchase price.

The end of an era?

Banks profits have taken a serious hit in the aftermath of the sub-prime mortgage fiasco. Up until recently, mortgage lenders had been doing business on small profit margins due to intense competition in the marketplace. Things have changed. Competition has fallen away.

Mortgages are harder to come by

Now mortgages are harder to come by, and many borrowers are having to settle for higher lending rates. So even though it is now costing banks and building societies more to borrow money, they are charging more than they used to lend it out. Profit margins per loan have risen considerably from 0.25% to anything up to 1%.

Escalating arrangement fees

Arrangement fees that are charged to set up new mortgages are also rising. Some lenders are now even charging arrangement fees to take out standard variable rate mortgages, something that was unheard until recently.

Reverting to the mean

Many experts agree that the housing market is now ‘reverting to the mean’ after a long period continuous growth. Credit has been extremely cheap in recent times, and this has fuelled runaway escalation of property values. The rate of growth was unsustainable, and now the market is reaping the consequences. It is hard to predict just how far property prices will drop until the point of market readjustment is reached.

What are they?

A 90% mortgage is a mortgage where 90% of the value of the property to be purchased is borrowed. In other words, the purchaser is loaned 90% of the property value.

90% is a reasonably common level of mortgage borrowing, especially for younger house buyers. By way of example, if a house costs £200,000, a 90% mortgage would be £180,000.

In general, the bigger the deposit that is placed on a property, the better the mortgage terms. Deposits of 10%, or more, facilitate access to lower interest rates. 10% deposits also offer the flexibility of lower monthly loan repayments, or even a shorter mortgage term.

The 20% deposit required for 90% mortgage is large enough to ensure that most lenders will offer their best deals.

The mortgage will also not be subject to any “higher lending charges” (HLCs). These are fees some lenders charge for customers borrowing more than 90% of the value of the property they are buying.

Providers of 90% Mortgages

Most lenders will provide 90% mortgages. These mortgages represent the mainstream level of borrowing and are very easy to obtain.

There is access to a wide variety of types of mortgage, such as:

• Variable rate
• Fixed rate
• Tracker
• Discounted rate

One of the benefits of a 90% mortgage is that it provides a reasonable level of protection from negative equity. Only in rare cases do house prices fall by more than 10% (with the exception of an economic recession). This means that in a worst-case scenario it should be possible to sell off the house and pay back the full mortgage loan.

What are they?

An 80% mortgage is a mortgage where 80% of the value of the property to be purchased is borrowed. In other words, the purchaser is loaned 80% of the property value.

By way of example, if a house costs £200,000, an 80% mortgage would be £160,000.

In general, the bigger the deposit that is placed on a property, the better the mortgage terms. Deposits of 20%, or more, facilitate access to lower interest rates. Big deposits also offer the flexibility of lower monthly loan repayments, or even a shorter mortgage term.

The 20% deposit required for an 80% mortgage is large enough to ensure that most lenders will offer their best deals.

The mortgage will also not be subject to any “higher lending charges” (HLCs). These are fees some lenders charge for customers borrowing more than 90% of the value of the property they are buying.

Providers of 80% Mortgages

Most lenders will provide 80% mortgages. These mortgages represent the mainstream level of borrowing and are very easy to obtain.

There is access to a wide variety of types of mortgage, such as:

• Variable rate
• Fixed rate
• Tracker
• Discounted rate

Mortgage repayment can be standard, flexible or offset. Flexible or offset mortgages allow various combinations of flexible repayments and permit savings to be used to reduce the amount of interest paid.