New proposals by The Financial Services Authority (FSA) include a ban on Self-Certification Mortgages.
Self Certification Mortgages were designed for workers who have trouble proving their income in a conventional manner such as contractors, freelancers, self employed, and company directors.
On face value, Self Cert Mortgages seem the ideal solution for the likes of contractors and freelancers as they usually require little or no proof of income; however the reality is high mortgage rates and in many cases extortionate arrangement fees.
During the housing boom it has been estimated that almost a third of all mortgages offered were on self-certified basis. This has resulted in a number of mortgage fraud enquiries as rogue brokers encouraged borrowers to give inflated income figures to boost their own commissions.
Individuals who are not permanently employed that have tried to secure competitive High Street mortgage funding on a non self certified basis have inevitably failed because lenders will not take all of their income into account.
So where does this leave borrowers who saw Self-Cert Mortgages as their only option?
At Contractor Mortgages Made Easy (CMME) we would never advise a client to take the Self-Cert route; instead we work with senior underwriters to secure you a mortgage based on your contract rate, thereby taking all of your income into consideration.
CMME are able to secure mortgages with high street lenders and at high street rates, giving you access to the same whole of market mortgages that are available to borrowers who are able to prove their income in the traditional way.
Taj Kang of CMME welcomed this news and commented "The death of self-cert mortgages will mean that proper consideration will now be taken by lenders and brokers as to how much a borrower can afford. This can only be a good thing as in most cases a mortgage is the most important financial decision of a borrower's life."
This article has been published with the permission of Contractor Mortgages Made Easy.
With many clients coming to the end of their current deals it is often appealing to revert back to the standard variable rate.
Jason Legg from Property Finance has come up with a list of reasons why you may not want to stay on the standard variable rate.
- HOUSE PRICES ARE REDUCING - A further 10% reduction is forecast by the third quarter of this year. Most lenders have interest rates tiered at 60%, 75%, and 85%. Ifyou wait to remortgage, this could end up costing money as your loan tovalue (LTV) increases and the mortgage falls into the next tier ofproducts.
For example: A client currently at 75% LTV decides to wait to remortgage. Hedecides three months later to apply and then discovers his LTV is 80%.On current deals, this could mean an increase of up to 2.3% in theinterest rate or £2,300 per year on a £100,000 mortgage.
- RATES ARE LOW – Currently there are a whole host of low fixed rates available. Therates are lower than they have been historically. Fixing at these ratesensures that you can budget accurately and will not experience anypotential increase when base rates go up! It may cost slightly more in the short term, but over the term it could save you a lot of money.
- BASE RATE WILL INCREASE IN THE FUTURE – If base rate can fall by 1.5% then it can rise by 1.5%. If you elect to remain on the standard variable rate then potentially you will experience a rise. By this point, you will have missed out on the low deals that are currently available.
- WILL LENDERS PASS ON FURTHER CUTS? – Until now the majority of lenders have passed on the base rate cuts but will they continue to do so? Severallarge lenders have already intimated that they won’t pass on furtherbase rate reductions and in the recent one, some only passed on a smallproportion of the cut which may be an indication that rates arebottoming out.
- ALL WEATHER MORTGAGE –Some clients who are more suited to risk will prefer a variable rate. Many of the tracker products available are over 2% above bank baserate which could prove expensive if rates rise again. Afew lenders allow customers to take advantage of their trackers whilerates are low but permit them to fix at any point without incurring anyearly repayment charge if they decide that rates are on the increase.
- HEDGE YOUR BETS! – With some lenders you can mix and match your product and only pay one product fee. If you are unsure then why not split your deal between a fixed rate and a tracker?
7. LONGTERM BUDGETING – As the economy recovers, the need for long termbudgeting becomes paramount. Taxes are likely to rise and this couldaffect disposable income. Fixing at a low rate now means that you canbudget for the future.
It is important to consider the above. If you would like to discuss further please contact Jason Legg.
Written by Jason Legg
Are you an Accidental Landlord?
The downturn in housing turnover over the past two years promptedmany contractors to let their old properties out rather than sell at aloss, this has in effect turned a large number of contractors into"Accidental Landlords"
The surge in these so-called 'accidental landlords' has limited thesupply of property in the sales market and increased the stock of homesavailable to let.
The good news for buyers is that all the signs show that many ofthese homeowners now have an opportunity to sell, shifting a largenumber of properties across from the inflated rental market to thesales market.
An Opportunity to Sell:
David Smith, of property consultancy Carter Jonas, said anyonehoping to sell now had a "window of opportunity" that might soon shut.
"We have to expect more turbulence ahead, specifically as a result of rising unemployment and interest rates," he said.
"This toxic combination will bring more property on to the market aspeople struggle to meet their repayments, which will apply downwardpressure on prices and potentially reverse the recent trend, at leastfor a time," he added.
House Prices Continue to Recover
Latest figures reported by the Nationwide suggest that house figures have recovered to the same level as a year ago.
For five consecutive months house prices have risen and the latestrise of 0.9% brings the average UK Horse price to £161,816 matchingthe average price for September last year.
"The most intense phase of the recession and financial crisis hasprobably passed," said Martin Gahbauer, the Nationwide's chiefeconomist.
"However, given that the housing market still faces considerableheadwinds in the form of high unemployment, restrictive creditconditions and an impending withdrawal of the stamp duty holiday, itwould be surprising to see house prices continuing to increase at thevery strong rate seen in recent months," he added.
Options for Contractors & Freelancers
Taj Kang, Associate Director at CMME, can see good opportunities for those who are thinking of buying a new home.
"Reluctant owners of second properties may now be marketing theirproperties for sale. This will mean there could be more housing stockon the market for contractors and freelancers thinking of buying theirnew home. The withdrawal of the stamp duty holiday at the end of theyear means that there is also a good financial incentive for thoselooking to secure that new property sooner rather than later."
Publisher
Ian Burrows
Marketing Director
Contractor Mortgages Made Easy
Any press or media enquiries relating to this article please contact media@contractormortgagesuk.com
This article has been published with permission of Contractor Mortgages Made Easy.
Contractor Mortgages Made Easy are a whole of market mortgage brokerwho specialise in securing bespoke mortgages for contractors
Income from contracts can prove difficult toassess and many lenders; especially in this economic environment aresimply not that keen to lend.
We have teamed up with Contractor Mortgages made Easy whom are our preferred suppliers for mortgages in the Professional Contracting and Freelancing industry.
CMME are fully aware of thelives of individuals in this industry and will calculate the level ofborrowing from as much as up to 4 times your contract income.
Whether you are re-mortgaging or buying from scratch CMME can assist; and you may have little or even no deposit to pay.
Find out how much you can borrow by entering your daily rate.
With many clients coming to the end of their current deals it is often appealing to revert back to the standard variable rate.
Jason Legg from Property Finance has come up with a list of reasons why you may not want to stay on the standard variable rate.
- HOUSE PRICES ARE REDUCING - A further 10% reduction is forecast by the third quarter of this year. Most lenders have interest rates tiered at 60%, 75%, and 85%. Ifyou wait to remortgage, this could end up costing money as your loan tovalue (LTV) increases and the mortgage falls into the next tier ofproducts.
For example: A client currently at 75% LTV decides to wait to remortgage. Hedecides three months later to apply and then discovers his LTV is 80%.On current deals, this could mean an increase of up to 2.3% in theinterest rate or £2,300 per year on a £100,000 mortgage.
- RATES ARE LOW – Currently there are a whole host of low fixed rates available. Therates are lower than they have been historically. Fixing at these ratesensures that you can budget accurately and will not experience anypotential increase when base rates go up! It may cost slightly more in the short term, but over the term it could save you a lot of money.
- BASE RATE WILL INCREASE IN THE FUTURE – If base rate can fall by 1.5% then it can rise by 1.5%. If you elect to remain on the standard variable rate then potentially you will experience a rise. By this point, you will have missed out on the low deals that are currently available.
- WILL LENDERS PASS ON FURTHER CUTS? – Until now the majority of lenders have passed on the base rate cuts but will they continue to do so? Severallarge lenders have already intimated that they won’t pass on furtherbase rate reductions and in the recent one, some only passed on a smallproportion of the cut which may be an indication that rates arebottoming out.
- ALL WEATHER MORTGAGE –Some clients who are more suited to risk will prefer a variable rate. Many of the tracker products available are over 2% above bank baserate which could prove expensive if rates rise again. Afew lenders allow customers to take advantage of their trackers whilerates are low but permit them to fix at any point without incurring anyearly repayment charge if they decide that rates are on the increase.
- HEDGE YOUR BETS! – With some lenders you can mix and match your product and only pay one product fee. If you are unsure then why not split your deal between a fixed rate and a tracker?
7. LONGTERM BUDGETING – As the economy recovers, the need for long termbudgeting becomes paramount. Taxes are likely to rise and this couldaffect disposable income. Fixing at a low rate now means that you canbudget for the future.
It is important to consider the above. If you would like to discuss further please contact Jason Legg.
Written by Jason Legg
When the credit crunch began about a year ago interest rates andarrangement fees went up as lenders increased their margins. This wasnot just down to greed but because the banks no longer trusted eachother so the rates (LIBOR, SWAP) at which banks lend to each otherincreased which was passed on to the mortgage customer.
Over the last few weeks there appeared to be light at the end of thetunnel with lenders starting to cut rates as LIBOR rates had improved.After the recent events (Lehmann Brothers, HBOS) LIBOR rates haveincreased again, although this has not yet been reflected in mortgagerates.
The mortgage market continues to be volatile and it is not possibleto predict if rates will rise imminently or what will happen over thenext few months. Central banks put £100 billion into the globalfinancial system last week hoping that this will improve interest ratesand "free-up" the market however there is always the chance that theremay be another problem just around the corner.
So, as of today, there are still some competitive deals to be had -the lower the loan to value the more attractive the terms. If you dorequire mortgage or remortgage advice it is even more important thanever that you obtain independent mortgage advice.
Dreaming of that Villa in Spain?
After deciding on Murcia as the place where they would most like tobuy their holiday home and eventually retire to, Mr and Mrs Smith madea formal offer for a 3-bedroom villa which was formally accepted by thevendor.
Before having begun researching the property market in Spain theSmiths were wise enough to seek financial advice to help them work outhow much money they would be permitted to borrow and how much theycould realistically afford to borrow over a given mortgage term.
Their financial advisor discussed both the option of raising therequired funds in the U.K by taking out a mortgage on theirunencumbered U.K main residence and the alternative of arranging a Euromortgage through a Spanish lender which would be secured against theSpanish property.
Given that they were planning to rent out the Spanish propertyduring most of the year and would be receiving rent in Euros thefinancial advisor suggested that a Euro mortgage would suit them bestas they could use the Euros earned to contribute towards the mortgagepayments.
The financial advisor was careful to explain to them that by takinga Euro mortgage they were putting themselves at risk to currencyfluctuation volatility. This would be due to the fact that they wouldboth be earning the majority of their income in Sterling and would needto exchange this money into Euros in order to pay off their mortgage.The financial advisor recommended that they speak with a currencyspecialist who could help them minimise this risk by exchanging theirmoney smartly.
When it came to selecting a mortgage product Mr and Mrs Smith werehappy to see that there were a variety of different mortgages availableto them. The common maximum mortgage available was 80% of the purchaseprice or value (whichever the lower) and the maximum age that theeldest applicant has to be before the end of the mortgage term was 75although a very select few lenders would consider up to the age of 80.Their advisor explained to them that practically no Spanish lendersworked on the U.K model of income models, rather the more commonEuropean "affordability" approach. Typically the "affordability"calculation is as follows: The total of the Spanish mortgage payment,plus any existing worldwide borrowings the clients may have should notexceed 35% of their net monthly income.
Given that Mr and Mrs Smith were both 55 with Mr Smith employedfull-time earning £29,000 net after tax and Mrs Smith part-time earning£10,000 net after tax with no current mortgage or outgoings whatsoever,35% of their net monthly income would be £1,137.50 (£29,000 + £10,000 /0.35% / 12 months) They would therefore be permitted a mortgage wherebythe monthly repayment would not exceed £1,137.50. With such anallowance a typical Spanish mortgage lender would normally allow amaximum loan of around £155,000 or €195,300 at current exchange rates.
After deliberating over their mortgage options with their advisorthey decided that a Capital and Interest (Repayment) mortgage over 20years and arranged on a variable rate basis would best suit theirneeds. They decided against a fixed rate option as the variable rategave them flexibility to make over payments without any early repaymentpenalties. Knowing that they were likely to be permitted borrowings ofa maximum of £155,000 and that the maximum loan-to-value mortgage was80% they knew that they could set their sights at a property of£193,750.
Before deciding on how much to buy for they made sure that they hadat least 30% of the purchase price in savings to make up for depositand fees, duties and any charges that would arise. When buying aproperty in Spain and arranging the mortgage it is always recommendedthat you have at least 10% of the purchase price in savings to coverduties and costs associated with buying property. Given that they onlyhad £50,000 in savings they decided on buying for £155,000 (€195,300)and apply for a mortgage of 80% £122,450 (€154,287). For this theywould require deposit money of £31,000 (€39,060) and additional fundsof £15,500 (€19,530) to cover associated costs.
Their advisor applied for a Approval in Principle from a Spanishbank for a 20 year "Repayment" mortgage of £122,450 before illustratingtheir mortgage product in full. The lender approved a mortgage inprinciple subject to the clients undertaking a full-status check atapplication stage.
Mr and Mrs Smith signed the preliminary purchase contract for thevilla in Murcia safe in the knowledge that they had a Euro mortgagealready approved in principle.
Written by Matthew Weston
Blevins Franks International Ltd
Tel: +44 (0) 207-336-1012
Email: matthew.weston@blevinsfranks.com
There has been a lot going on in the mortgage market over the lastfew weeks and much media coverage about the effects of the “creditcrunch”. As mortgage advisers we thought this may help answer a numberof questions.
What is going on?
The UK mortgage market is currently operating in a way in which ithas not done within the last 30 years; certainly very differently fromrecent years.
Last year there was a position of oversupply, with intensecompetition among both new and traditional lenders on criteria andprice. Now we have moved to a state of undersupply, reduced criteriaand widening lender margins, all of which leads to a higher price forthe consumer.
Many lenders have left the market. Others have withdrawn newlending. Even those with strong balance sheets funded by deposits arerestraining their new lending, so as not to damage their operations orover-run their funding budgets.
This has caused a shortage of products; schemes being withdrawn atvery short notice; products being re-priced upwards and criteria beingadjusted.
Why is this happening?
There are three main reasons:
1. A lack of liquidity in the money markets – i.e. the money thatwas previously available for banks to lend to one another. In the pastbanks used their deposits from savings accounts to fund mortgages. Morerecently, mortgage lending has been increasingly funded by the moneymarkets (borrowing from other lending institutions) or from the sale ofmortgage backed securities packages.
Due to very poor arrears experience of the loan within thesepackages, which had been used to fund the American sub-prime market,banks have had to write off huge losses, often billions of dollars. Theproblems have been with the American rather than the UK sub-primemarket, which is better controlled.
This means that major banks are now scrambling to adjust theirbalance sheets so that they will have less funded by money markets andmore funded by deposits. If a bank has any cash, for example fromredeeming mortgages, it will not lend it to any bank that may haveproblems since they are now worried that they may not get it back. Thisis why LIBOR (the rate at which banks are prepared to lend to eachother) is at a level way above the Bank of England base rate. In short,there is not much cash around to fund new mortgage lending.
2. There is a problem of confidence. Lenders fear that as a resultof all the other problems in the market, house prices will fall andthat arrears will get worse. The consequence of this is the tighteningup of criteria. No lender wants to be the last one in the market withwide open criteria.
3. There is an issue of processing capacity. Lender administrationcan run into serious trouble if too much volume is taken on tooquickly. Therefore lenders faced with warning signs of high telephonetraffic or “agreement in principle” levels, have been taking thedecision to adjust rates or criteria, or, in a few extreme cases,shutting their doors for new business.
When will the market “return to normal”?
The short answer is nobody really knows. It is quite possible thatwe will not see any return to the sort of market we had in 2006 and2007 - that market was exceptional with many new aggressive lenders,with big aspirations, making the market compete on riskier terms withlittle or no profit margin. With their departure, the remaining lendersare re-building a more appropriate approach to risk, taking criteriaback to where it was several years ago.
The hope is that perhaps a year or so after the “credit crunch”began, when all the banks have gone through a reporting cycle, all thebad news will be out in the market and the write offs and losses willbe history.
As long as the confidence issue can be handled until that point, we should see lenders becoming competitive again.
Are there any reasons to be cheerful?
There are some positives in the current situation. In the UKemployment is at record high levels (unlike the early 1990s) providinga high demand for housing. At the same time we are not building enoughnew homes. Supply and demand means that the housing market is stronglyunderpinned and is unlikely to crash.
Interest rates are on their way down, with some economistspredicting bank base rate getting as low as 4%. Whether the lower bankbase rate is followed by a fall in mortgage rates is far from certain,but with sufficient cuts the cost of borrowing should get cheaper. Thisis likely to encourage people back into the housing and mortgage market.
Mortgage intermediaries who review the “whole of the market” - likeBlevins Franks - remain the favoured route for consumers to obtainmortgages from lenders. In the current climate advice is needed morethan ever to obtain the best deal possible.
In Summary
There are mortgage lenders who want to lend this year.
Mortgage rates may not fall as fast as the bank base rate.
Larger deposits may be required.
Poorer credit risks will find it more difficult to arrange a newmortgage so keeping a clean credit history has never been moreimportant.
The Bank of England can and is providing more liquidity support into the market - £50 billion announced on 21st April 2008.
Mortgages
For many people a mortgage represents the largest single financialtransaction that they will ever become involved in, and for many peopletheir outgoings on mortgage payments represent their largest singleitem of expenditure.
Therefore, the need to understand how the mortgage market operatesand the options and alternatives open to any borrower is obviouslyextremely important. It should all be relatively straightforward, butthere are now so many options and alternatives available, that it canall appear totally baffling to a typical borrower who is not a“financial wizard”.
The following comments are designed to try and simplify matters a little for you.
The first and most important point is to understand that you canhave either a repayment mortgage or an interest only mortgage. It isvital to understand how each mortgage operates.
Repayment Mortgages
This is where each monthly payment that you make to the bank orbuilding society includes the interest that you owe on the loan, plus asmall amount of capital. This means that the amount you owe isgradually reducing as each payment is made and the amount outstandingreduces to nil at the end of the mortgage term.
Interest Only Mortgages
In contrast, these only involve the payment of interest to the bankor building society, and does not include any repayment of capital.When the mortgage term finishes you will still owe the amount that youoriginally borrowed. You will be expected to repay the capital when themortgage finishes. However, it is up to you to how you fund for thisrepayment.
Therefore, and in basic terms, an interest only mortgage is cheaperthan a repayment mortgage, but with a repayment mortgage you arereducing the amount originally borrowed, during the lifetime of themortgage itself.
Irrespective of whether you have a repayment or an interest onlymortgage, the rate at which interest is applied will depend on the typeof mortgage chosen.
There are a number of options and alternatives here, with the major ones being as follows:-
Fixed Rate
The interest rate is fixed for an agreed period which typicallymight be somewhere between 1 and 10 years. You are protected ifinterest rates rise, but you will not benefit if interest rates fallsince you are “locked in” to a fixed rate arrangement. You may be ableto switch out of a fixed rate arrangement, but there may be costsinvolved.
Variable Rates
Under this type of mortgage, the interest rate will change each timeinterest rates change. However, most lenders tend to “adjust” mortgagerepayments on an annual basis rather than each and every time interestrates change. Under this arrangement, you have no protection at all ifinterest rates rise, but if interest rates fall you benefit from suchreductions.
Discounted Rates
Under this type of mortgage, the bank or building society offerssome form of discount off their normal variable rate mortgage. Theamount of the discount varies from lender to lender, and it is usualfor the discount to last for a pre-agreed term of say 1 or 2 years.
Capped Rates
Under this type of arrangement, the rate of interest does vary, butis “capped” so that it cannot go higher than an agreed level. Forexample, if you had a 6% capped mortgage, it would mean that theinterest payable could not be greater than 6%, but can be lower ifinterest rates fall.
Like many things in life, we feel that there is no absolute right orwrong answer as far as which type of mortgage is best. There are somany variables, and every individual has their own particular needs andrequirements and different financial planning objectives in the short,medium and long term.
The key issue is to make sure that you understand the basicdifferences between an interest only mortgage and a repayment mortgage,and then to truly understand and analyse the different types ofmortgage scheme available to you.
In our opinion you must receive expert advice and guidance from atruly independent adviser, who will be able to compare and contrast foryou all of the options available, so that you can then make an informeddecision as to which mortgage is best for you.