Interest Only Borrowers need to plan

Citizens Advice has warned that there could be almost a million mortgage borrowers with an interest only mortgage but no plan as to how they will repay the mortgage.

Interest only mortgages do exactly as the name suggests with the monthly payments only covering the interest charge.  As a result the capital balance is not reduced and the borrower will need to repay the whole of the mortgage amount at the end of the term.

Traditionally, the borrower would have made regular contributions into an alternative repayment vehicle to run alongside the mortgage.

These are typically investment backed vehicles such as endowments or stocks and shares ISAs.  The hope is that the vehicle will grow sufficiently over time so as to reach the target amount required to pay off the mortgage.

However, some have taken no repayment vehicle at all, relying instead on the sale of the property to cover the balance.  The fear is that they could reach the end of the term with no means to pay off the mortgage, which could result in them having to sell the property to pay off the mortgage.

Anyone in that situation would do well to try and put a plan in place sooner rather than later, as the longer they leave it the harder it can become.  Switching the mortgage to repayment will mean that monthly payments increase but shopping around for a keener rate can help minimise the impact as much as possible.

If that looks too much to take on, putting funds aside or overpaying the mortgage as and when it’s possible will at least start the process of reducing the mortgage.  Just be careful to check that any overpayments will be within allowed limits so that no early repayment charges are incurred.

Even those with a repayment vehicle in place should regularly review their plans, in order to ensure that they remain on track to meet their target.  If there is any potential shortfall then, again, it makes sense to try and deal with that sooner rather than later.

Guild Mortgage Service, Provided by London & Country Mortgages

YOUR HOME OR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

LAND REGISTRY DATA: AUGUST 2015 (released 28 September 2015)

The August 2015 Land Registry data showed a monthly increase in average house prices across England and Wales of 0.5 per cent. In London prices increased by 1.7 per cent, exceeding all other regions; the East Midlands, Yorkshire & The Humber, and the North West experienced falls, the greatest being the North West at minus 1.4 per cent.

The East once again showed the highest annual change in prices at 8.4 per cent, followed by the South East at 7.6 per cent, London at 6.6 per cent and the South West at 5.4 per cent. The North West saw the lowest annual change at 0.2 per cent but no region experienced a fall. The overall annual price change now stands at 4.2 per cent, making the average house price in England & Wales £184,682 and in London £493,026. By property type, semi-detached properties showed the highest annual increase at 4.7 per cent; the lowest was seen in terraced properties at 3.7 per cent.

In greater detail, 14 counties and unitary authorities saw an annual fall in prices, the greatest being Darlington at minus 6.2 per cent; Reading again experienced the highest annual rise at 14.6 per cent. Both Reading and Southend-on-Sea saw the strongest monthly growth with an increase of 2.4 per cent, while Merthyr Tydfil had the most significant monthly drop at minus 3.4 per cent. Nine counties and unitary authorities saw no monthly price change.

Of the metropolitan districts, Sandwell showed the largest annual price increase at 9.8 per cent; five saw a fall, the greatest being Bradford again at minus 2.4 per cent. Bolton saw the highest monthly price increase at 1.6 per cent, while ten saw a drop, the largest again being Wolverhampton at minus 2.0 per cent.

Of the London boroughs, Newham saw the highest annual price rise at 15.5 per cent, while Hammersmith & Fulham and Camden experienced falls at minus 0.3 per cent and minus 1.7 per cent respectively. On a monthly basis, Barking & Dagenham showed the highest increase at 2.2 per cent, while Kensington & Chelsea saw the biggest fall with a movement of minus 1.1 per cent.

The volume of properties sold in June 2015 was 13 per cent lower than a year earlier in England and Wales and 19 per cent lower in London; falls were seen across nearly all price brackets. Properties sold for more than £1 million across England and Wales as a whole fell by 17 per cent and in London by 22 per cent over the same period.

Month on month, the total number of properties sold across England and Wales increased by 7.3 per cent from 65,619 in May to 70,404 in June – chiefly in properties valued above £250,000. The number of property transactions from March 2015 to June 2015 averaged 65,550 per month, compared to 73,985 over the same period a year earlier.

Mortgages for older borrowers

With the UK population living longer and working later in life, it comes as no surprise that our mortgage requirements are also beginning to change.  High house prices have made it all the harder for first time buyers to get on the ladder and many will not buy their first home until they are in their thirties. 

In addition many of those entering the market for the first time are choosing longer mortgage terms, possibly as long as 35 or 40 years, in order to make their loans more affordable.

The Council of Mortgage Lenders recently published figures revealing that there are currently 11 million people in the UK aged 65 and over – representing around 17% of our population. By 2034 this is expected to rise to 17 million, or 25% of the population.

That could see more borrowers with a mortgage beyond the current standard retirement age.  Lender criteria has got tougher and lenders have typically capped the maximum age to which they will lend, even when it can be show the mortgage would be affordable. 

After deciding to relocate in order to be closer to their grandchildren, our clients approached the mortgage service for the Guild of Professional Estate Agents looking for advice. Both applicants were already retired and in receipt of a combination of private and state pension income.

The couple were looking for a mortgage term that would take them up the age of 75.  Using the proceeds from the sale of their current property, the couple were able to put down a sizeable deposit.  After discussing costings with their mortgage adviser, they felt comfortable that their pension income would be sufficient to support the mortgage payments.

While some lenders would not allow a mortgage term running past the age of 70, the couple’s mortgage adviser recommended a competitive 5 year fixed from a high-street building society.  It was able to take a more flexible approach enabling them to secure the mortgage term up to the age that they required.

Guild Mortgage Service, Provided by London & Country Mortgages

YOUR HOME OR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

With the tougher mortgage rules in place since 2014 getting a mortgage perhaps seems to be a more complex process than ever.

Lenders are focused on establishing that a mortgage will be affordable for the borrower, not only now but also in the future.  As a result they will ask questions not only about your level of income but also about your outgoings.

That will include expenditure on other credit commitments like loans and credit cards but will also look at other items like regular travel costs, utilities and childcare.  This helps the lender calculate how much you can borrow so it makes sense to sit down and map out your monthly budget.

This will mean that you have all the figures to hand and help you to gauge the amount you might be able to borrow more accurately. It might also help you see where you might be able to make savings.

You will also need to be able to prove your income to the lender, so be prepared to come up with plenty of paperwork to back up your application.  They might typically require payslips, accounts for the self employed, P60 plus bank statements, proof of address and ID as well.  It’s not possible to predict everything a lender may request but gathering together what you can in preparation could help the process run more smoothly and quickly.

If you have any concerns about your credit history, either because of a possible blip in the past or because you have been previously declined, then you can get a copy of your credit record.  This could help identify any issues and if there are errors then you can get those rectified before you make an application.

It’s important to remember that just because you can’t meet one lender’s criteria that another will not be able to help.  Shopping around can help match your circumstances to the right lender as well as help identify better rates.

Lenders have always had differing distribution strategies, from relying entirely on mortgage brokers, to having different pricing for branches and brokers, to not accepting introduced business at all.

For many years HSBC has been in the latter camp, preferring to restrict mortgages to their own branches and website. But that has now started to change and we’re very pleased to be one of the first firms to be able to arrange their mortgages.

It’s a sign of growing support for the intermediary market generally. Since the Mortgage Market Review brought in the need for virtually all mortgages to be formally advised upon, the importance of high quality advice (and the work brokers have always done) is increasingly recognised by lenders.

It’s also the case that giving advice is a rather bigger job than giving “only information”, so lenders have also seen that not only do their own staff need greater training, each mortgage now  takes longer to arrange.

So the fact that there is a readily available, already trained body of mortgage advisers out there is increasingly valuable to lenders seeking to grow their business in a highly competitive market.

At the time of writing HSBCs range looks well suited to movers and first time buyers, with competitive rates for those with deposits between 10% and 20%, giving a welcome additional option for hard-pressed buyers. How the lending policy and service supports that, only time will tell; but you don’t get to be the biggest bank in the land by accident and having extra options can never be a bad thing.