Monthly Archives: October 2016

These types of mortgages offer different levels of risk and flexibility and may appeal to certain types of people or at times of different economic activity. At the end of the offer period both types will revert to the standard variable rate (SVR).

A fixed rate mortgage has an interest rate that remains fixed for the whole of the offer period, usually two, three or five years. Every month the amount of your repayments remains the same even if the Bank of England base rate increases or decreases or your lenders SVR changes.

If you want the peace of mind and know exactly how much your mortgage will cost each month the fixed rate mortgage is the suitable option. The Bank of England base rate reached 0.5% in March 2009 and if you expect this to rise in the future a fixed rate mortgage will ensure you will not have to pay more interest.

In contrast a tracker mortgage is a type of variable rate mortgage where the interest rate tracks the Bank of England base rate. This will be set at a percentage above the base rate such as 0.75% or 1.0% during the offer period such as two, three or five years or sometime for the lifetime of the mortgage.

As soon as the base rate changes either up or down, the lender will also change the interest charged on the tracker mortgage. In some cases where you pay a higher fee the tracker mortgage deal can include greater flexibility such as being able to exit the offer period without penalty.

If the Bank of England base rate is high you may feel you could benefit if the base rate falls and opt for a tracker mortgage. Tracker mortgages charge about 0.2% less than a fixed rate so you could save money in the short term. However, you must be able to afford an interest rate rise if due to economic activity there is a rise in the base rate.

The London Interbank Offered Rates (Libor) is a benchmark interest rate that a number of the world’s leading banks charge each other for loans. It is set by market forces representing $450 trillion of deals and used to price financial contracts.

Every day the largest banks submit the interest rates they are willing to lend to other banks based on a number of currencies and other different periods of time. The highest and lowest quartiles are discounted and an average is calculated for the remainder.

One of the main sources of mortgage lending is borrowing from other banks so Libor has an important part in setting mortgage interest rates. Many commercial and buy-to-let mortgages directly track Libor although most residential mortgages track the Bank of England base rate.

Another important benchmark is the swap rates and these influence the fixed mortgage rates. Banks take deposits and pay a variable or floating interest rate while offering fixed rate mortgages.

This exposes the bank to a risk which they can hedge by swapping the funds raised through variable rates with fixed rate funds from other banks. These swap rates react to expectations of future interest rates and inflation, which affect the price of mortgages.

The attractiveness of fixed rate mortgages depends on how they compare to variable rates. When fixed rates are lower than variable rates demand is strong and when fixed rates are higher than variable rates demand is weaker.

A freehold property allows the owner to enjoy the land in perpetuity and is the most popular in England and Wales. It is usual for a house to be freehold and flats or apartments to be leasehold.

As the owner of a freehold property you can leave your land to your family or transfer by way of a gift. You also have the right to adapt the land according to your personal preferences although this is subject to national and local laws. Ultimately you are responsible for the upkeep of your land including maintenance or repairs.

In contrast leasehold gives you the right to occupy the land for a specified period of time in exchange for a nominal ground rent and this right can be transferred to subsequent buyers.

With many leases the duration is 99 to 999 years and provided the expiry date is a long time in the future leasehold is as good as freehold. If the lease on a property is less than 70 years it may it more difficult to arrange a mortgage from a lender. Once the lease expires the property rights revert to the owner of the freehold.

Apart from the nominal ground rent, to maintain the communal areas of the block you would pay a service charged. In addition if the block is old there may be expensive renovations required over and above other charges. Another potential cost for a property with a short lease remaining would be the cost to extend the lease and to do this there would be a charge from the freehold owner.

The criteria for interest only mortgages have changed and lenders require homeowners to have enhanced incomes and equity before they can approve the application. There are fewer interest only mortgages available and these often requires equity in your property to be greater than 50% with household income exceeding £50,000.

For an interest only mortgage there is no guarantee that the original loan will be repaid as you are only paying the interest rather than any of the amount borrowed. At the end of the term you usually between 25 and 40 years, you would owe the original amount and would need some way of paying this amount.

Lenders would also expect you to provide proof you have a suitable capital repayment vehicle. You would need to save money such as using a tax efficient ISA invested over the long term to clear the debt and this would be a higher risk approach than a repayment mortgage.

A repayment mortgage combines both a capital and interest repayment and is calculated so at the end of the term the original loan is completely repaid.

For example, if you buy a property for £300,000 with a £50,000 deposit your mortgage will be £250,000. The most popular term is 25 years and if you pay an average interest rate of 1.95% the cost is £1,053.56 per month. This amount will stay the same as long as the interest rate remains the same but would increase if the interest rate rises.

From the payment of £1,053.56 per month initially £647.31 per month is the repayment of capital and £406.25 per month is interest. As each month passes the capital amount gradually increases and the interest amount decreases as you are reducing the size of the debt.

Deciding on whether you select a fixed rate or variable mortgage such as a tracker or discounted rate can be difficult and is often driven by the economy at the time or future expectations of interest rate movements.

The reason for this is that all lenders have a standard variable rate (SVR) which is linked to the base rate set by the Bank of England. As the Bank changes the interest rate in relation to economic activity lenders may also change their rates. Fixed rate mortgages are influenced more by the cost of borrowing between banks called the ‘swap’ rate and change up or down with market expectations.

The Bank of England reduced interest rates in March 2009 to 0.5% due to the financial crisis and again in August 2016 to 0.25% due to the Brexit vote and lenders also reduced their mortgage rates.

In the long term the Bank of England intend to increase interest rates and this expectation has seen 90% of people select a fixed rate mortgage. The main reason people opt for this route is the certainty of knowing their mortgage payments will remain the same during the term of the special deal, usually for two, three or five years.

A tracker mortgage is a variable rate and offers cheaper interest repayments of about 0.2% compared to a fixed rate but you will pay more if interest rates increase as this mortgage tracks the Bank of England base rate.

When you buy your property you will pay Stamp Duty Land Tax (SDLT) if your property is valued at £125,000 or more. How much tax you pay depends on whether it is residential, a buy-to-let or second home.

From April 2016 stamp duty for new buy-to-let properties has increased by 3% on the whole purchase value which also applies to people buying a second home. The following table shows how stamp duty is applied in England and Wales:

Stamp duty is paid on the proportions in the above bands. For residential properties up to £125,000 the SDLT is zero but landlords and second homes must pay an additional 3% or £3,750 on this portion.

For a property valued at £300,000 homeowners would pay £5,000 in SDLT whereas a landlord or second home buyer will pay £14,000.

From completion of the property purchase you will have 30 days to pay the stamp duty although your solicitor will usually collect stamp duty tax from you at completion and pay this on your behalf. Always remember it is legally your responsibility to pay the tax so you need to ensure you have paid the correct amount.