Bridging Finance for your Property Investment
Bridging finance is a stop-gap measure to solve a problem – how
to complete on the purchase of a property when the sale of your
own has not yet been finalised or when a mortgage on the new
property has yet to materialise. It is a temporary measure (never
open-ended) and has been traditionally provided by the banks.
For the property investor, the need for bridging finance is most
likely to arise following a successful bid at an auction (auction
catalogues routinely carry advertisements for bridging loan
companies). When a property is bought at auction, 10% of the
price is paid immediately in cash and the balance is due 28 days
later. If a mortgage hasn’t already been arranged (and it rarely
can be), it must be put in place before the deadline for
completion. Failure to meet this deadline will result in the loss of
the deposit. It then gets worse. If the property is subsequently sold
for less than your bid, you could be liable for the shortfall!
Most lenders simply don’t work fast enough for this. A valuation
needs to be arranged, the searches made, the offer issued, the legal
work completed and the funds transferred. In the meantime,
anything can go wrong. A poor valuation report can play havoc
with the timetable. The lender may retain some funds until
essential work is carried out. The valuer may call for an
engineer’s report, resulting in further delays and expense. Some
lenders can take five working days just to transfer funds! For this
reason many successful bidders at auction find themselves turning
to the providers of bridging finance.
Kamis, 09 April 2009
LENDING CRITERIA all bridging loans
LENDING CRITERIA all bridging loans
As with mortgages there are standard criteria that apply to
virtually all bridging loans.
Maximum loan
Given these indecent profit margins, you might expect lenders to
be generous with their loan-to-value criteria. Not so. The
maximum loan you can expect is 70%. This is belt and braces for
the lender. If you fail to redeem the loan the property will be sold
with the absolute certainty that the lender will recover the debt,
and all related expenses, in full.
The term
A typical term is 12 months, with the loan to be repaid in full at
the end. Normally there will be the right to redeem the loan
earlier, but watch out for the minimum term requirement. Many
bridging loan companies insist that you keep the loan for a certain
period, typically three months (see above). This insures a
guaranteed overall profit on each transaction. You can’t redeem
the loan even if you are able to do so!
Non-status
Unlike mortgages, most bridging loans are not based on your
ability to repay the loan. They are, in the jargon, ‘non-status
loans’. Income, therefore, is not a factor in deciding whether you
should get a bridging loan or not. At the same time, confusingly,
application forms for such loans do ask about employment details
and income. It is important at the outset to establish that your
loan will indeed be non-status unless, of course, you have
sufficient income to service the loan, together with you current
mortgage and all other liabilities!
As with mortgages there are standard criteria that apply to
virtually all bridging loans.
Maximum loan
Given these indecent profit margins, you might expect lenders to
be generous with their loan-to-value criteria. Not so. The
maximum loan you can expect is 70%. This is belt and braces for
the lender. If you fail to redeem the loan the property will be sold
with the absolute certainty that the lender will recover the debt,
and all related expenses, in full.
The term
A typical term is 12 months, with the loan to be repaid in full at
the end. Normally there will be the right to redeem the loan
earlier, but watch out for the minimum term requirement. Many
bridging loan companies insist that you keep the loan for a certain
period, typically three months (see above). This insures a
guaranteed overall profit on each transaction. You can’t redeem
the loan even if you are able to do so!
Non-status
Unlike mortgages, most bridging loans are not based on your
ability to repay the loan. They are, in the jargon, ‘non-status
loans’. Income, therefore, is not a factor in deciding whether you
should get a bridging loan or not. At the same time, confusingly,
application forms for such loans do ask about employment details
and income. It is important at the outset to establish that your
loan will indeed be non-status unless, of course, you have
sufficient income to service the loan, together with you current
mortgage and all other liabilities!
Rabu, 08 April 2009
Truth About Your Property Brokers Fees for your Investment
Truth About Your Property Brokers Fees for your Investment
It is not generally known that mortgage brokers are paid by the
lenders in the form of a marketing allowance (or procuration fee).
This will be anything from 0.25 to 1% of the mortgage amount
and it is paid regardless of whether the broker charges the client a
fee or not. The reason this is not generally known is because
brokers do not generally tell you! And while they are now obliged
to reveal this fact (in the KFI) to residential borrowers and to
disclose the full cash amount received, they will not necessarily do
this for the BTL borrower (see above). The point to remember is
this: if you pay your broker a fee he is paid twice!
In addition to a fee payable on completion, some brokers also
charge an administration fee, payable immediately and usually
non-refundable. This can be anything from £100 to £500. If your
broker feels the need to charge a fee before doing any work for
you, how confident can he be that he will secure a mortgage?
So what should you do? The obvious answer is to find a broker
who does not charge a fee. If you can’t find one ask how much
the broker will receive from the lender and negotiate on any fee
he wishes to charge you. If the broker is reluctant to discuss these
matters look for another broker.
WHERE TO FIND A BROKER
The obvious source is local and national newspaper advertising.
There is, however, an organisation called IFA Promotions that
carries details of independent financial advisers in your area.
Their website is www.unbiased.co.uk. In this case you will know,
before you start, that your broker is independent.
WHAT TO ASK
Wherever you find your mortgage broker, there are some basic
questions you need to ask before you commit yourself, body and
soul, to their financial advice:
- Is the broker authorised by the FSA to conduct mortgage
business?
- Does he have access to the whole market?
- Does he provide advice?
- Does he charge a fee?
- What procuration fee will the broker receive from a lender?
- Does he charge an up-front admin fee?
- Does he use a packager?
If the answer to any of the first three is no and the answer to
either of the last two is yes, you should definitely go elsewhere.
It is not generally known that mortgage brokers are paid by the
lenders in the form of a marketing allowance (or procuration fee).
This will be anything from 0.25 to 1% of the mortgage amount
and it is paid regardless of whether the broker charges the client a
fee or not. The reason this is not generally known is because
brokers do not generally tell you! And while they are now obliged
to reveal this fact (in the KFI) to residential borrowers and to
disclose the full cash amount received, they will not necessarily do
this for the BTL borrower (see above). The point to remember is
this: if you pay your broker a fee he is paid twice!
In addition to a fee payable on completion, some brokers also
charge an administration fee, payable immediately and usually
non-refundable. This can be anything from £100 to £500. If your
broker feels the need to charge a fee before doing any work for
you, how confident can he be that he will secure a mortgage?
So what should you do? The obvious answer is to find a broker
who does not charge a fee. If you can’t find one ask how much
the broker will receive from the lender and negotiate on any fee
he wishes to charge you. If the broker is reluctant to discuss these
matters look for another broker.
WHERE TO FIND A BROKER
The obvious source is local and national newspaper advertising.
There is, however, an organisation called IFA Promotions that
carries details of independent financial advisers in your area.
Their website is www.unbiased.co.uk. In this case you will know,
before you start, that your broker is independent.
WHAT TO ASK
Wherever you find your mortgage broker, there are some basic
questions you need to ask before you commit yourself, body and
soul, to their financial advice:
- Is the broker authorised by the FSA to conduct mortgage
business?
- Does he have access to the whole market?
- Does he provide advice?
- Does he charge a fee?
- What procuration fee will the broker receive from a lender?
- Does he charge an up-front admin fee?
- Does he use a packager?
If the answer to any of the first three is no and the answer to
either of the last two is yes, you should definitely go elsewhere.
Knowing The Mortgage Broker before invesiting the property
Knowing The Mortgage Broker before invesiting the property
Given the complexity of the buy-to-let (BTL) market a good
mortgage broker can be of considerable benefit in sourcing the
right product from the right lender. He will be up to date with the
latest lending criteria, will know the lenders who have a
drawdown facility or who will lend to limited companies and will
know the product range in the market and where to find the
maximum loan possible. The following points, however, should be
noted when dealing with a mortgage broker.
TIED, PANEL ORWHOLE OFMARKET
There are three categories of mortgage broker. The tied broker
can offer products of one lender only. This is the case for most
banks and building societies. Some brokers work from a panel of
lenders and will offer products from that panel only. Finally, there
are whole-of-market brokers who have access to all lenders in the
market. In each case the broker is obliged to declare his status at
the outset.
It goes without saying given the complexities of the BTL market,
that only the last category – the whole-of-market broker – should
be considered by a potential BTL borrower.
REGULATEDBROKERS
Since 1 November 2005 all brokers are directly regulated by the
Financial Services Authority (FSA) and work under a strict set of
rules and regulations.
REGULATED AND NON-REGULATEDMORTGAGES
While the brokers are regulated, however, the mortgages they
arrange can be regulated or non-regulated! Confused?
In their wisdom the FSA decided that not all mortgages should be
regulated and only regulated mortgages should offer the borrower
full protection if things go wrong. The broker and the lender must
decide at the outset whether the loan is regulated or not. Among
the guidelines provided to help them to decide, the following is the
most important:
Will 40% of the property be occupied by the borrower or his
or her immediate family? If the answer is no then the mortgage
is not regulated. It is obvious, therefore, that BTL mortgages
are not regulated.
The significance of this should not be underestimated. Neither the
lender nor the broker is obliged to follow the strict rules of
disclosure regarding such matters as fees, redemption penalties,
advertising content and so forth. Nor will you be asked, for
example, to state why you wish to choose an interest only
mortgage or to confirm that you are aware of the associated risks.
You may not receive the full, detailed key features illustration
(KFI) provided for residential borrowers. You are, in effect,
entering into a commercial transaction and you are deemed to be
capable of looking after yourself!
ADVISED AND NON-ADVISED
Most brokers (tied, panel or whole of market) give advice on the
appropriate product for your needs, based on a full analysis of the
information you provide. You will encounter brokers, however, who
act solely on a non-advised basis. They do not ask you to provide
detailed information about your circumstances and do not offer any
advice. They simply provide the product you ask for. They are
obliged to inform you that you are buying a product on a nonadvised
or execution-only basis. It goes without saying that you have
no protection whatever in these circumstances if things go wrong.
BROKERS ANDPACKAGERS
A further complication when dealing with a broker is the fact that
some brokers use packagers when sourcing a mortgage. A
packager packages mortgages for lenders. In other words they deal
with all the initial admin such as application forms, valuations,
credit checks and so on, and then pass the packaged mortgage to
the lender for an underwriting decision.
While some lenders see this as a useful way of attracting volume
business (and reducing their costs), there are three major problems
with this arrangement, from the point of view of the borrower:
- Interminable delays! Every lender has certain requirements in
terms of paperwork, proof of income, proof of address, etc. In
many cases, however, they will at least consider the case while
waiting for all the paperwork to turn up. If there is a problem
(unrelated to paperwork still to come) you will know about it
straightaway. When a packager is used, you will not. The
reason is simply that nothing is passed to the lender until
absolutely every piece of paperwork is in. Only then will you
know if there is a problem!
- Brokers who use packagers are at a serious disadvantage: they
cannot talk directly to the lender. They must communicate with
the packager alone and hope that they, in turn, will pass on
immediately their queries to the lender. In practice they will
not. The reason is simply that your case is one of hundreds the
packager is dealing with. The packager has a schedule for
communications with your particular lender. That may be
Tuesday afternoon! In that case your broker’s inquiry could
well reach the lender on Tuesday afternoon, whatever the
packager has told him! To describe this as inefficient would be
a serious understatement.
- There is also the obvious handicap of never being able to talk
directly to the underwriter who will make the final decision on
the case. Underwriters can be persuaded to change their minds
and are open to suggestions. In practice it is impossible to
negotiate in this way through a packager.
Given the complexity of the buy-to-let (BTL) market a good
mortgage broker can be of considerable benefit in sourcing the
right product from the right lender. He will be up to date with the
latest lending criteria, will know the lenders who have a
drawdown facility or who will lend to limited companies and will
know the product range in the market and where to find the
maximum loan possible. The following points, however, should be
noted when dealing with a mortgage broker.
TIED, PANEL ORWHOLE OFMARKET
There are three categories of mortgage broker. The tied broker
can offer products of one lender only. This is the case for most
banks and building societies. Some brokers work from a panel of
lenders and will offer products from that panel only. Finally, there
are whole-of-market brokers who have access to all lenders in the
market. In each case the broker is obliged to declare his status at
the outset.
It goes without saying given the complexities of the BTL market,
that only the last category – the whole-of-market broker – should
be considered by a potential BTL borrower.
REGULATEDBROKERS
Since 1 November 2005 all brokers are directly regulated by the
Financial Services Authority (FSA) and work under a strict set of
rules and regulations.
REGULATED AND NON-REGULATEDMORTGAGES
While the brokers are regulated, however, the mortgages they
arrange can be regulated or non-regulated! Confused?
In their wisdom the FSA decided that not all mortgages should be
regulated and only regulated mortgages should offer the borrower
full protection if things go wrong. The broker and the lender must
decide at the outset whether the loan is regulated or not. Among
the guidelines provided to help them to decide, the following is the
most important:
Will 40% of the property be occupied by the borrower or his
or her immediate family? If the answer is no then the mortgage
is not regulated. It is obvious, therefore, that BTL mortgages
are not regulated.
The significance of this should not be underestimated. Neither the
lender nor the broker is obliged to follow the strict rules of
disclosure regarding such matters as fees, redemption penalties,
advertising content and so forth. Nor will you be asked, for
example, to state why you wish to choose an interest only
mortgage or to confirm that you are aware of the associated risks.
You may not receive the full, detailed key features illustration
(KFI) provided for residential borrowers. You are, in effect,
entering into a commercial transaction and you are deemed to be
capable of looking after yourself!
ADVISED AND NON-ADVISED
Most brokers (tied, panel or whole of market) give advice on the
appropriate product for your needs, based on a full analysis of the
information you provide. You will encounter brokers, however, who
act solely on a non-advised basis. They do not ask you to provide
detailed information about your circumstances and do not offer any
advice. They simply provide the product you ask for. They are
obliged to inform you that you are buying a product on a nonadvised
or execution-only basis. It goes without saying that you have
no protection whatever in these circumstances if things go wrong.
BROKERS ANDPACKAGERS
A further complication when dealing with a broker is the fact that
some brokers use packagers when sourcing a mortgage. A
packager packages mortgages for lenders. In other words they deal
with all the initial admin such as application forms, valuations,
credit checks and so on, and then pass the packaged mortgage to
the lender for an underwriting decision.
While some lenders see this as a useful way of attracting volume
business (and reducing their costs), there are three major problems
with this arrangement, from the point of view of the borrower:
- Interminable delays! Every lender has certain requirements in
terms of paperwork, proof of income, proof of address, etc. In
many cases, however, they will at least consider the case while
waiting for all the paperwork to turn up. If there is a problem
(unrelated to paperwork still to come) you will know about it
straightaway. When a packager is used, you will not. The
reason is simply that nothing is passed to the lender until
absolutely every piece of paperwork is in. Only then will you
know if there is a problem!
- Brokers who use packagers are at a serious disadvantage: they
cannot talk directly to the lender. They must communicate with
the packager alone and hope that they, in turn, will pass on
immediately their queries to the lender. In practice they will
not. The reason is simply that your case is one of hundreds the
packager is dealing with. The packager has a schedule for
communications with your particular lender. That may be
Tuesday afternoon! In that case your broker’s inquiry could
well reach the lender on Tuesday afternoon, whatever the
packager has told him! To describe this as inefficient would be
a serious understatement.
- There is also the obvious handicap of never being able to talk
directly to the underwriter who will make the final decision on
the case. Underwriters can be persuaded to change their minds
and are open to suggestions. In practice it is impossible to
negotiate in this way through a packager.
Selasa, 07 April 2009
The common misconceptions about bridging finance
The common misconceptions about bridging finance
Let us first deal with the widespread misconceptions about
bridging finance:
- It is not a mortgage. Wrong. It is a mortgage.
- It is very fast and simple. Wrong. It is a mortgage.
- It is expensive. Wrong. It is a horrendously expensive mortgage.
No lender will happily advance many thousands of pounds without
security. A loan secured on a property is a mortgage. Bridging
finance is a mortgage. Even if the loan will be needed for a very
short time, the lender will still require a charge on a property so that
they can recover their loan if the borrower defaults.
By definition, therefore, it is not a simple process and, while it is
faster than a traditional mortgage, it is not at all as fast as is
commonly believed. All the normal requirements of a mortgage
are there:
- Proof of ID and address.
- Satisfactory valuation.
- Proof of title.
- Buildings insurance.
- Registration of mortgage deeds.
Having said that, specialist bridging finance companies do tend to
work faster than the banks by, for example, insuring the title to
the property instead of conducting searches through the local
authorities. Such searches can add weeks to the mortgage process.
Again, specialist firms will tend to arrange valuations very quickly
and move the whole process along at a brisker pace than the
banks. While a bank can take up to three or four weeks to
arrange the loan, a bridging finance company could achieve the
same result in, perhaps, seven working days if all the requirements
listed above can be met in that time (claims for a shorter
timescale than this should not be believed). They have, after all, a
powerful incentive to move quickly – their fees.
Let us first deal with the widespread misconceptions about
bridging finance:
- It is not a mortgage. Wrong. It is a mortgage.
- It is very fast and simple. Wrong. It is a mortgage.
- It is expensive. Wrong. It is a horrendously expensive mortgage.
No lender will happily advance many thousands of pounds without
security. A loan secured on a property is a mortgage. Bridging
finance is a mortgage. Even if the loan will be needed for a very
short time, the lender will still require a charge on a property so that
they can recover their loan if the borrower defaults.
By definition, therefore, it is not a simple process and, while it is
faster than a traditional mortgage, it is not at all as fast as is
commonly believed. All the normal requirements of a mortgage
are there:
- Proof of ID and address.
- Satisfactory valuation.
- Proof of title.
- Buildings insurance.
- Registration of mortgage deeds.
Having said that, specialist bridging finance companies do tend to
work faster than the banks by, for example, insuring the title to
the property instead of conducting searches through the local
authorities. Such searches can add weeks to the mortgage process.
Again, specialist firms will tend to arrange valuations very quickly
and move the whole process along at a brisker pace than the
banks. While a bank can take up to three or four weeks to
arrange the loan, a bridging finance company could achieve the
same result in, perhaps, seven working days if all the requirements
listed above can be met in that time (claims for a shorter
timescale than this should not be believed). They have, after all, a
powerful incentive to move quickly – their fees.
Choosing a Best Lender
Choosing a Best Lender
With the default rate of buy-to-let (BTL) mortgages lower than
that of residential mortgages and with interest rates higher, the
BTL market has proved a remarkable success story for lenders. As
a result, competition for this business has increased greatly in
recent years with more and more lenders offering a BTL product
range. How do you choose between them?
MAINSTREAMOR SPECIALIST
For most high-street lenders, BTL is an add-on. Their core
business remains residential mortgages for owner occupiers. For
that reason, when it comes to BTL, they tend to be unduly
restrictive in one way or another. For example, a lender may insist
that some element of personal income, in addition to the rent, be
taken into account when calculating the mortgage to be offered.
Others may lend only to 80% or 75%. Some will limit to just a
few the number of BTL properties you may purchase or put a cap
on the total value of your portfolio. Few will help you if you have
had any credit problems in the past. All will be considerably less
generous in their calculation of the maximum mortgage you can
have. For the serious investor the specialist lender remains the best
choice.
FIRST-TIME BUYER
Most lenders will not offer a BTL mortgage to a first-time buyer.
They expect you to have your own residential mortgage already.
Only one or two will consider first-time buyers. It is vital to check
this point with the lender, directly or through a broker, before
embarking on a decision in principle request or
full application. You will not only be wasting your time but you
will also leave too many footprints on your credit file
INTEREST RATES
Surprisingly, the lowest rates are not generally best for the BTL
investor, for they usually come with unacceptable conditions. A
particularly low initial rate, for example, may tie the borrower in
for a number of years after the rate has changed back to the
higher variable rate. Changing to another lender during this
‘extended tie-in’ will incur a hefty penalty. In addition, as we shall
see, choosing the lowest rate available always means sacrificing the
maximum mortgage available. For most investors the priority is to
borrow as much as possible.
CHARGES
These vary widely from lender to lender. All have an arrangement
fee (which can be added to the loan), but this fee can range from
a few hundred pounds to as much as 1.75% of the amount
borrowed! Because it is added to the loan (few choose to pay it up
front), there is a tendency to disregard it. It is, however, a very
costly add-on as interest is also paid on this amount for the
duration of the mortgage.
In addition to the arrangement fee (sometimes called a completion
fee), some lenders charge a ‘mortgage indemnity guarantee’ fee, or
MIG. This is essentially an insurance premium paid by the
borrower, but for the sole benefit of the lender. If the lender
repossesses the property but fails to recover the full mortgage
amount on resale, the insurance company will pay the lender the
difference (the insurance company can then legally pursue the
hapless borrower to recover the sum it has paid out!).
MAXIMUM MORTGAGE
Most lenders agree that the rent should exceed the mortgage
interest (not capital and interest) by a certain amount. But they
differ on two important counts – the definition of ‘interest ’ and
the margin by which it should be exceeded.
For most lenders the ‘interest ’ is not the rate you pay (which may
be quite low initially) but the standard variable rate (much higher)
charged by the lender. A few lenders, however, base the
calculation on the pay rate. Since this will normally be lower than
the variable rate, the mortgage available is correspondingly
higher. In addition, some lenders require the rent to be 130%,
others just 125% of the mortgage interest. A few will come down
to 115% or 110%. Choosing a lender with the right formula is
crucial if you want the maximum mortgage possible.
With the default rate of buy-to-let (BTL) mortgages lower than
that of residential mortgages and with interest rates higher, the
BTL market has proved a remarkable success story for lenders. As
a result, competition for this business has increased greatly in
recent years with more and more lenders offering a BTL product
range. How do you choose between them?
MAINSTREAMOR SPECIALIST
For most high-street lenders, BTL is an add-on. Their core
business remains residential mortgages for owner occupiers. For
that reason, when it comes to BTL, they tend to be unduly
restrictive in one way or another. For example, a lender may insist
that some element of personal income, in addition to the rent, be
taken into account when calculating the mortgage to be offered.
Others may lend only to 80% or 75%. Some will limit to just a
few the number of BTL properties you may purchase or put a cap
on the total value of your portfolio. Few will help you if you have
had any credit problems in the past. All will be considerably less
generous in their calculation of the maximum mortgage you can
have. For the serious investor the specialist lender remains the best
choice.
FIRST-TIME BUYER
Most lenders will not offer a BTL mortgage to a first-time buyer.
They expect you to have your own residential mortgage already.
Only one or two will consider first-time buyers. It is vital to check
this point with the lender, directly or through a broker, before
embarking on a decision in principle request or
full application. You will not only be wasting your time but you
will also leave too many footprints on your credit file
INTEREST RATES
Surprisingly, the lowest rates are not generally best for the BTL
investor, for they usually come with unacceptable conditions. A
particularly low initial rate, for example, may tie the borrower in
for a number of years after the rate has changed back to the
higher variable rate. Changing to another lender during this
‘extended tie-in’ will incur a hefty penalty. In addition, as we shall
see, choosing the lowest rate available always means sacrificing the
maximum mortgage available. For most investors the priority is to
borrow as much as possible.
CHARGES
These vary widely from lender to lender. All have an arrangement
fee (which can be added to the loan), but this fee can range from
a few hundred pounds to as much as 1.75% of the amount
borrowed! Because it is added to the loan (few choose to pay it up
front), there is a tendency to disregard it. It is, however, a very
costly add-on as interest is also paid on this amount for the
duration of the mortgage.
In addition to the arrangement fee (sometimes called a completion
fee), some lenders charge a ‘mortgage indemnity guarantee’ fee, or
MIG. This is essentially an insurance premium paid by the
borrower, but for the sole benefit of the lender. If the lender
repossesses the property but fails to recover the full mortgage
amount on resale, the insurance company will pay the lender the
difference (the insurance company can then legally pursue the
hapless borrower to recover the sum it has paid out!).
MAXIMUM MORTGAGE
Most lenders agree that the rent should exceed the mortgage
interest (not capital and interest) by a certain amount. But they
differ on two important counts – the definition of ‘interest ’ and
the margin by which it should be exceeded.
For most lenders the ‘interest ’ is not the rate you pay (which may
be quite low initially) but the standard variable rate (much higher)
charged by the lender. A few lenders, however, base the
calculation on the pay rate. Since this will normally be lower than
the variable rate, the mortgage available is correspondingly
higher. In addition, some lenders require the rent to be 130%,
others just 125% of the mortgage interest. A few will come down
to 115% or 110%. Choosing a lender with the right formula is
crucial if you want the maximum mortgage possible.
The principal products on offer in the buy to let BTL Market
The principal products on offer in the buy-to-let (BTL) market
are the following:
-discounted
-fixed
-base-rate tracker
-variable.
A discounted rate (i.e. a discount on the current variable rate)
will normally be offered for a period of two or three years, after
which the rate reverts to the variable. During the discount period
the pay rate can move up or down in line with the lender’s
variable rate. It is not fixed. There will be a penalty for redeeming
all or part of this mortgage during the discount period.
A fixed rate is just that – fixed, immovable. Fixed-rate terms are
generally from one to five years, with the longer fixed rates the
most expensive. There is a penalty for redeeming all or part of the
loan during the fixed period. There may also be a non-refundable
fee for booking the fixed rate at the outset.
Base-rate trackers (BRTs) are linked to the Bank of England base
rate (usually 0.5–1% above) and will follow that rate up and
down. They can apply for the full term of the mortgage or for a
limited period. A BRT will generally be cheaper than the variable
rate. Many BRTs have no redemption penalty at all. Those with a
limited BRT term will usually charge a fee for redemption.
The lender’s variable rate is the standard rate available on all its
products. It can be varied at any time and will be more expensive
than the other products offered. There are no redemption
penalties.
The choice of product will depend on your circumstances but the
following points are worth noting:
- If it is important to be able to redeem the mortgage in the
early years, then the variable rate or a BRT (without a
redemption penalty) are the only suitable products. The others
will tie you in for a number of years with severe penalties (as
high as 5%) for early redemption. This is particularly
important if you think it likely that you will remortgage with
another lender during the period to which the redemption
penalty applies.
-You may be quite happy to stay with a lender for the duration
of any special deal on offer. It is unlikely, however, that you
will want to be tied to the same lender for a number of years
after your deal has come to an end (and you are back on the
lender’s more expensive variable rate). That is an extended tiein.
It is surprising how often this detail is missed when a
tantalisingly cheap interest rate is on offer. Extended tie-ins
should be avoided at all costs. There are no free lunches!
are the following:
-discounted
-fixed
-base-rate tracker
-variable.
A discounted rate (i.e. a discount on the current variable rate)
will normally be offered for a period of two or three years, after
which the rate reverts to the variable. During the discount period
the pay rate can move up or down in line with the lender’s
variable rate. It is not fixed. There will be a penalty for redeeming
all or part of this mortgage during the discount period.
A fixed rate is just that – fixed, immovable. Fixed-rate terms are
generally from one to five years, with the longer fixed rates the
most expensive. There is a penalty for redeeming all or part of the
loan during the fixed period. There may also be a non-refundable
fee for booking the fixed rate at the outset.
Base-rate trackers (BRTs) are linked to the Bank of England base
rate (usually 0.5–1% above) and will follow that rate up and
down. They can apply for the full term of the mortgage or for a
limited period. A BRT will generally be cheaper than the variable
rate. Many BRTs have no redemption penalty at all. Those with a
limited BRT term will usually charge a fee for redemption.
The lender’s variable rate is the standard rate available on all its
products. It can be varied at any time and will be more expensive
than the other products offered. There are no redemption
penalties.
The choice of product will depend on your circumstances but the
following points are worth noting:
- If it is important to be able to redeem the mortgage in the
early years, then the variable rate or a BRT (without a
redemption penalty) are the only suitable products. The others
will tie you in for a number of years with severe penalties (as
high as 5%) for early redemption. This is particularly
important if you think it likely that you will remortgage with
another lender during the period to which the redemption
penalty applies.
-You may be quite happy to stay with a lender for the duration
of any special deal on offer. It is unlikely, however, that you
will want to be tied to the same lender for a number of years
after your deal has come to an end (and you are back on the
lender’s more expensive variable rate). That is an extended tiein.
It is surprising how often this detail is missed when a
tantalisingly cheap interest rate is on offer. Extended tie-ins
should be avoided at all costs. There are no free lunches!
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