The Importance of Affordability

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In 2014, the Financial Conduct Authority (FCA), the financial services industry regulator, brought in new rules for mortgage advisers and lenders to improve the process of getting a mortgage and prevent these past problems.

These new, stricter rules require your lender to check you can afford your repayments now and in the future. To do this, they will need information about your income and outgoings. You will have to tell them if you expect your income and outgoings to change in a way that means you’ll have less to spend on your mortgage payments. You will also need to give your mortgage lender evidence of your income.

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Types of Mortgages

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Variable rate

Your monthly payment fluctuates in line with a Standard Variable Rate (SVR) of interest, set by the lender. You probably won’t get penalised if you decide to change lenders and you may be able to repay additional amounts without penalty too. Many lenders won’t offer their standard variable rate to new borrowers.

Tracker rate

Your monthly payment fluctuates in line with a rate that’s equal to, higher, or lower than a chosen Base Rate (usually the Bank of England Base Rate). The rate charged on the mortgage ‘tracks’ that rate, usually for a set period of two to three years. You may have to pay a penalty to leave your lender, especially during the tracker period.

You may also have to pay an early repayment charge if you pay back extra amounts during the tracker period. A tracker may suit you if you can afford to pay more when interest rates go up – and you’ll benefit when they go down. It’s not a good choice if your budget won’t stretch to higher monthly payments.

Fixed rate

With a fixed rate mortgage the rate stays the same, so your payments are set at a certain level for an agreed period. At the end of that period, the lender will usually switch you onto its SVR (see ‘Variable rate’). You may have to pay a penalty to leave your lender, especially during the fixed rate period. You may also have to pay an early repayment charge if you pay back extra amounts during the fixed rate period.

A fixed rate mortgage makes budgeting much easier because your payments will stay the same - even if interest rates go up. However, it also means you won’t benefit if rates go down.

 

Discounted rate

Like a variable rate mortgage, your monthly payments can go up or down. However, you’ll get a discount on the lender’s SVR for a set period of time, after which you’ll usually switch to the full SVR. You may have to pay a penalty for overpayments and early repayment, and the lender may choose not to reduce (or delay reducing) its variable rate – even if the Base Rate goes down.

Discounted rate mortgages can give you a gentler start to your mortgage, at a time when money may be tight. However, you must be confident you can afford the payments when the discount ends and the rate increases.

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Flexible mortgages

These schemes allow you to overpay, underpay or even take a payment ‘holiday’. Any unpaid interest will be added to the outstanding mortgage; any overpayment will reduce it.  Some have the facility to draw down additional funds to a  pre-agreed limit.

Offset mortgages

Taking out an offset mortgage enables you to use your savings  to reduce your mortgage balance and the interest you pay on it. For example, if you borrowed £200,000, but had £50,000 in savings, you would only be paying interest on £150,000. Offset mortgages are generally more expensive than standard deals, but can reduce your monthly payments, whilst still giving you access to your savings.

Government-backed schemes

Over recent years the government has backed a number of schemes – such as ‘Help to Buy’ - to support homebuyers. We can explain the details of these schemes and whether you can benefit from them.

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Repayment methods

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Capital repayment

This is the most appropriate method for repaying a residential mortgage. Your monthly payments will comprise a portion to pay the interest on the money you’ve borrowed, as well as a portion to repay the capital sum (the amount you borrowed).
The benefit of capital repayment is that you can see the mortgage reducing each year (albeit very slowly in the early years) and you are guaranteed to repay the debt at the end of the mortgage term, as long as payments are maintained.

Interest only

If you opt for an interest only loan, your monthly payments  will only cover the interest on the mortgage balance. The capital (the amount you borrowed) will remain the same and will need to be repaid at the end of your mortgage term. This means you will need a separate investment or combination of investments to generate the capital required, and you will need to prove that you can afford to do this.

Lenders are becoming increasingly strict in terms of the types of investments they will accept as a repayment vehicle. For an  interest only mortgage, the lender will need to see your plan for repaying the loan when the interest only period ends. If you  fail to generate enough to repay your mortgage by the end of  the mortgage term, you may be forced to sell your property.
 

Summary of main costs you will incur:

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• Valuation Fee

• Arrangement Fee

• Legal costs and fees

• Stamp Duty

• Our advice fee

• Early Repayment Charge

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