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Pros and Cons of Mortgage types

Nimrod103
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Pros and Cons of Mortgage types

#148167

Postby Nimrod103 » June 26th, 2018, 5:05 pm

My daughter has asked me to advise her on what mortgage to get, but I know nothing about it,since I haven't had a mortgage since Abbey National was a building society.

She and her husband are in good steady employment, though she works only 3 days/week at present. Most best buy mortgages from MoneySavingsExpert seem to consist of a discounted fixed term rate, an arrangement fee of about £1000, before moving onto a lenders SVR which seems to be in range 3.94 to 5.89%. The best deals come from HSBC for a 2 year fix. Would there be any advantage to go through a broker? Is it likely they could get better deals without a fix, as they don't really need that certainty in the first few years?

It all seems so complicated now, that it is hard to truly judge what is the best deal.

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Re: Pros and Cons of Mortgage types

#148391

Postby Loup321 » June 27th, 2018, 3:20 pm

I'm surprised no one else has replied yet, but here are my views. Lots is my opinion, but it might help you get started.

I'm going to ignore interest-only mortgages, because I think they are hard to come by these days and I dislike them.

You can get fixed rates, discounted rates and tracker rates. You also have the lenders standard variable rate (or basal mortgage rate, or standard mortgage rate or whatever they decide to call it)
    *Fixed rates are fixed, and the longer the term of the fix the higher the rate, but they do give assurance thet you will pay the same amount each month for the ficed term.
    *Discounted rates are so many percent points below the lenders standard variable rate. They change as the lender changes its default rate.
    *Tracker rates do not depend on the whim of the lender, but on the Bank of England Base Rate. They will be so many percentage points above the BoE base rate (in the past, they could have been below the base rate, but you won't get that at the moment).
Most lenders change their own variable rates in response to the Bank of England rate, but it isn't a directly proportional change. When the Bank of England rate was high, lenders standard variable rates were a couple of percentage points below it. Now that the Bank of England rate is so low, lenders are typically 4-5% above it. The difference between Discounted and Tracker rates could change if the BoE rate changes A LOT. I suppose it also depends on how honourable you think your lender will be - remember, they're not out to help you, they are out to make money for their shareholders (which could be you if it's a Building Society).

You need to consider the term of the deal and the fee for the deal to see what is good value.

If you or your daughter are good with Excel, make a spreadsheet that shows how much you pay each month over a 25 year term (which is typical) for a variety of products available, and you will see which offer better value. The fee is usually added to the initial loan cost (obviously, you could pay the fee up front, but you could conversely take a lower loan by having a larger deposit, so it's the same really). Put the rate in a separate column, because it will change after 2, 3, 5 or 10 years.

Personally, I like Nationwide's products, and they have online calculators that will show you what your monthly payments will be for a variety of loan scenarios. This is useful to check your spreadsheet is working correctly.

Then you need to gamble on whether you think the Bank of England will raise the base rate. How much will they raise it by, and when? I'll just pop and get my crystal ball and tell you the answer. It's on it's way by unicorn post.

Be aware that if you have access to suplus cash you could pay small amounts off your mortgage early. There are usually penalties for paying back money early in the initial term of the loan, but you can pay back small amounts. Check each product carefully. My mortgage allows me to pay back up to 10% of the original sum borrowed each year without penalty, but I can't get the money back if I suddenly need it. It used to be that I could overpay £500 at a time, and borrow back whenever I needed to up to the total amount I had overpaid.

There are products I'm not familiar with, like guarantor mortgages and offset mortgages. Guarantor mortgages are where a homeowner guarantees the borrower will pay the money each month, if they have a bad credit rating. I'm not sure of the value to lenders, because they are lending with a WHOLE HOUSE as security! Offset mortgages are where you can use your savings to reduce the capital owed, and hence the interest due each month, but still have access to the savings.

Do you need a broker? Sometimes. If you have anything unusual, like you're self-empolyed or you're trying to buy a flat in an ex-Council block, they can be very helpful. We used a broker, and I was adamant that I wanted to go directly onto the lenders standard variable rate (because it was lower than the current tracker rate), and was told I couldn't but I did need to take out exhorbitantly price life and critical illness cover to cover the entire cost of the loan, as did my partner. I wasn't impressed, particularly as we were both in good jobs and had no dependents.

I hope that's useful to get you and your daughter started understanding the sorts of products available. It might be worth a sit down with your own bank's mortgage adviser to explain all the different product types. They will have no obligation, but will come away understanding a lot more than I have explained here.

All the best,

LouP

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Re: Pros and Cons of Mortgage types

#148395

Postby Meatyfool » June 27th, 2018, 3:39 pm

Mortgage free for quite a while so no advice on what to get in today's market but I will say what worked for me!

Current account mortgage. Altogether lousy and to be avoided if the couple are not careful with money.

If however, there is a chance that income levels will allow them to save well, then the offset mortgage is an ideal place to put those savings. You get a "debt" rate of interest, the interest is in effect tax free and if one of them is a higher rate tax payer they can avoid having to pay the "extra" tax on the savings they would otherwise have had to pay - because they didn't earn any credit interest!

Once you see the "overdraft" on your mortgage getting lower month after month, some people (ie my wife and I) get into saving more and more - what the Dealing with Debt board at the old place called "snowballing".

Without a doubt, the best financial product I ever had.

As I said, mortgage has been paid off for a long time, but I still run my current account mortgage as my main bank account so if necessary I could write out a cheque and dip into it, any time.

Meatyfool..

Nimrod103
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Re: Pros and Cons of Mortgage types

#148544

Postby Nimrod103 » June 28th, 2018, 9:43 am

Thanks for the helpful replies. I like the idea of doing a spreadsheet for comparison purposes. It is my sort of language.

I can understand that fixed rates give you certainty on the amount being repaid (for a limited period), but it does lock you in. In effect you are taking a bet against the lender, that you think interest rates will rise faster than the lender does. Seeing as the lender probably knows more than you do, and that UK interest rates are showing signs of moving up much more slowly than people thought even 6 months ago, I find that bet rather unappealing.

Discount rates need to be evaluated properly if they involve a large upfront fee. Do mortgages always involve an upfront fee? Maybe the fee just covers the discount given?

I would have thought that the most important thing is to be on as low a SVR as possible for the life of the mortgage. Am I missing something?

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Re: Pros and Cons of Mortgage types

#148546

Postby Meatyfool » June 28th, 2018, 9:47 am

Once upon a time, there was no (or very small) one off fee on taking a mortgage.

Now borrowers are more savvy AND competition/regulation/other(!) is fierce, the banks have to make their money somehow, and the fee is one way to get them to do it.

Meatyfool..

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Re: Pros and Cons of Mortgage types

#148547

Postby Alaric » June 28th, 2018, 9:51 am

Nimrod103 wrote:I would have thought that the most important thing is to be on as low a SVR as possible for the life of the mortgage. Am I missing something?


That would be the simple way to do it. Alternatively there's the need to remortgage every couple of years or so. At least two dangers in this, one being that you pay a shed load of arrangement fees over the years, another being that your circumstances or the rules operated by lenders may change leaving you unable to obtain fresh finance, either at all, or at a competitive rate.

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Re: Pros and Cons of Mortgage types

#148567

Postby UncleIan » June 28th, 2018, 11:07 am

Nimrod103 wrote:I would have thought that the most important thing is to be on as low a SVR as possible for the life of the mortgage. Am I missing something?


Not much no. Though it depends how likely they are to be bothered to switch mortgages to a new low SVR or not. Total cost of ownership? Is that the phrase? I.e. how much you pay back over the life of the mortgage is the important thing.

Also, what are their likely future circumstances going to be? They likely to move a lot? They likely to have pay rises or bonuses?

A spreadsheet is a dull but really really useful visual way of showing someone what could happen. I sorted one out for myself when I cashed in my unspectacular endowments to pay for an extension. I knew I had no other means of paying off my interest only mortgage except either saving or investing one way, or using overpayments to make it a virtual repayment mortgage. I used a spreadsheet to model different scenarios, like interest rates rising mainly, but also you could also see what difference overpayments made, or paying more each month, you could see the date of when it was all paid back change as you adjusted payments. That really focussed the mind.

Nimrod103
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Re: Pros and Cons of Mortgage types

#148627

Postby Nimrod103 » June 28th, 2018, 2:11 pm

A quick question. Looking at the Nationwide mortgage page online, it lists a series of alternatives at 2, 3, 5 and 10 year fixed/trackers. For each there are two options, one with and one without an upfront product fee. The price over the fixed period is calculated for these two options, and the result is quite similar.
In the case of a 2 year tracker (for the amounts my daughter wants to borrow) - without fee is £19400 and with fee £ (18506+999 = 19505). Paying a fee up front seems to increase the overall cost in the fixed period (£105 higher). I feel I must be missing something here, there seems no reason to go down the upfront fee route.

PaulBullet
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Re: Pros and Cons of Mortgage types

#149375

Postby PaulBullet » July 2nd, 2018, 8:24 am

From my experience the fee's tend to be fixed so you have to borrow enough to make the difference significant over the time period.

basically low fee + long fix + big amount = pay fee

high fee + short fix + small amount = don't pay fee

also if you have a good LTV then you tend to get good rates without fees

Paul

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Re: Pros and Cons of Mortgage types

#149638

Postby Pastcaring » July 3rd, 2018, 7:35 am

Nimrod103 wrote:My daughter has asked me to advise her on what mortgage to get, but I know nothing about it,since I haven't had a mortgage since Abbey National was a building society.

She and her husband are in good steady employment, though she works only 3 days/week at present. Most best buy mortgages from MoneySavingsExpert seem to consist of a discounted fixed term rate, an arrangement fee of about £1000, before moving onto a lenders SVR which seems to be in range 3.94 to 5.89%. The best deals come from HSBC for a 2 year fix. Would there be any advantage to go through a broker? Is it likely they could get better deals without a fix, as they don't really need that certainty in the first few years?

It all seems so complicated now, that it is hard to truly judge what is the best deal.


Depends how it works in the UK.The KISS rule is always the best.

A broker makes his money by putting you into the best ( for him or you ) mortgage,conflict of interest.Commission means it is more important his family gets fed than your family

Plain vanilla mortgage,try to get one that has an offset.That compounds wonderfully.Better compounding occurs by paying the mortgage every fortnight rather than monthly.That way you are paying 13 monthly payments rather than twelve.Takes around 7 years off the length of the mortgage

If they are making it complicated then keep away from it.Rules never change,the more you pay off that mortgage in the early period,the more money you save.

People don' t seem to realise that if the mortgage is say £100,000 @ 4% then the first £ 80 a week is interest.Without spread sheets etc it is just mental arithmetic

The crossover point is where more money goes
into paying the money off,rather than paying the interest, 17- 18 years in the future

Mortgages are still very simple

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Re: Pros and Cons of Mortgage types

#149668

Postby djbenedict » July 3rd, 2018, 12:08 pm

I would just reiterate the recommendations for offset mortgages. Like meatyfool, I regard having an offset mortgage as one of my best ever financial decisions. It kind of automatically coverts one from being a spender to being a wealth accumulator.


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