Holiday payments on your mortgage June 17, 2009

What is a mortgage payment holiday?

Many of today’s mortgages come with a feature known as a mortgage payment holiday. This allows the borrower to, on occasion, delay making a mortgage payment for a set period of time. A mortgage payment holiday must be agreed by the lender and it’s only ever a temporary arrangement.

mortgage holiday

Why would I take a mortgage holiday?

Basically, during months when you know money will be tight, you can take the pressure off yourself a little by deferring mortgage payments and allocating that money elsewhere. For example, to cover Christmas bills, to pay for a holiday, or to get your car fixed.

How long does the mortgage holiday last?

The length of the break will depend on your mortgage lender. For example, Northern Rock allows a one-month payment holiday every year, while Halifax offers up to six months over the life of the loan.

Factors that determine how long a holiday you can take include what lender you’re with, the features of your particular mortgage deal, and payment history.

The downside of mortgage holidays

There’s no such thing as a free lunch – or a free holiday! When you suspend payments, the interest on your loan continues. This means at the end of a mortgage holiday, your mortgage debt will be higher because any unpaid interest will be added. Therefore, when you recommence paying the mortgage, repayments will increase.

Find out more about how to apply for a mortgage holiday.

Guide to Equity Release June 4, 2009

The mortgage product market is so highly competitive and the range of offers so diverse, that it’s almost inevitable that some offerings come in for a bad press from time to time. One of these attracting perhaps more than its fair share of bad press in recent years is the equity release arrangement.

Very simply, equity release is a scheme that allows elderly homeowners to free up some or all of the value (the equity) tied up in their place of residence. Despite their indisputable popularity, the Consumers’ Association magazine Which? Has branded the schemes as expensive and inflexible, to be used only as a last resort.

Although there are currently more than 40 variants of equity release schemes, they all fall into one or other of two broad categories – “lifetime mortgages” and “home reversion” schemes. In the former, the owner is offered a mortgage secured against the property for the term of his lifetime. This is repaid by rolling up all the interest payments which fall due either when the owner dies or when the property is sold. The mortgage comes with a guarantee that this repayment figure will never be greater than the market value of the home and such lifetime mortgages are subject to regulation by the Financial Services Authority.

With a home reversion scheme, the homeowner sells part or whole of his property to a finance company, for a cash sum or an annuity, but continues to enjoy lifetime enjoyment of his home (or until he moves out), more or less as a rent-free tenant. When the occupier dies or moves out, the finance company sells the property to recover its outlay and passes on any remaining proceeds to the occupier’s estate. Currently, such home reversion schemes are not subject to regulation by the Financial Services Authority.

So, what is wrong with either of these schemes, both of which give elderly homeowners the chance to enjoy the considerable amount of equity likely to be tied up in their home (when most properties are likely to have doubled in value since as recently as the 1990s)?

The answer – as is usually the case with all financial services products – is that there is nothing at all wrong in principle; it’s all down to the detail of cost and benefit. In other words, it’s absolutely imperative to do the sums, consider all the alternatives, and judge whether the amount being offered by way of a lifetime mortgage or home reversion fairly represents the present and future value of the property. Critics have described the schemes as “expensive” because of the generally “high” rates of interest attached to lifetime mortgages and the generally “low” prices offered to homeowners in home reversion schemes.

But the terms “high” and “low” are of course relative. Competition with the market and the proliferation of products to suit different needs means that “fair” is whatever the market will sustain.

Given the particular nature of these types of scheme, it makes sense to discuss any interest in equity release not only with a trusted independent financial adviser, but also with members of your own family. Clearly, many such schemes will affect any expectations of inheriting the “family home” that other family-members might have. Similarly, any younger partner, relative or friend who might be sharing your home with you at present might (depending on the terms of the particular scheme) be obliged to find other housing if you die.

So, here’s what to remember about Equity Release schemes:

* Suited for older homeowners who may have a lot of equity tied up in their home
* There are two types: lifetime mortgages and home reversion schemes
* This type of borrowing has attracted a lot of negative press due to high costs, so always thoroughly research the product before signing up
* If you sign up to an Equity Release scheme and have friends or relatives living with you, check out what their rights to the property would be when you die to ensure they are not without a roof over their head.

Rent v Buy after the Credit Crunch May 6, 2009

To buy or not to buy? That’s the question being asked in rented homes up and down the country. Conventional wisdom says it’s better to be a homeowner than a home renter, because your monthly home payment goes towards an asset that you own. But in today’s topsy-turvy, credit-crunch world, is it always better to buy than to rent?

For Rent

Renting Pros

* Recent research by Abbey shows it’s cheaper to rent a typical first-time buyer property than to buy one in London and East Anglia.

* You don’t have the worry of shelling out for unexpected maintenance bills, it’s just the household utilities and council tax to keep on top of. If it’s your home, you’re the landlord, and the cost is all on you!

* Renting gives you the flexibility and freedom to relocate whenever and wherever you need – and at the drop of a hat if necessary. Homeowners are likely to face a long wait to sell their property in the current market.

* Renting might be a better option for anyone worried about the security of their job. Most rental contracts last six months and sometimes offer notice periods, giving people whose circumstances change, the option to find somewhere cheaper to live more quickly if the worst should happen.

* If you need to relocate to a new area, renting a place gives you a chance to get to know the location without tying you down to staying there long term.

* While owning your own home might make better financial sense in the long run, it’s a big commitment. If you rent and fancy taking a career break to travel the world, for example, there’s nothing to stop you!
Renting Cons

* One of the biggest downsides to renting are the fees you have to pay upfront. Having to stump up deposits and rent in advance can be tricky.

* Money paid in rent pays off your landlord’s mortgage, not yours, leaving you with nothing to show for your cash.

* There’s no guarantee that you will be able to stay in the property when your six month tenancy runs out. In the worst-case scenario, you could find yourself homeless even sooner if your landlord fails to keep up with their mortgage, leaving you with all the hassle and cost of having to find somewhere else to live.

* Getting your deposit back from the landlord can be difficult. You’ll often have to shell out for professional cleaners and ensure the whole house is practically perfect in order to receive a full refund.

* Putting your personality into a property can be hard if you’re not allowed to decorate. Some landlords will let you paint rooms, but others ban you from hanging new pictures on the walls, let alone refreshing the colour scheme.

* When something does go wrong, it’s up to the landlord to sort it. While this can be blissful because someone else has to deal with the problem and pay for it, you may have to wait for them to sort it out, which doesn’t always happen instantly.
Buying Pros

* Property is cheaper. House prices have fallen by more than 20% since the market peaked, so if you buy now, you’re definitely getting a better deal than you would have done 18 months ago.

* Interest rates have been slashed to a record low, making mortgage repayments more affordable than they have been for years. But one thing you can be sure about is that rates will be on their way back up at some point in the future, so it might be worth considering taking out a fixed rate mortgage if you want to ensure your payments don’t rise. Compare mortgage deals for a great rate with Confused.com.

* The money you spend on housing every month goes towards paying off your own mortgage. This is an investment in your future, rather than your landlord’s, so you’re gradually acquiring an asset.

* Recent research by Abbey has shown it’s now cheaper to buy a typical first-time buyer property than rent one in all areas of the country except East Anglia and London.

* In the current climate, sellers are prepared to accept hefty discounts on their asking prices, particularly if they think the value of their home is falling by the day. Be warned though, as soon as the market stabilises, people will be less likely to do this.

* The Government introduced a one-year stamp duty holiday in September last year for properties costing up to £175,000 – saving people buying a home of this value £1,750.

* Being a homeowner can help build up your credit rating, as you can demonstrate to potential lenders that you’re able to keep up with your monthly debt commitments.

* If you have a spare room you could always make some extra cash by renting it out. Under the Government’s rent a room scheme you can receive £4,250 a year tax-free.
Buying Cons

* The costs associated with buying a home are big. There’s a temporary stamp duty exemption on properties costing up to £175,000, but you will have to pay the tax on properties costing more than this. There are also solicitors’ fees and moving costs to consider, as well as mortgage arrangement fees, which all add up.

* The days of lenders being happy to advance high loan-to-value (LTV) mortgages are long gone, so you will have to save up a deposit if you want to buy a home. A few mortgage deals still remain for people with a 5% deposit but you will pay high rates on these. If you’re looking for a competitive deal, you will need to put down at least 20% of your home’s value – no small undertaking.

* Whereas renters don’t have the worry of shelling out for unexpected maintenance bills, if it’s your home, you’re the landlord, and the cost is on you! You will also have to pay for building insurance.

* It’s difficult to sell properties in the current market, making it hard to change location if you need to move in a hurry, especially if you’re holding out for a decent price.

* It’s less easy to take a career break if you own a property as you’re tied down to a mortgage. However, you could consider renting out your home while you are away, and you might even make some money doing this if you have a low mortgage.

* You could fall into negative equity, meaning the value of your home drops below that of your mortgage, making it difficult for you to sell up and move on if you want to.
The last word

In the current market, it’s important to try to disengage yourself from the mania surrounding homeownership. Instead, focus on whether now is the right time for you to buy a home, or whether your circumstances mean you’d be better off renting for a bit longer.

Rate Cuts Left you Better Off? 4 Things to do with Your Mortgage Savings April 21, 2009

If the steep drop in interest rates means you now have a cheaper mortgage, here are some tips on what to do with that extra cash.

1.   Mortgage overpayments

Overpaying your mortgage each month will clear the debt quicker and potentially knocking years off your mortgage term.

For example, a borrower with a £150,000 tracker mortgage will have seen their monthly repayments drop by nearly £400 since interest rates peaked. Using this surplus money to overpay the mortgage each month, and making the same overpayment for the rest of the term, could reduce a 25-year mortgage by 11 years.

However, check first whether your mortgage provider will level any penalty fees for making overpayments.

2.   Pay off other debt

Often, loan and credit card repayments will be subject to much higher interest rates than a mortgage. In general, you should try and repay debts with the highest interest rates first. So it might not make sense to prioritise making overpayments on your mortgage, if you have outstanding credit card or loan debt on which you’re paying double-digit interest. Basically, do your sums and see what the most effective use of the surplus cash is.

3.   Save for a rainy day

While it’s generally recognised that paying down debt should be a priority, it’s also worth considering saving some of the extra money you have each month.

It’s a good idea to aim for savings of between four to six months’ pay to set aside for emergencies, or in case you’re unable to work or lose your job. In the current economic climate, even though savings interest rates are generally not as good as they were pre-credit crunch, having a bit of extra cash stashed away for a rainy day could provide a vital safety blanket.

It’s also worth saving towards events or purchases in the future, such as buying a new car that you might previously have taken out a loan to fund. Using your own savings is not only cheaper and more prudent than borrowing the cash, the credit crunch has made borrowing more difficult as lenders have tightened their lending criteria and increased their repayment interest rates.

4.   Pensions

It’s easy to push pensions to the back of your mind when planning finances, after all retirement may be decades away. But where pensions are concerned it pays to start saving early.

But how much to put aside? Only you will know how much you can afford, but the more you save, the more comfortable your retirement will be.

One suggestion of how much to put into a pension is to set aside a percentage of your salary that’s equivalent to at least half your age each month.

This might seem like a scary amount but the good news is your employer may help with contributions, and for every 80p a basic rate taxpayer saves and every 60p a high rate one puts into a pension, the Government will top up by £1 through tax relief.

Though, be aware that once you’ve put money into a pension, it’s locked up until you retire.

Remortgages : The basics April 21, 2009

For all the strange and seemingly confusing jargon, it’s important to remember that shopping for a mortgage is essentially just like for anything else. At its simplest, you want to pay as little as possible for the best you can get. In the same way that you wouldn’t want a contract that tied you into having to shop at just one supermarket for the next 30 years, so you don’t have to be tied into one and only one mortgage provider for the whole duration.

The process of remortgaging, therefore, recognises that mortgage lenders are in a highly competitive financial market. A whole range of different mortgage products are on offer, at different rates, to suit the varying needs of different borrowers, whose precise needs are going to change over the years.

Remortgaging, essentially, allows an existing mortgage borrower to switch lenders or to persuade an existing lender to offer a better deal.

And it’s precisely this “better deal” that is the sole motive for remortgaging. You remortgage to get a better deal. To return to our analogy with supermarkets, remortgaging allows you to shop around for the best deal that suits your needs and your pocket right now. And, as often as not, you’ll make the change because you can get just what you want at a better price – you can save money. And given the scale of your investment in a mortgage, those savings can be truly significant, running in to literally thousands of pounds! More than that, if you continued to shop around and changed to even better terms every so often, you could end up slashing loads off your mortgage.

But it’s not only cash savings that can make remortgaging a sensible option. Perhaps the terms and conditions of your current mortgage are no longer the most appropriate to your needs or maybe they are just too restrictive. Remortgaging can be a way to secure the terms that are suitable for you right now, whatever the ones that might have seemed reasonable when you first took out your mortgage.

Is this really too good to be true? Is there a downside to remortgaging? Well, it’s true that there’s a cost attached to engaging with the market more proactively and more flexibly. It’s a cost which you should be aware of, but not one which should necessarily dissuade you from remortgaging. As with any economic endeavour, it’s really just a question of ensuring that any gains outweigh the costs involved. The costs arise because of the penalty you’ll face in leaving your current lender, the fee you’ll need to pay for signing up with the new lender, together with any necessary legal expenses.

In a short article such as this, it’s clearly not possible to cover every angle of a subject as involved as remortgaging. Nevertheless, if the prospect is one you feel worth pursuing, the steps are really quite straight forward:

1st: Obtain a quote from your current mortgage provider, including any penalty for early termination. If they offer improved terms, conditions or repayment rates, there might not be any need to swap lenders anyway;

2nd: Shop around for any new mortgage offers that are appealing and obtain detailed quotes from these lenders;

3rd: Add together the penalty fees from your existing lender and the joining fees required by any new lender to calculate the cost of your remortgage;

4th: Calculate your mortgage repayment savings over a given number of years, subtract the costs you arrived at in the 3rd step, and see whether it’s worth making the switch;

5th: If you decide to proceed, make the formal application to the new lender you’ve chosen

6th: Allow between one and two months for the valuation of your property to be made and for any necessary legal processes;

7th: Sign the new mortgage deed, sit back and enjoy the new deal!

Property Crunch April 21, 2009

Now more than ever we have lots of people interested in fianance, with the credit crunch and subsequent economic woes pushing the usual boring subject of mortgages to the forefront of everyone’s minds.  How will the current crises affect how people buy  houses in the future?  This blog will attempt to find out.