Standard Variable Rate
Based on BOE rate with an admin fee
- If the BOE rate reduces the lender doesn’t have to pass it on to the borrower
Fixed Rate
- Funded by the wholesale (Interbank) market
- Arrangement fees - £100 - £2000
- High early redemption charge
- Early repayment charges apply
+ number of months interest payable to exit the mortgage early - Overhang is where the early redemption charge applies beyond the fixed rate period ( usually when it’s linked to a purchase of linked products)
Discounted Rate
- A specific percentage lower than the SVR
- Usually a 5 year term and then switches to SVR
- Arrangement fees are £100 - £2000
- Early redemption fees apply
- This doesn’t defend against rising rates
Cap & Collar Rate
- Arrangement fees £100 - £2000
- Early redemption fees apply
LIBOR Tracker Rate
- Rates are reviewed 8 times a year & quarterly
- Sometimes the client is required to buy other products
- This can be lifetime or a set-term
- Arrangement fees
- Early redemption fees apply
Flexible Capital Repayment Mortgage
- Interest is calculated daily
- Can allow under/over payment with limits set
- Can allow further advances
- Can offer a drawdown facility with a chequebook
- This is good for self-employed/business people
- Many lenders offer an offset facility
Offset Mortgage
- The savings account bank and Mortgage provider must be the same
- Lender looks at home equity and savings when calculating interest
- Borrower will lose interest on savings
- Interest rate is usually higher than SVR and can be fixed or variable
- Borrower can choose to use the interest saved to pay the mortgage off faster
Lender Incentives
The mortgage market is extremely competitive and many lenders offer incentives such as…
- No valuation fee
- No early redemption charge
- Legal fees paid by the lender
- Free insurance for 12-months
+ IPI, CIC, MPPI etc
- Portable Option (moving a mortgage to a new property to avoid early redemption charges)
+ If the mortgage is larger on the new house then the additional capital is loaned at a new rate.
- Cashback (if the property needs work)
+ Lump sum based on the borrowed amount
+ Lower LTV given higher percentage e.g. 1% or HLTV 0.5%
+ The rate is usually SVR
+ The amount isn’t added to the loan
+ Borrower cannot pay off the loan or they will need to pay the money back
FX Mortgage
- A UK property with the mortgage capital lent in a different currency
- Different interest rates can be attractive when UK rates are high
- Must be £250k minimum
- Can be capital repayment or interest only
- Risky because of fluctuating exchange rate as payments are made in GBP and converted
- Can get insurance to cover the fluctuations
- Either a UK property with foreign currency loan or an expat paying a UK mortgage in sterling
- in basic terms: UK property, the payment currency has to be exchanged to a different currency.
- MCD applies for MCDFX mortgages
+ Risk is detailed in ESIS
+ Lender must cap effects or move mortgage in the event of major rises.
Sub Prime
- Much higher risk
+ includes Bankrupts and those with poor credit - Rates are similar to usual rates
- Usually incur higher arrangement fees & charges
- Lenders may include state benefits for affordability
- Since MMR affordability they are usually near prime.
Guarantee Mortgages
- Usually for first time buyers
- Guarantor must be under 65
- Sometimes a second charge is put on a guarantors property
Full Guarantee
- Guarantor must pay the whole mortgage in event of default
Limited Guarantee
- is responsible for the difference the lender would have offered the buyer
- Removed once the loan gets to the amount that the bank would have offered the lender
New Type Guarantee Mortgage
- Guarantor gives the lender a deposit, usually 20%. It is given back after a set term if there isn’t a default
Islamic Mortgage - No Interest
Based on Sharia Law
Stamp duty is only paid once when the lender buys the property, paid by the borrower
Ijara Mortgage
- Client selects a property
- Bank buys the property, client pays stamp duty
- Client pays capital & rent payments to the lender
- Once paid up the lender transfers the property to the borrower
- This is a lease to own scheme
- Repayments are fixed every 12 months
- Usually a 25 year term
Murabaha Mortgage
- Lender buys the property
- Lender sells back at a higher price
- Client pays back borrower in fixed payments until they own it
- More expensive than the Ijara & much less popular
- Property is registered in the clients name from the start
- Up to 15 yr term
- 20% required upfront
- Right to buy properties can’t be purchased under this
Self Build
- Client buys land then builds the property
- The lender provides staged payments to allow work to be done
- Up to 70-75% of the land value
- Up to 75% of building costs
- All interest rates are available
BTL Mortgages
- Requires 20-25k of earned income
- Must be 25 - 75 years old
- Must be employed, self-employed or retired with pension.
- Must not be a first time buyer
- Lenders charge higher rates or high arrangement & early repayment fees
- 20-25% deposit
- Affordability calculated on rental cover of 145% of rental income
CBTL
Affordability assessed by owners personal income/expenses as usual
PRA & BTL
Stricter underwriting is in place for BTL mortgages
- Defined as an investment property where borrower or family member isn’t residing there
Excluded properties
- Corporate lending to LTD companies
- Existing properties with consent to let
- BTL contracts under 1 year
- Existing BTL remortgage with the same loan size
PRA are concerned about BTL as there is a risk of too much debt when rates change causing financial difficulties.
- New affordability for over 4 properties
- Are the properties profitable enough to cover costs
- Do they need to supplement with their own income
- Will the rent cover the mortgage
From 2017 lenders apply the following
ICR - Interest cover ratio
Rental Income to mortgage, running costs & taxes - now estimated at 145% of rent with a minimum interest payment at 5.5%
Income affordability
If a client uses their own income for the mortgage a full affordability assessment is done
+ they will show flexibility with high net worth individuals
Affordability Stress Test - BTL
- Stress test is applied for mortgages with a fixed term of less than 5 years
- Minimum increase is 2% over current rate
- If this is less than 5.5% then 5.5% must be used
- Lenders can factor rising rents for BTL linked to CPI with a max of 2%
Special Purpose Vehicle
- Structured as a LTD company
- Separate legal entity, the client is a shareholder
- Shareholders do not own the property directly
- Subject to company taxation, investors can offset full interest against rent
SPV Advantages
- Shares can be transferred without property transfer
- Purchase of SPV shares SDLT is 0.5% rather than 3%
- More expenses can be claimed
- Shareholders are not liable for debt unless the director gives a personal guarantee
- Full interest rate relief
- Corporation tax is 19% & only taxed once
- Salary & dividends do not need to be paid out
SPV Advantages
- Fewer lenders will lend
- Mortgage costs are higher with more checks
- Strict company account reviews
- Limited liability may need personal guarantees
- Corporation tax on rental income at 19% rather than income tax & CGT, annual allowances can’t be used.
- Shareholders are liable for CGT on their shares
- BTL property tax is applicable
- SDLT is applicable when transferring to a SPV
