In the last few months, mortgage interest rates have fallen significantly as speculation grows as to when the Bank of England will begin to reduce the Bank Base Rate. So, whether you are stepping on, up/down the property ladder or considering purchasing/refinancing a buy-to-let property, your mortgage is likely to be more affordable than a few months ago. However, careful thought and research needs to be undertaken to ensure the right mortgage product and lender is selected to meet your personal circumstances.
First Time Buyers “FTBs”
Purchasing your first home is likely to be your single largest financial transaction. It is therefore critical that you consider your mortgage options carefully:
- Fixed or variable rate mortgage
- Interest only or capital repayment
- Initial term of 2, 3 or 5 years
Both lenders and the government provide FTBs with assistance through innovative mortgage products and initiatives:
- Help to Buy mortgages
- Shared ownership
- Mortgage guarantee scheme
- Family springboard/boost mortgage
- Lender assistance with valuation/legal fees
Whether you are relying on family assistance (e.g. ‘Bank of Mum and Dad’) or using savings, the size of deposit ( i.e. the sum of money you have to put towards the purchase of your first home) is critical to understanding all the mortgage options available to you.
The ‘second stepper’
As a ‘second stepper’ taking your next step up the property ladder, you have the advantage over FTBs as you would most likely have already been through the mortgage process. However, your personal circumstances may have changed from the time when you applied for your current mortgage; e.g. family circumstances, income, expenses etc. Additionally, the mortgage industry has experienced a significant tightening of regulations over the past decade with a particular focus on how lenders are required to assess your affordability.
The ‘second stepper’ mortgage
If you are ‘stepping up’ the property ladder, it is highly likely that your new home will cost more than your existing home and potentially require a higher mortgage amount. Like first time buyers, you will need to establish the size of your deposit and potentially agree a ‘mortgage in principle’ before you start viewing properties. If you decide to keep your existing property, you will need to discuss your current mortgage with your existing lender and potentially transfer it from a residential mortgage to a buy-to-let mortgage. This may require you to re-mortgage to a different lender.
Mortgage options for over-55s
For over-55s who may be considering retirement, ‘down-sizing’, helping children onto the property ladder or raising additional liquidity for everyday or one-off expenditure, lifetime mortgages have become an important financial planning tool.
A ‘lifetime mortgage’ is a loan secured against your home – you retain full legal ownership of the property and usually there are no monthly repayments to make as the loan plus rolled-up interest is repaid when you pass away or go into long-term care. Many lenders offer the flexibility of allowing you to pay part of or all the monthly interest rather than have the interest roll up. Unlike normal mortgages, a ‘lifetime mortgage’ does not have a fixed end date. The amount of mortgage you will be eligible for will depend on facts such as your age (minimum age of 55), health, value of your home and existing outstanding mortgage.
Lifetime mortgages can provide you with the financial flexibility to:
- stay in the existing family home;
- potentially delay taking a tax-free lump sum or regular income withdrawals and thereby allowing the pension fund to remain invested for longer;
- delay accessing savings such as ISAs;
- allow you to gift during your lifetime rather than only on death;
- introduce some succession planning during retirement.
This is a lifetime mortgage. These are only applicable to those 55 and over, and it could affect eligibility to state means-tested benefits and the inheritance you may leave. To understand the features and risks, ask for a personalised illustration. Equity release includes lifetime mortgages and home reversion schemes. We can advise and arrange lifetime mortgages and will refer to an approved specialist for home reversion schemes.
In the last decade, the introduction of stricter lending regulations and tax changes has forced lenders to tighten their lending criteria, in particular by raising rental cover requirements from 125% to 145% AND using a stress rate much higher than the actual pay rate.
The introduction of a new definition for professional/portfolio landlords (borrowers who have 4 or more mortgaged buy to lets) requires lenders to carry out additional detailed checks on whether borrowers meet stricter affordability criteria.
Due to rising interest rates during 2023, some landlords have struggled to re-mortgage and/or expand their portfolio. However, with rates falling in 2024 and rental affordability criteria easing, landlords can start to review existing finance arrangements and consider buying opportunities.
When to apply for a mortgage
Whether you are a FTB, second stepper or landlord, it may be advisable to ascertain the size of mortgage lenders would potentially be willing to lend to you – ‘mortgage in principle’ – before you start viewing properties. Some lenders may carry out a credit check for an agreement in principle.
You should also understand the maximum loan to value (‘LTV’) which the lender is willing to provide. LTV is the amount of mortgage expressed as a percentage of the property value. For example, if your mortgage amount was £85,000 and your property is valued at £100,000, your loan to value is 85%. Armed with this information and coupled with the size of your deposit, you will be able to establish the value of properties to view. It is important to understand that such a ‘mortgage in principle’ is an indication and not a formal offer. The actual amount a lender is willing to lend may differ from the ‘mortgage in principle’ amount.
Once you have found your property and had your offer accepted, this is the time to make a formal application for the mortgage which meets your personal circumstances. It is critical that you receive a formal mortgage offer from the lender before you exchange contracts.
Get in touch
If you are currently looking for a residential mortgage or to refinance your existing mortgage and would like to discuss your personal position, please contact the Kinnison team:
Email: [email protected]
Call: 0203 871 2823