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Mortgages Print E-mail

How much do I have to repay?  
Can I swap my mortgage for a better deal?
How can I save money on my existing mortgage contract?
How much should I borrow?

Nehemiah 5:3 There were also some who said, "We have mortgaged our lands and vineyards and houses, that we might buy grain because of the famine." There were also those who said, "We have borrowed money for the king's tax on our lands and vineyards. Yet now our flesh is as the flesh of our brethren, our children as their children; and indeed we are forcing our sons and daughters to be slaves, and some of our daughters have been brought into slavery. It is not in our power to redeem them, for other men have our lands and vineyards." And I became very angry when I heard their outcry and these words.

How much do I have to repay?


Mortgages usually demand the largest outgoing payment from personal income every month. The wrong deal could cause insolvency or the reposession of property by the lender, but the right deal could vastly increase your wealth.

 

The issue with low mortgage rates is that the capital loaned could become too high compared with the value of the property secured against it. This could lead to negative equity, where the loan is higher than the value of the property. If interest rates suddenly increase, the repayments could become too expensive, and missed payments usually allows the bank to resell the property to another buyer in order to repay the loan and protect the bank's investment.  Reposession has to go through the courts which can be a long and expensive procedure, so it is not profitable for banks to reposses properties. Banks are often willing to negotiate lower repayments or IVA agreements in order to keep repayments going. 

Fixed interest loans don't last for more than a few years before they become tied to the LIBOR rate, the rate at which banks lend to each other, but mortgages are usually long term agreements of up to 25 years. The key to success is therefore to leave equity headroom in the agreement, by paying a large deposit, or negotiating a discount on the offer price of the property. 

Mortgages offer the longest repayment terms at the lowest interest rates in a bank's personal debt portfolio, because they are secured, low risk loans. The interest rates charged to existing customers are often higher than the rates offered to new customers or from other lenders. For these reasons, it is important to make an informed decision at the very beginning of your property purchase. It may affect the value you have gained from your investment at the time that you complete your repayments.

The key to keeping mortgages affordable is to understand that each repayment is split into two elements, namely the portion which reduces the amount of the original loan and the portion which compensates the lender for the cost and risk of giving the cash to you. As the original amount of the loan is reduced, the interest and other costs related to the loan are also reduced, because the interest is based on the capital balance remaining outstanding.

Interest represents the amount by which the value of money has deteriorated between the time at which you receive the loan and the time at which you repay it. Interest also includes a profit element for the lender to compensate for the risk of giving the money to you, as opposed to investing it elsewhere. Insurance is intended to reduce some of that risk to the lender, by providing money to cover the mortgage repayments if you can no longer do so from your normal income.

The total amount you repay on your mortgage is the sum of all your repayments over the life of the mortgage. The insurance should be included in the sum of repayments, as a mortgaged property is more expensive to insure. You may be alarmed to discover what you pay over 25 years compared with what you borrowed, but remember that the value of money deteriorates over time and you will gain on the capital appreciation of your home.

You will need to insure the property against damage in the event of decreased value due to events such as fire. Once the value of a property drops below the value of the mortgage, you can enter a state called negative equity, and the bank can demand immediate repayment of the entire mortgage if written into the contract. If you cannot repay it, the bank may repossess your property and you could end up with nothing.

You will need life insurance that covers the period of the mortgage. This should be enough to ensure that the mortgage can be repaid when you die. The key is to keep checking the value of the policy to ensure that you are not over insured. The additional money spent on insurance could be used to reduce the original amount of the loan saving you time and interest.

Repaying a little more than the minimum amount on your mortgage each month will save a lot of time on your mortgage because it goes directly to reducing the amount of the original loan without any additional fees and charges. Secondly, any money that can be saved on interest rates and other costs such as insurance costs, can be allocated towards reducing the original amount of the loan, thereby, further reducing interest and other costs and resulting in the loan being repaid earlier.


Can I swap my mortgage for a better deal?


Thanks to the Internet, it is very easy to compare rates with other mortgage providers these days. Competition is intense keeping mortgage costs low and options are widely varied to suit your individual circumstances.

There is a danger when you change your mortgage contract on a regular basis, because there could be fees included in the small print of the contract when you repay it early. There are also significant fees for setting up a new contract each time. These could include the following:

  • Origination fee

  • Appraisal fee

  • Credit report

  • Inspection fee on newly constructed homes

  • Underwriting fees

  • Document preparation and review fee

  • Tax service fee

  • Mortgage insurance arrangement fee

  • Household insurance

  • Life insurance

  • Solicitors' and brokerage fees

  • Property survey fee


Most of these fees are negotiable, so it pays to get a few quotes.

If you repay your home over 25 years, and enter into a new mortgage contract every 3 years, you would remortgage eight times. Therefore, you may save a little on the interest rate each time, but the fees for early repayment and setting up each new mortgage could exceed the saving on the interest rate. You could therefore end up paying more for your mortgage than if you had stayed with your original contract over 25 years.

Be careful of clever advertising, because these are the risks that are not highlighted in many advertisements. People involved in selling mortgages earn commission and may not take into consideration whether you will save money in the long run. They will often only emphasise the short term saving on your monthly payment, therefore it is wise to ensure that you have carefully compared all the fees and savings before signing a contract. Never be bullied into signing, because it is a long and expensive contract to enter into.

There are various ways to reduce your monthly repayments with a new mortgage. For instance, as your repayments are based on the original loan amount, a new mortgage to replace the smaller balance of the loan amount after two years of repayments can reduce the monthly repayment, but it may take longer to pay it, thereby increasing the overall cost of paying for the property. The costs can also be ‘hidden’ in the set up fees and insurance to make up for offering a lower interest rate.

Unfortunately the trend is to charge higher interest rates after an introductory period of two or three years as mortgage lenders are under constant pressure to gain new business. The point of sale is the only point at which the commission and fees are earned.

This is not to say that there are not very good deals available that can save you money in the long term. Before you sign, ask the mortgage adviser to demonstrate how you will save money over the life of the mortgage, and then verify what he or she has claimed by reading the small print of the contract.


How can I save money on my existing mortgage contract?


You have the option of approaching your bank with other offers that are lower than what you are paying to try to renegotiate your interest rate and other fees. If the value of your home has risen causing the loan balance to drop below 90% of the value of your home, you may be able to negotiate a better interest rate on your existing mortgage. This would be preferable to remortaging your home as you save on all the costs and effort.

You can save money by allowing your interest rate to track the base interest rate of your bank, but your monthly repayments will vary. You can also offset your interest on your mortgage with interest on your savings, which can reduce your monthly repayment or reduce the time it takes to repay your mortgage. To do this you need quite a lot of cash in linked savings accounts, as your mortgage interest rates on these types of mortgages are usually higher. It is usually only a viable option when your loan is less than about 75% of of the value of your property.


How much should I borrow?


The ratio of the loan amount to the value of the property purchased is very important.

Interest rates are much higher as soon as the loan value is 90% or more than the value of the property. Many advisers only offer a maximum mortage of 95%, but higher amounts are available. Loans above 95% are so expensive that they may lead to an overall loss. The increase in property value may not cover the cost of borrowing over the term of the loan. Such properties are not worth buying because they will make you poorer. Such high charges are incurred when the risk to the lender is too great, as they may loose money if they have to reposess, pay legal and administration costs linked to reposession, and auction the property off for less than what was owed on it. First time buyers may be the exception to this rule.

It is important to leave headroom in the household budget for increases in interest rates and unforeseen costs unrelated to the mortgage but affecting the household. It is important to plan ahead, for example if there are children in the house their costs will change significantly over five years.

It makes sense, therefore, to prepare an annual budget that stretches for five years into the future, called a five-year plan. It may give you a good idea of how costs may change over the period, affecting how much you can afford on your mortgage.

The amount you may borrow is calculated in two ways by lenders. One is by using salary multiples and the other is called affordability-based lending, a relatively new way of calculating your loan limit.

Most banks and building societies use a multiple of four for single buyers and three for couples, but the best way to find out is to ask your lender. Rates as high as five or six are available, but they are extremely risky and more expensive. Affordability based lending looks at individual circumstances to see how much is left over for the mortgage after all the other costs have been paid, and may provide more to childless singletons and couples than to single parents.

It is possible to make up a deposit with 0% credit cards, cheap personal loans (under 10%) and other forms of medium to short term credit. These types of agreements can be easier to repay if you have some headroom in your budget or may be expecting bonuses or other lumps of money.

However, mortgages calculated under the affordability-based lending method tend to allow you to borrow more money and the amount is reduced when you have other forms of debt to repay. It is possible to get a few quotes and work out the best balance of short and long term debt.

Mortgages calculated under the salary multiples method should largely remain unaffected.

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