The only way is up
It seems that barely a day goes by when we don’t hear about turbulence in the world’s financial markets and the dreaded ‘credit crunch’. As Northern Rock’s speedy collapse demonstrated, it is clear that a lot of this economic uncertainty has been created by irresponsible borrowing practices within the housing market, particularly in the US.
As the well-known saying goes, ‘When the US sneezes, the rest of the world catches a cold,’ and while we have not seen the kind of economic downturn here that they have experienced over the pond, UK banks are definitely tightening their belts and being a lot more cautious about their lending practices.
But what does this mean for you? Many of you will not have a mortgage at this stage of your life and some of you may not have even thought about getting one in the near future, either. However, as a new set of financial conditions comes into play, it is worth keeping a watchful eye on proceedings in case the time comes when you do want to head into the fray.
With this in mind we got independent financial advisers, Lloyd & Whyte, to provide us with some top tips to consider before you start thinking about mortgages. They specialise in advising dentists, so are best placed to provide tailored advice to dental graduates who are keen to get a foot on the property ladder.
In order to get truly impartial advice, you will need to speak to an Independent Financial Adviser, who will be able to access the entire mortgage market place. They will not only just have access to these products, they will be far more likely to be able to advise on all the options available and which of these may best suit your circumstances. There is nothing wrong with approaching a bank (who will only recommend their own products) or a multi-tied agent (who will recommend from a select panel of lenders) but you are obviously limiting the product range available and you need to be aware that the advice you are receiving could be interpreted as less impartial as a result.
There are a number of lenders that recognise the earning potential of young professionals, and in particular dentists, which means that they are willing to offer improved terms on this basis. This can often include lower deposits or even lending over and above the property amount to help with fees and all the other necessary costs associated with buying and moving into a house.
In essence, there are four core types of mortgage: fixed,
variable, discounted and tracker. There are of course, other variations but this is the basis upon which most mortgages are developed. Which product is right for you is down to your circumstances at the time, the market and professional input from an Independent Financial Adviser.
• Fixed rate mortgages simply provide a fixed monthly
repayment throughout the term agreed. The rate tends to be slightly higher than other mortgage types but the benefit is you can budget much more effectively.
• A tracker rate mortgage is linked to the Bank of England base rate and although it is still variable, it can go up or down. It is more likely to be adjusted as changes in the base rate are announced and therefore
you may benefit from any reductions quicker.
• Variable rate mortgages are based on the standard variable rate quoted by the lender. The lender is in control and
calculates this themselves using the Bank of England base rate as their starting point. This therefore goes up and down in line with the Bank of England interest rate, although lenders may be slower to reduce the rate than they are to increase it.
• A discounted rate mortgage is basically similar to the
variable rate but, as the name suggests, it is discounted
fractionally. Again, the lender is in control of this using the Bank of England base rate as their starting point. While this can go up as well as down, lenders can be quicker to put the rate up than they are to bring it down.
Offset mortgages combine some elements of a savings account with the mortgage, which means that any interest earned on your savings is offset against the amount outstanding on your mortgage. This can be a useful tool if you plan to use this account for any income that you set aside for paying your tax bill. This then effectively kills two birds with one stone: you save effectively to cover your tax bill and all the while the interest on this amount is working for you to help reduce the outstanding amount on your mortgage.
The current financial climate seems to be relatively
uncertain, and due to excessive lending over recent years, mortgage providers are now being much more cautious
on the amount and terms of mortgages. This isn’t to say that it is all gloom and doom – but that seeking independent advice may be more important in the current climate than ever before if you want to secure the best possible mortgage arrangement for you.