A short guide to mortgages
Magdelena Harding, senior financial consultant at Wesleyan Financial Services, shares her advice on getting a mortgage and how the pandemic has affected the process.
Buying property and moving through the process of getting a mortgage is confusing and stressful for many at the best of times. If you add a global pandemic into the picture, you might well be tempted to stop before you take the first step.
But whether you’re a first-time buyer or adding to your property portfolio, there are still opportunities to be had and reasons to move forward with applying for a mortgage.
To allay any confusion and discuss how the pandemic has impacted the property market, I recently took part in a webinar on this very topic,
Below are my answers to some of the questions that were asked during that webinar. These include what the recent reduction in stamp duty means for you, the effect of COVID-19 on property prices, how your application may be impacted if you/your partner is on furlough and why a loan from the bank of mum and dad might not actually be that helpful.
Can you recap what the stamp duty reduction announced by Rishi Sunak after the first lockdown means for those buying houses?
Firstly, it is helpful to clarify what stamp duty is. Stamp duty is a levy that house buyers pay based on conveyancing and the transfer of lands and property.
To help the economy after we went into the first lockdown, this levy has been temporarily reduced. Between 8 July 2020, and 31 March 2021 inclusive, you only need to pay stamp duty for any residential properties purchased in England and Northern Ireland if they cost over £500,000.
If the property costs less than £500,000 there is no stamp duty to pay. This can lead to savings of up to £10,000.
This will be the case until 1 April 2021, when the reduced rates will revert back to normal standard rates.
For properties over £500,000 there is a scale of how much stamp duty you pay:
- Between £500,001 and £925,000, stamp duty is 5%
- Between £925,001 and £1.25million, stamp duty is 10%
- For anything over £1.25 million, stamp duty is 12%.
However, if you are buying additional second properties, such as a holiday home, there is an additional 3% to pay.
What impact is the stamp duty reduction having on property prices?
There has been a robust recovery with regards to the housing market and the coronavirus pandemic.
Nationwide reports that house prices have gone up by 6.5%, compared to last year. This is their highest rise for nearly six years.
House prices were about 0.9% higher in November, than in October. With the average house price valued at about £229,700 according to Nationwide.
However, they expect the price of properties will slow down.
Has the pandemic caused delays in the process of buying a property?
Sadly, we are seeing considerable delays in the whole process. Some lenders still have reduced service levels as they might still have less staff working and/or people working from home and within the restrictions of their local tiers etc.
The demand of buyers is also increasing the pressure on conveyancing, solicitors, and local searches. I’ve seen a very straightforward cash buyer, who didn’t even need a mortgage, take eight weeks to go from start to completion, which is quite a delay.
There’s also the issue of stamp duty increasing after 31 March 2021. That currently means if you haven’t completed by that date, you will have to pay the normal rate of stamp duty.
There have been calls on the government to extend the scheme beyond that or allow it to phase out. So that if you exchange before 31 March 2021, you might still benefit from the reduced rate. However, nothing has been announced yet.
What are the most popular types of mortgage?
There’s essentially two: capital repayment (where you pay off both the capital and the interest every month) or interest-only (where you pay off only the interest every month).
Capital repayment is the most common mortgage, while an interest-only is a little bit harder to get. Here you have to prove that you have a strategy to pay off the capital at the end of your mortgage.
The big benefit of a repayment mortgage is, at the end of the term, your home is totally mortgage-free and paid off.
There are also differences when it comes to rates:
- Discounted rates are discounted for a period of time before reverting to a higher one
- Fixed rates are static for a period of time before reverting to a higher one. These type of mortgage rates are very common and popular. This is due to the peace of mind of knowing exactly how much you will pay every month
- Variable rates are set according to the provider, and can go up and down
- Tracker rates generally follow the Bank of England interest rate, plus a percentage that the provider asks for as well. These rates can go up and down.
It’s important to understand that rates are dependent on lots of factors such as:
- Loan-to-value ratio
- How much deposit you’ve got
- Type of properties
- Potential restrictions on new build properties or local authority properties.
Why might mortgage lenders have an issue with someone using money from parents as a deposit?
If parents lend you the money for your deposit, the provider or lender will consider that a debt you owe. They will factor in the need to pay it back when considering your financial situation.
However, parents can gift you a deposit, as long as that gift is without ties and they are willing to sign a letter to the provider that says: ‘This is an outright gift without the expectation of repayment’. That is totally acceptable.
My wife/husband has been furloughed; can we get a mortgage based on their full salary?
Generally speaking, a large majority of lenders won’t necessarily accept furlough income. But there are always exceptions.
Some lenders will consider it if you can evidence that they will return to work. For example, a letter from the employer that says that after the furlough period ends, they will go back.
Lenders are worried about zero contracts and non-guaranteed income, and lowering their lend-to-value ratio accordingly. The best advice is speak to a specialist mortgage adviser who already has relationships with lenders. They can support you to find something that best suits your situation.
Is old age a barrier to getting a mortgage?
Lenders have really improved with regards to this issue because they can’t discriminate against age.
As an example, I recently arranged a mortgage for an 80-year-old client. If you are a bit older, you just need to make sure that your retirement income is enough to afford the repayments within the term.
At the other end of the scale, what advice do you have for first-time buyers?
I would always advise anyone to speak to a specialist who can look at your individual situation and advise you accordingly. There are some other steps you can take to make getting a mortgage easier:
- Consider clearing any debt, particularly short-term debts such as credit cards, store cards, overdrafts etc. Having a good credit score is important
- Be on the electoral vote register and make sure any bills associated with that are paid on time
- Avoid County Court Judgements and check if you’re financially linked with another person
- Ensure all your bills have the accurate details, such as address and name spelled correctly
- Limit the number of credit applications you make, particularly over the previous six months before applying for a mortgage
- It’s helpful to have a stable address for a decent period of time
- When saving for a deposit, bear in mind that 95% loan-to-value mortgages are virtually impossible to find. But it is still possible to find some 90% loan-to-value mortgages. Given that, Nationwide are saying the average house value is £229,700. That is a deposit of around £22,000
- Don’t forget about other associated costs such as legal fees, stamp duty (where applicable), mortgage fees and moving costs.
If you are looking for a mortgage and would like to speak to an adviser you can book a 30-minute quick start no-obligation chat with a Wesleyan financial consultant. Alternatively, call: 0800 316 3784.