HS has a very simple philosophy. If you come and see one of our brokers for a consultation you should expect to walk out with the advice you would expect from you if the roles were reversed. This do unto others approach reaps dividends. Clients know that they will be given frank, no-nonsense advice that is in their best interests.
Increasingly there are now products that cater for helping families get the younger generation onto the housing ladder, products that allow mortgages to be extended longer over the working life, and increasingly into retirement, products for the older borrower, and increasingly sophisticated products for investors. Our brokers have the whole market from which to select the best products in each of these categories to suit every client’s individual needs.
How the mortgage works!
The lender makes a payment to you allowing you to fund the purchase of a home. Each month you make a payment back to reduce the loan. Part of the payment is interest due to the lender, and part is capital, and this reduces the amount that you owe. This is the reason they are referred to as capital and interest mortgages or repayment mortgages
In the early years the borrower owes the lender a lot of money. This means that most of the payment is interest. Only a tiny amount will be capital that reduces the loan. Over time the amount owe will go down. This makes the interest due less. That results in more capital is paid off each month
Borrowing to buy a house makes economic sense. If inflation in the economy is maintained at the government’s target figure of 2% pa then every year, in real terms, your loan figure is reducing in real terms. Your income is likely to grow by slightly more than inflation. Assuming a £25,000 income at the start of a mortgage then after 20 years you would be earning £37,000 based on only 2% a year inflation. In the meantime, your mortgage payments are based on the loan taken, less the amounts repaid.
If house prices increase by the same 2% each year then every year will see the home rise in value. A home bought for £110,000 after 20 years of 2% growth would be worth £163,000. Of course, houses prices do not generally move in a straight line, but over time there has historically been growth.
The conclusion is that for house buying the very long-term nature of the deal means that the loan should reduce as payments are made, the house should grow in value, and the income used to finance the loan should also grow. That increasing gap between the loan and value will increase the equity in the property. Paying off the loan at the end of the term results in a mortgage free property.
YOUR HOME IS AT RISK IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE SECURE AGAINST YOUR PROPERTY
For the older clients who own their own home and wish to raise funds.
(Equity Release Mortgages)
In the past there was a choice of two products for older borrowers. Either by selling the home to a Home Reversion company who were gambling on how quickly they would get the keys to the home, or by borrowing to release a sum of money allowing interest to roll up against the value of the house.
Home reversion plans effectively gave total possession of the property to the loan company. They would use actuarial calculations based on age and health to see how long they would have to wait for possession. The longer the seller lived, the less profit for them.
Equity release interest roll up mortgages were very expensive. The high interest rates charged, and the compounding of interest costs, meant that without above inflation capital growth in house prices families were short-changed after their loved ones had departed.
Recent developments have seen the advent of products that are far fairer. Interest roll up at rates more akin to normal borrowing. Rates in the past were more than double normal mortgage interest rates. Early repayment charges were also frequently penal. Interest rates are now normalising as lenders have finally realised the sheer size of the market available, and the immense security older borrowers with large amounts of equity possess.
Interest only mortgages that allow payment of the interest. These are known as RIO’s – Retirement Interest Only mortgages. Interest payments are far more affordable than capital and interest. The loan against the property never goes up as long as the interest is being paid. The option is far cheaper than selling and renting and keeps the borrower in the family home.
Capital and interest mortgages where lenders will use pensions in payment as affordable income
Capital and interest mortgages where lenders will use pensions in payment as affordable income when assessing ability to pay. This can take the age into the 80’s for some lenders. If pension income is sufficient then it can be used to prove that a mortgage is affordable. There are still caveats, and there is a need for private pensions to pass to the survivor in a joint application which rules out any state funded pensions or benefits.
Equity release mortgages allow either a lump sum to be drawn down for a specific purpose the most common of which is to buy an annuity, or for regular payments of income. Taking a lump sum was traditionally the only way to take equity from the home. Income is now available via a drawdown facility for either sporadic payments based on need, or for regular monthly payments where income is required. This system benefits the borrower as interest does not being to roll up until the money is drawn down. Many still prefer a lump sum to fund an annuity as there is no investment risk, or funds management involved.
If you would like to speak with one of our brokers, please contact us and we will arrange an appointment for you.