100% Mortgage vs 95% Mortgage+Loan advice

Gopes

OK, in the very early stages of trying to get on the Property Ladder.

I have decided to buy with my flatmate (also my best friend). We have lived together in 4 different flats over the last 7 years or so, so risks of a joint mortgage have been considered.

We are both graduates, with no significant debt (a few grand on credit cards, nothing more), which can be paid off in a few months judging on existing income.

We had a meeting with a mortgage advisor, and we have had an initial offer of a 100% mortgage for £205,000 through Royal Bank of Scotland, based on incomes of £25k and £27k respectively (and no debt - not a problem). They will send us the exact repayment figures, etc. in the next day or so (the mortgage advisor works with my flatmates employers, so at this stage it is all a bit informal).

We are going to be looking to buy in SE London, and would be expecting to buy somewhere between £180k and £200k.

We both have secure jobs in the financial services industry, and are confident that our incomes will rise significantly in the next few years. We both lead relatively frugal lifestyles - don't buy expensive clothes, don't drink or smoke a lot.

At this stage, we are just starting out in our quest for a home, and will most likely not end up taking out this particular mortgage, but it has given us a 'ball park' figure as to how much we can borrow.

My question is:
We do not have any savings, as we have been busy paying off our student debts.
Now if, for sake of argument, my sister (who earns a good salary) took out a loan for say £10k on my behalf - I obviously agree to pay all the repayment costs, etc.

Would this be likely to be an effective (if slightly dodgy) way of getting a 95% mortgage + 5% loan - and thus better rates, or would I actually be better off getting the 100% mortgage, albeit at a slightly higher rate, as long as it had flexible overpayments, allowing me to chip away at the capital as quickly possible.

I hope I have expressed myself clearly, and apologies for not yet knowing the correct jargon.

Thanks in advance for your guidance.
Gopes

P.S. I was quite surprised at how much they had offered us - does £205k 100% seem a bit high for a joint mortgage with combined income of £52k?

P.P.S. Obviously, until we get the document with the repayment info and rates, this will become a bit clearer

P.P.P.S. I am well aware that I will quite possibly end up needing another £5k for all the fees, stamp duty etc. - I get my annual bonus next month (which will hopefully be in the region of £3k), and will put that on one side, which along with the surplus we can raise in our current accounts should be about enough.

Boomdocker

I dont have any advice but would also be interested in any replies as my friend and I are just considering something very similiar. We are also pondering the 100% route versus the 95% and 'finding' a deposit elsewhere. For us the biggest hurdle is lack of deposit. We just don't have disposable cash of any great amount for a deposit.

roswell

just one question, if you dont have disposable money for a deposit what you going to do about fee`s, boiler break downs pipes leaking, furnishings ... more borrowing possibly ???

Boomdocker

Sorry I dont want to pinch this thread from Gopes but again similarly we have bonusses due and some cash available but not enough perhaps for a substantial cash deposit as well as fees etc. I have no outstanding borrowings and ideally dont want any apart from the mortgage. Furnishings etc are taken care off as we own most things we need now. In terms of new stuff, decorating and repairs, that will be prioritised and budgetted for as they are now.

It would be interesting to hear your view on the actual 100% v 95% & loan mortgage query.

HelpWhereIcan

The main thing I would caution you against is, as you seem to be aware, that a lender will have a problem if they discover the 'deposit' is coming from a loan. Strictly speaking a fraudulent application (CIFAS category 3 or 4 - ommission of material facts) that could be registered with CIFAS and cause you problems in obtaining credit in the future. Having said that, in practice, the chances of a lender finding out are quite minimal and I am sure that many people do this. The main problem a lender will have is that the loan repayments would consitute income that is already 'spoken for' and that they would normally exclude when working out how much you can borrow.

However, in answer to the question, purely as an academic exercise and not encouraging you to borrow the deposit, I will do some research into the figures and post them later (have to go to Homebase), although I would suspect that you will pay less (in total) over a period using a 95% mortgage plus loan and you will pay less per month with a 100% mortgage.

Therefore, to my mind, it will come down to how tight your budget is. Have a think about how much you could comfortably pay each month bearing in mind the additional costs of being a homeowner etc.

I would also add that my income has increased dramatically over the last 5 years but my expenditure has expanded to fit, so I would caution against assuming that something that is 'tight' now will automatically be affordable as your income increases. By all means make assumptions about increases in your income to improve affordability, but do not assume that your expenditure will remain the same.

Hope this helps

Boomdocker

Thank you, having never done this before this sort of information is valuable.

Gopes

Thanks for your replies:
roswell - you are right - however as like boomdocker, there is cash available - I have 4 brothers and sisters who are all working - in the past, when we were students, we have helped each other out, and will (in principle) carry on doing so - hence there is a fall back, if e.g. the boiler breaks down.
Also as an example with £1650 cash coming in per month (after tax), I am currently spending under £1000 per month (including rent of £425). This means that as I calculate it, I could easily put £800 into mortgage, and still be left with £250 per month on top of my normal expenditure for emergencies.
Also, for the last 4 months I have been 'Acting up' in my job, so expecting to move to a new salary bracket before long (hopefully before I actually take out the mortgage - however, of course this is not guaranteed).

My friend earns about £1500 per month after tax - and his expenditure is broadly similar to my own - hence as a maximum - we would be able to afford somewhere in the region of £1500 a month in mortgage repayments (based on net income of £3150) - I believe that this is sufficient for the normal £200k monthly repayments. (Obviously if we did borrow the 5% for the deposit, repayments for that would come out of the maximum available for mortgage repayments).

HelpwhereIcan - thanks any figures would be greatly appreciated - I am aware that the 5% loan 'fiddle' is not advisable and could be considered fraudulent - that is why I am trying to figure out whether it is worth it - if I jump through all those hoops and only end up saving myself a couple of hundred quid in the long run - it is probably not worth it. If on the otherhand, the 95% mortgage (plus the costs of borrowing £10k (repaid over a period of say 5 years) will end up saving me several grand, then it is worth considering.

Finally, has anyone got any views as to whether the initial offer of £205k based on join incomes of £52k.

Most of the online mortgage calculators seem to come up with a maximum loan of in the region of £150k - however, these are working on a couple buying together. Our circumstances are different, in that we are not a couple - which I believe means we can borrow a bit more.

However, £205k seems to be quite a lot more, and, although I have no reason to believe we would not be able to meet the repayments in the short-term (mid-long term prospects are much more rosy, as our careers progress - although I take the point that day-to-day expenditure tends to rise accordingly).

Thanks for such prompt replies.
Gopes

LittleWoman_3

Gopes wrote:

Also as an example with £1650 cash coming in per month (after tax), I am currently spending under £1000 per month (including rent of £425). This means that as I calculate it, I could easily put £800 into mortgage, and still be left with £250 per month on top of my normal expenditure for emergencies.

Finally, has anyone got any views as to whether the initial offer of £205k based on join incomes of £52k.

£800 would cover a repayment mortgage of about £130K(?) so £205K for 2 individuals who can afford this amount would not be a struggle. The online calculators presume that one party may not alway want to work (from the days when one party would spend a number of years bring up a family) for the next 25 years so will not give full multiples on the 2nd income.

You seem to be worried about the amount of money available and your options. Its quite a comittment when you do it for the first time.

You don't have to borrow the maximum if you don't want to.

There are cheaper properties, you just need to be a bit more less fussy! My mother is about to put her 4 bed house on the market - under £250K which for the London/Kent boarders is very cheap - but then it does overlook 6 lanes of the A2 but only take just over 30 min to drive into the city!

HelpWhereIcan

To begin, £205k on your incomes is very generous (particularly at 100% lending) and is actually well above what the Royal Bank of Scotland would normally lend, even on their professional scheme (however they may have agreed a generous stretch for you). That is not to say that there is no-one else, just that your choice of lender will be restricted.

Ok, have had a look at some figures. I have to start off with the usual caveat that I am in no way reccomending any deal/lender I have used in my example and that I giving you the figures only as an academic exercise. Please ensure you get some personalised advice from a whole of market broker who can match your circumstances, needs and objectives to a deal after conducting a full review.

Based on the RBS 100% tracker at 5% - £205k over 25 years on repayment is apprx £1235-53 pm (including adding the Higher Lending Charge of £6150 :eek: . The total amount payable over 25 years is approx £424329 :eek: :eek: . Obviously this assumes that you stay with the RBS for the full 25 years, never remortgage or move, and pay their standard variable rate of 6.59% (currently) from year 4 -25. While this is very unlikely to happen, I have not the time, ability or the inclination to factor in the effect of remortgaging every few years.

BAsed on a 95% mortgage of £194,750 over 25 years with IF using their 5.04% fixed, the monthly payment would be approx £1145.96 and this has no Higher Lending Charge :j The total amount payable over 25 years would be £364,147 :eek: IF's standard variable rate is currently 5.7% - obviously a lot better than 6.59%.

A loan of £10,300 with Cahoot at 5.9% APR over 84 months would be £147.82 pm, with a total amount payable of approx £12,416. This gives a total monthly outlay of approx £1293 pm.

12416 + 324147 = 376563 (95% mtg + loan total amount payable)
424329 (100% total amount payable)

Think I know which I would prefer over the long term.

Plus, also consider this. The loan would be gone in 7 years, leaving in theory an extra 147 pm. If you were to over pay by £90 pm (to match the 100% payment) from year 8 onwards, you would save 2 years and £29,224 in interest on the remaining mortgage. Again making a 95% mortgage better value. :T In fact,if I wanted to be realy anal, I would say that the difference in payment would be more than £90 pm in year 8 onwards considering the difference in Standard Variable Rates, so the saving could be even bigger.

So, in summary, I would say that the maths shows that the saving on a 100% mortgage is only on the monthly payment and the other way you suggest gives a much better long term cost.

The main reason for this is that you will have more choice of lender at 95%, meaning that even if you do not save anything on the initial interest rate deal (unlikely), you have a much better chance of getting a deal that does not charge a Higher Lending Fee and has a decent long term rate.

I have in some respects, deliberately picked the IF deal to illustrate the potential effect of this and would agree that the long term costs would not be so hugely different if the standard variable rates were the same, or I had used a 95% that charged a higher lending charge. However, I think it illustrates well the pros of having a choice of lenders and deal.

Apologies for the length of the post (I really need to get a social life!!), but I hope this helps.

Boomdocker

Thanks for all these really informative replies. It is extremely helpful when you are not too sure yourself of all the ins and outs. We are only just starting to dip our toe into buying for the first time and find this sort of support invaluable.

Gopes

Wow, thank you very much for 'HelpwhereIcan' - that was really helpful, and you have demonstrated the advantage of a 95% over a 100% - that is a big enough difference that I will try and get the 5% deposit any way I can.
Also, thanks for your views about RBS stretching beyond their normal lending limit - obviously, at the moment it was just a phone call, and until i have a proper break down in the figures, I cannot confirm whether there is a nasty catch (or they have just made a mistake).

Anyway, thank you very much.
Boomdocker - if I find any other useful hints, I will drop you an email - perhaps you can do the same - if our circumstances are similar, what each of us finds out may help the other.
Gopes