First time buyer - any advice on mortgage type suitable for me?

funkey_monkey

Hi,

I'm looking for some advice on my first property purchase - which is to be a home for myself.

I have savings totalling £165k in various accounts earning from 1.5% to3% in interest. (I am in my late 30's, don't smoke, rarely drink and work long hours). Some of this is locked in for one more year in ISA's.

I am looking to purchase a house in the £150k - £170k price bracket.

I have just made an appt to visit an IFA to discuss my options but I'd like to gather some info so that I go into the meeting with my eyes open and am able to ask pertinent questions.

Firstly, I don't want to sink all my cash and near cash into the house. I appreciate that the return I am getting on my money currently is poor, but I need to have it near to hand in case I find a property which I need to act on.

So, Interest Only does not appeal to me - I'd rather pay it off as I go along. So repayment is appealling to me.

With the amount of savings I have saved over the years Offset is the one which interests me most as I can get better return on my money than it is getting currently - plus it is near to me if I need it for an emergency - so it is not locked into the property.

Whether to go for a variable rate of fixed is something I'm not sure about. A gamble on interest rates is something I'm not keen on as I am risk adverse. However, from what I am reading about BoE thoughts, the Interest Rate is not going to skyrocket any time soon, so it might be the best choice.

Unless I have thought wrongly of offsets, is it the best option for me? I was thinking only putting enough into the deposit in order to get into a good LTV interest rate - hopefully no more than 30% - 40%. This means the rest can be put into an offset savings account it will be tax efficient and I'll have saved money tax free at whatever the IR of the mortgage is.

Some questions on my logic above:
1. Is offset a sensible approach?
2. If I have more than £50,000 to offset against the mortgage how does this affect me in terms of the £50,000 FSA guarantee if the provider goes belly up?
3. Does Offsets offer tracker style interest rates?


Thanks.

ACG

1) it would seem like its one of them. It depends whats available to you and the rates they charge but i as an advisor would certainly be considering it for you.
2) Good question, i would imagine that anything over the £50k isnt backed by the scheme. I would also imagine that they wouldnt do the sensible thing and wipe off the amount you have lost from your mortgage - but i would double check that.
3) I think there will be fixed and tracker type options available.

GMS

Well done for having such savings firstly.

You state you are risk averse so why consider a tracker? Goes against your own risk profile.

Offset can work but keep in mind that whilst you save on interest you will not gain any interest on your savings. Many people go into offsets and are surprised down the line to see their savings have no tearned interest.

Whilst bank base rates may well stay low for a while yet the rates at which mortgages are available is not linked to base rate as such. Rates at which lenders borrow is linked to swap rates which will adjust frequently depending on economic circumstances.

Have you considered a long term fix? Look at putting down a 40% plus deposit possibly and go for a 5 to 10 year fix. Security of payments, best rates available (depending on criteris being met), security of payments and money still in the bank earning interest and available as and when you choose.

Look at a mortgage which allows overpayments too is you would like to pay off quicker.

With your deposit you should have plenty of options assuming affordability and credit all ok.

Plenty more than this to consider and of course your full circumstances are not known. I am sure your adviser will be able to help you fully.

Good luck

funkey_monkey

GMS wrote: »

Well done for having such savings firstly.

You state you are risk averse so why consider a tracker? Goes against your own risk profile.

Only considering it because I don't see IR rising significantly over the next few years.

Offset can work but keep in mind that whilst you save on interest you will not gain any interest on your savings. Many people go into offsets and are surprised down the line to see their savings have no tearned interest.

But what I am losing but not gaining interest on savings I get through the back door by being taken off the interest additions to my mortgage.

My understanding is (and please correct me if I am wrong):
Property: £150,000
Deposit: £50,000
Mortgage: £100,000

I have savings of £165k in cash, but for this example assume that I have £40,000 left over once the deposit has been paid. Therefore, I should only be paying interest on £100,000 - £40,000 = £60,000.

With the IR of mortgages current sitting at around 3%-3.5% this is a better return on the £40,000 over time.

Is my thinking confused?

Have you considered a long term fix? Look at putting down a 40% plus deposit possibly and go for a 5 to 10 year fix. Security of payments, best rates available (depending on criteris being met), security of payments and money still in the bank earning interest and available as and when you choose.

Never really considered it as I always thought it bwas bad to lock yourself in for such a long period - especially when there will be fees for switching down the line or ERC's.
Look at a mortgage which allows overpayments too is you would like to pay off quicker.

Good luck

Thanks.



Some more questions -

1. I intend to go around a few people (maybe another IFA and then directly to banks & societies themselves - even though IFA should have whole of market) and get advice. Can/Will I be charged at this stage or is this only done when the mortgage is agreed and they take either a fee or %commission?

Joe_Bloggs

Barclays/woolwich have an offset mortgage that can include and preserve the cash ISA tax status of past contributions. There may be other lenders who do this but I don't know which/who or why others don't.
J_B.

GMS

Fees should be declared and agreed up front. Some charge a fee at the start, some upon application, some once an offer is produced and others on completion.

Offset will work but the numbers need to be checked out. If you can borrow at 3% and save at 3.5% then you need to ask is it worth sacrificing the savings.

You saying 'Only considering it because I don't see IR rising significantly over the next few years.' would indicate an attitude to risk. However you have previosuly stated you are risk averse.

You need to see what the difference in rates is between a tracker and a fixed. If you choose a tracker then in my opinion it is better to go for a lifetime one rather than a fixed term one.

Tying in to a fixed rate for 10 years may look like a prison sentence but if it is portable (can be changed to a new property) then you are not nailed down to the property you buy (subject to meeting criteria). Rates of today are likely to look like a bargain in the future.

Many things to be considered but don't be talked into something you don't want.

Saying you are risk averse then saying a tracker is ok as you don't think rates will rise is kind of a vegetarian tea totaller ordering a steak and a beer.

Even if a tracker looks great today and has a margin to increase and still be comfortable, don't fall into the trap of thinking you can always switch to a fix when it gets too high. At that point the fixes will have risen too and may look like a missed opportunity.

funkey_monkey

Thanks - yes when you write it down like that it's a fair point in regards to the tracker. Fair point too in regards to difference between savings rates and borrowing rate.

I'll ask first about the fee's as that is a concern if I am going to ask a few providers.

GMS

Remember, assuming you for criteria and affordability you should literally have the pick of the market.

Ask as many questions as you feel necessary to your adviser. After all this is probably the biggest purchase you have ever made?

If you are using several advisers make sure they are not applying for any Agreement/Decision in Principle(s) for you as multiple applications will cause you harm.

Chat to a broker and see what you think. Speak to your own bank too. Always a good reference point as it gives something to compare to.

funkey_monkey

I know it's from the Daily Mail but its got me we not, quite worried, but it caught my attention:
http://www.dailymail.co.uk/news/article-2109335/Fears-thousands-homeowners-face-repossession-taxpayer-backed-NatWest-hikes-mortgage-prices-200-000-customers.html

If I get an agreement in principle for a mortgage now, does it hold the current interest rate on the mortgage or whatever rate applies at the time completion?

Am I best/wise to get an AIP now for a mortgage? I know from a buying perspective that in the current market no chain and an AIP would be quite attractive to any genuine sellers.

funkey_monkey

Hi guys,

Well my appt with the IFA and hopefully I'll get some good news from them.

On this same theme, I posted this thread in a few places in order to get some varied replies. Here is one here which you might want to comment on:

You need a Lifetime offset base rate tracker, and first direct srill do these with a current interest rate of 3.29% (or 2.58% if you want to pay a £1500 fee but don't do this you wont need too.

Why am I convinced of this? Well I will explain how the offset products work exactly.

You get three accounts, current account offset, savings account offset and mortgage account. what you have "borrowed" sits in the mortgage account. Your wages and bills all flow through the current account offset and this amount is "offset" against what is in the mortage account monthly so you pay less interest. As you know also what is in the savings account is "offset" against what is in the mortgage account monthly before interest is charged.

So effectively, if you have 100% of the value of the mortgage account sitting in the current and savings account you pay 0% interest every month because you have "offset" the whole debt so there is nothing for the bank to charge interest on!!!

To clarify.

You buy house £167k.

Put down £100k.

£67k mortgage via lifetime offset baserate tracker @ 3.29%

£65k cash into savings into "savings offset account"

£2k wages into current account offset monthly.

Your monthly interest bill on the mortgage is ..................................................£0.00, 0%.

This is because every month the £67k mortgage is "offset" against the £65k savings and £2k wages before interest is charged, and as they are the same there is nothing to pay interest on.

What is really cool about this is then you don't have to give a rats **** about what the BOE base rate is because even if it rises to 10% in 5 years time and they are charging you 12.79% (10% +2.79% baserate tracker) you don't care because every month there is £0.00 amount to apply the 12.79% too as the whole mortgage debt os offset monthly.

Also, what you then do is every month when you pay down the mortgage by £223 (£67k / 300 payments (25 years)) you withdraw this £223 the next day from the savings offset account and put it into the highest interest ISA account you can find that year.

This way you only have the exact amount monthly in your offset accounts to ensure £0.00 interest charges and the value of the monthly capital repayments accrue in a positive interest paying ISA earning you more.

Then is interest rates do rise to 10% you will still pay £0.00 on the mortgage monthly but will earn 10% + on the ISA savings accounts.

Granted the example, given ties up all my cash, but is the principle sound?


Also another question I forgot to ask in my original post:
What LTV do I need to get good rates? I appreciate that the lower the LTV the better the rate wil be, but is there a point where things make a significant jump? I only want to sink into a deposit the minimum needed to get a decent rate.

dimbo61

Why not look at YBS 5 year plus + fixed rate offset mortgage at 3.59% fee £995
If you have the cash to buy a property out right WHY take out a mortgage at all
You have to pay fees, survey, ( for lender ) etc
Take it on repayment over say 10 years and overpay/save into offset account each month.
Keeping as much money as possible in tax free ISA,s