Ok needs must and all that - mortgages?

[MD]

Can someone please explain to me what the hell is with all these mortgage options?

I need to buy a house and I am talking VERY soon, but I have been to the bank, found out my allowance and now need to try and figure out which mortgage is best for me.

I am going to repay over 25/30 years, and Ideally I need as low a monthly payment as possible (who doesn't?)

So can someone try and explain the difference in stupid man terms between tracker, fixed etc etc. I need to get a good idea of what i am letting myself in for etc etc.

Oh and please don't tell me its a crap time to buy etc as that really won't help me right now!

Matt.

[luap.h]

www.moneysavingexpert.com will probably help you immensely

more specifically

[MdSalih]

Ok - first of all, if you go in to any bank branch and speak with the mortgage advisor they will explain both of these terms in excellent detail and if it's a half decent advisor he won't stop until you fully understand the terms. Make sure you visit a few banks if you have the time and discuss it with different mortgage advisors until you are crystal clear on exactly what you are getting.

I will give you the basics of how it all works, which should hopefully give you a basic grasp of it.

First of all, the most fundamental thing you need to be aware of to get an understanding of all of this is the Base Rate for interest which is set by Bank of England on a monthly basis. This is the rate by which lenders decide how much interest to charge you on your mortgage. Currently this base rate is: 4.75% - it was stable for around 11 months at 4.5% and went up 0.25% on the 3rd of August 2006. As stated before, the base rate can go up and down on a monthly basis - it used to go up and down at rates of as high as 2-3%.. But these days it seems to only fluctuate at rates of 0.25% or 0.50%

Anyway, that is the Base Rate you will pay on your mortgage amount. Now on top of that the bank charges a certain amount - this is where tracker and standard/fixed rates come in.

A Tracker Rate - A tracker rate is one which follows the Bank of England's Base Rate from a month to month basis. The lender will offer you an interest rate just above the current base rate and as a result, your monthly payments will go up when the base rate goes up and they go down when it goes down.

An example scenario is as follows: (Note: figures are not 100% realistic and are only there to give you an idea)
Take the case you go and take out a mortgage tomorrow at the current rate of 4.75%. You decide to go for a tracker with total repayement over 25 years. The lender offers you a rate of 0.50% above the base rate and a 2 year tie in (will explain the 'tie in' concept later on). So your current mortgage rate will be 5.25%.

Now in two months time.. guys at the Bank of England decide that the base rate needs to increase by another 0.25% and so base rate now is 5.00% - You will recieve a letter from your bank saying the rate has gone up and so has your monthly payment amount.

Say now, in the next 1 year, the rate goes down a few times.. to something like 3.00% ... your total monthly payment amount will also go down.

A Standard Rate (Note: Again, figures are in now way realistic)
In this case the bank offers you a set rate above the current Base Rate by a standard/fixed percentage which you are tied to over a set period of time (i.e. 1 to 10 years ). In this case, the bank takes the current base rate (4.75%) and says something like... we'll add on an additional 2.00% making your total interest rate go to 6.75% - for the full duration of your tie in. So now, if the bank of england increase the base rate, your rate remains at 6.75% (which is a good deal for you) for the duration of your tie in. And also, if it goes down to something like 2.0% ... you'll still be paying 6.75% (which is a bad deal for you)

In summary, the standard/fixed rate is a set rate above the current base rate. It does not fluctuate with the base rate.

• Advantage: You are better off if the base rate hikes
• Disadvantage: If the base rate drops a significant amount, its a bad deal for you, considering you'd be only paying less if you were on a tracker

Tie In
A tie in is exactly what it says on the tin... it ties you into a certain type of mortgage for a set period of time. However you can get some deals without tie ins... sometimes, banks offer tracker rates which do not come with a tie in, but don't expect it to be as cheap as the ones with a tie in.

Normally, you can break out of a tie in for a penalty fee - an amount which the bank sets.

Once you come to the end of a tie in, you can switch lenders if you find a better deal or re-negotiate a better deal with your current lenders

Conclusion
A tracker rate's total interest rate is normally less than a standard rate. However, there is a greater risk in going with a tracker deal. Standard/fixed rates can be the safer option.. but in 6 months time you could be kicking yourself if the base rate goes down by a significant amount.

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That should give you an overall idea of how it works. Now it comes to the decision of which one to go for.

You should realise by now that it is really a gamble.

What you need to decide is what you can comfortably afford. If you get a really good fixed rate deal with a tie in of x years, and you think you could easily afford the amount for x years then it might be an idea to go for it. However, if you want to take your chances and go with the tracker seeing that it has a very good chance of being a great deal cheaper than the fixed rate, you might want to go for it instead.

Some final advice, speak to a *lot* of mortgage advisors and make sure you shop around *a lot* for a good mortgage deal that best suits you... and don't just go to the high street banks. Make sure you are comfortable with the total monthly payment amount, making sure you consider the risks of possible increase in the base rate if you choose the tracker route.

I hope that helps and feel free to query me on anything you dont understand from my post.

MdSalih

[jamin]

In my experience, my bank wouldn't lend what I wanted....

Went to an INDEPENDANT advisor and got lent what I needed for a better rate then my bank offered.

And that was after being told by my bank that I was in the top 95% of their customers and they valued my business.

[Merlin4458]

Really nice explanation there to be honest. Ill be looking for a house in the next few years and that really helped my understanding

[bigblue]

I can also thouroughly recommend seeing an independent financial advisor. Or 2.

First guy we saw was great and seemingly had "whole of market" advice but second one we saw found us a gem and we signed up for the offer very shortly afterwards.

Still worth popping in to see someone at your bank for a bit of a chat about it, especially if you have an attractive offer already from elsewhere.

[Rave]

MdSalih's explanation is entirely correct. Now I know you said:

Oh and please don't tell me its a crap time to buy etc as that really won't help me right now!

....but I just can't help myself, and I really think I will be doing you an enormous favour if I can persuade you not to buy right now. I could easily spend hours going on about how we're in a massive bubble and how house prices are now almost certain to fall (or even completely crash) in the next few years, but there's only one fact that matters: that it's now much cheaper to rent pretty much any type of property than it is to buy it outright. In other words, it's cheaper to rent the property directly from a landlord than it is to rent the money from the bank to buy it.

Lots of people counter this by saying that 'if property prices continued to go up, you could be priced out forever'. Leaving aside the fact that it's completely unlikely, so what? If you save the difference between what you'd pay in rent and what you'd pay in interest, you can be building up a substantial pot of savings. If you buy, then the only equity you're building up is whatever you manage to repay of the mortgage, plus whatever the value of the house increases by. House prices may have increased by 20% year on year between 2001 and 2005, but in the last year that has dropped to around 7%- barely better than you could get in a high interest savings account, without the costs associated with owning a house. Simple economic logic says that the days of massive increases in house prices are gone for a long time- the bubble simply cannot inflate much further, there's not enough new cash to pump into it.

So, while renting is cheaper than buying, it really is the sensible option. To give this some grounding in reality, consider my own personal situation. My wife and I currently rent a one bedroom flat for £650 a month- £7800 a year. Its current market value is probably around £125,000, so the interest on a mortgage at 5.25% (if I could get that on a 100% mortgage, which I doubt) would be £6562 a year. Add to that the yearly service charge, which is something north of £1000 a year, the water rates, and the cost of maintaining the place, and the landlord is effectively subsidising us to live here. He would make more by flogging the house and sticking the money in a high interest savings account, without the bother of having to be a landlord (not that we give him any hassle, but in that he's lucky).

Now, this place is too small for us, so we're going to move to a three bedroom house. Cost to buy- £250,000, cost to rent- £900 a month. You do the maths. The only risk is that they give us notice and we have to move- but equally if we want to move again for whatever reason, we just give a month's notice and up sticks, whereas if we owned we'd have all the hassle of selling the house and buying another one.

If/when it becomes cheaper to buy a house than to rent it, then we'll buy, assuming there's no good reason not to. But for the time being we'll have a nicer house and happier lives because we rent.

I need to get a good idea of what i am letting myself in for etc etc.

Years of negative equity and associated grief, is my guess. But assuming you've still not been put off, let's look at the practical effects of interest rate changes. As a hypothetical example, you borrow £100,000 on a tracker mortgage at 5%. You pay interest of £5000 a year. If interest rates go up half a point, then your interest rate will go up to 5.5%. That means your yearly interest will now be £5500. That's an increase, obviously, of 10%- extra money you have to pay every month. If interest rates went up to their long term average of around 8%, then you'd have to pay £8000- an increase of 60%. It works in reverse too of course- if interest rates fell to 4.5%, then you save 10% every month- but we have had a long run of low interest rates, and the likely direction of rates is upwards back towards the 50-year trend. Another rate rise of .25% in November is looking like pretty much a certainty- Gordon Brown said as much the other day. You can get 4/1 on Betfair for the rate rise to come earlier, in October, and I'm pretty tempted- I just wish I'd piled in in August when it was 15/1.

So, if after all that you're intent on buying, I have to say that some of the 10-year fixed deals around look like by far the safest bet, assuming you can easily afford the payments now. I think you can still find them at under 6% for 10 years. In 1992 rates went up to 12% and higher. People were handing in the keys to their houses at Building societies in their thousands because the mortgage payments were crippling them.

[MD]

MdSalih's thanks so much - makes much more sense now.

Rave - that line was in there just for you buddy , my rent is up and i ain't renting again. If the rates go through the roof I can buy the whole thing in one through other means - don't ask...

Matt.

[Nemeliza]

If the rates go through the roof I can buy the whole thing in one through other means - don't ask...

We won't

Check out this useful website i found a while ago from the halifax people. Lots of information and a checklist of what you need to do.
buyingyourfirsthome < no joke

[Zak33]

I have to congratulate MdSalih for his description too.

Let's point out some other stuff here though, to make sure you're life goes better for the expertise on offer, not worse.

Capped Rates: Some lenders still offer rates that fluctuate with the Bank OF Englands interest rate, but have a maximum that they'd ever get to, and not exceed even if the rate did.

Banks are clever (ish) and charge more money over the base rate, to cover their ass(et)'s in case the few that they loan on, DO end up winning.

Next: Why does the Bankof England raise and lower interest rates?

Well, if we all go out and buy new LCD screens, new cars, and get bigger loans, more credit card debt etc, then the high street spending shows as going up, and the economy needs pulling back in, slowing down, and the rate goes up a fraction. In my opinion since the Bank of England took over this rate adjustment, from the government body (though I'm sure Mr Brown still sticks his oar in) it's been very well managed.

Next up: this is what Uncle Zak asks EVERY SINGLE PERSON who is buying their first house:
What are the chances that your first house is going to be the house you stay in for 8-10 years?

Answer....alomst @:~: all. You wont still live there in 8-10. No one ever does. You'll need a bigger house. You'll need a different house. You'll need to move to a different area. You'll need a garage. You'll NOT need a garage anymore. It's impossible to say..but one thing I can tell you...

In the next 3-4 years you won't have paid off anything substantial of your mortgage...maybe &#163;1000

So you think of three things:
1: if the house prices go up, at least you'r on the ladder, and you'rs goes up as well
2: when you need to sell, can you pay it all off, with no penalty?
3: can you pay more whenever you like, without penaly?

So...my advice is this: Irrespective of how long the mortgage needs to be, make sure you can overpay, with no penalty and also clear the whole thing (ie when you sell) with no penalty.

There is almost NEVER a tie in that's worth having, because the carrot they tempt you with is gone in a few months, and you've got the stick over your head for a few years!

Example in a moment

[Zak33]

OK: Example's

You work out your monthly possibilities in 2006, and by 2007 you've moved in. Congrats nice place you've got here
You set your mortgage for 25 years, and you struggle to make those payments in the first few months, while you paint the walls, recarpet the livingroom and remove that horrible kitchen cabinet and put something nicer in. BUT...you have the ability to overpay, and have no tie in.....

Three year up the road and your income has risen, you've met someone to live with, she moves in and suddenly you've got nearly double the household income. Guess what? Now you can make some headway into that mortgage.

But......I BET you want a bigger house by then so the ability to settle early is even MORE important, so you're not tied in.

----------------

You choose an easy start option: You're offered either a cash sum or a lowered rate for the first few months..it seems like heaven. You move in...nice place you've got here...and you can easily afford to paint, carpet etc. But you were tied in.....

I'll stop now.

Lastly: If you're good with money (as I'm proud to announce that I am most of the time) you might want an offset mortgage (if they'll let you have one)

I pay a yearly charge of &#163;200 for a special account that allows me to offset 4 different bank accounts, including my current account, against my mortgage. Apart from the free travel insurance, the discounts other stuff and the personal account manager, who is a god) I save way more than that in interest every 3months, let alone every year.

They calculate the interest on my mortgage every night (365 days per year) and then work out how much money I have in my other accounts. So if my current account has on average &#163;500 in it over the duration of the month, my savings accounts arent savings, they're offset against the mortgage, so I don't pay income tax on the interest AND I can take them back out with no loans or requests.

The money you can save long term with an extra &#163;100 per month is quite scary over 25 or 40 years.

So confident was I that it's the right mortgage (because I had one on my last house) that I chose a 35 year mortgage!

35 years.... he's mad!!!

Ahh..but I have no intention of taking 35 years to pay it off...I pay off as much as I can and so does Sair, everymonth. BUT....on the one month that money is tight: I have a low minimum payment

BUT only consider it if you're good with holding your money.

[MD]

ask people who know me, Im really strict with myself over money.

Ill try and dig out the thread I posted when I first joined here that was life changing, ever since then I don't have a credit card debt, I take 15 visits to a website before I buy anything and it drives everyone I know nuts.

I need to ideally find something within 3 months, and lots of people will offer incentives for closing a contract early.

I am taking this all in and I thank you all for your help, really appreciated....now to find that thread...

[MD]

http://forums.hexus.net/showthread.p...t=credit+cards the photos dead but it was a pile up cut up cards.

Ive learnt the hard way on money and I don't want to go back - ever.

remember that thread Zakky? Was way back when and like you helped me there too fella

Cheers

[dkmech]

Yeah, being able to overpay without penalties is great. Every pound you pay off extra won't be charged interest on for the next 25 years. Since in the early years you are mainly paying off the interest anyway anything extra you can pay then is a great bonus.

[kalniel]

*shivers at the thought of house prices*

[kempez]

I just got my first mortgage through. Me and the fiancee have a few leftover student debts to pay off so we chose to get those on the mortgage. I went to an IFA friend of the family and went wityh Northern Rock fixed for 5years - not too bad and allowed me to be able to buy a flat in this expensive part of the woods