Low rates and higher lending volumes are great, but also keep an eye on costly arrangement fees
AS WE pass “Mortgage Freedom Day” – the point of the year when average UK homeowners have earned enough to service their annual mortgage bills – it is a good time to reflect on the virtues of owning a house. The equivalent day for home-renters is a month later, according to Halifax.
And if you are able, buying beats renting. Property portal Zoopla estimates that, in 90 per cent of the UK, it is now cheaper to buy a two-bedroom flat than to rent one. So if you are looking to buy for the first time, move home, or even remortgage, now may be a an opportune moment given historically low mortgage rates. The average rate on a two-year fixed rate mortgage with 75 per cent loan to value (LTV) fell to a record low of 2.83 per cent in March. And the average five-year fixed rate mortgage (75 per cent LTV) is now just 3.52 per cent.
Additionally, lending volumes are increasing: data from the Council of Mortgage Lenders shows that the number of home loans rose by 4.7 per cent over the last year. A lot of this is attributed to first-time buyers, for whom mortgage lending is up by 17 per cent. The market is slightly more subdued for home-movers and those remortgaging; up by a modest 3.2 per cent.
GET THE BASICS IN ORDER
Even though finance is available and rates are low, lenders are still strict. It is, therefore, paramount to ensure that you only apply for suitable products – getting turned down for a mortgage can leave a black mark on your credit history, and make it difficult to apply for lending in the future.
So have the basics in order, and make sure that your credit history is sound: ensure that you are registered on the electoral role; be prepared to show at least six months of bank statements, showing your account has been run properly (changing account six months before your mortgage application may not be wise); if you have recently taken a new job, wait for six months before applying for a mortgage.
VALUE OF ADVICE
Sometimes bespoke advice is needed. “Selecting the best mortgage product is more than looking at rate tables,” says Ray Boulger of John Charcol.
Looking purely at online comparison websites will not tell you how a lender assesses your mortgage application; advisers will. Most of the big lenders use credit scoring. But smaller lenders, like Clydesdale Bank, use human underwriters.
The advantage of human underwriters is that they can take a holistic view of your application, and don’t solely rely on credit scores. This is useful for those with a poor credit history, but who are in the process of improving it. Although these lenders may charge higher rates or fees, Boulger says that they aren’t especially higher than the rates of larger lenders.
And professional advisers will also know how long specific lenders take to turnaround mortgage applications. This is particularly important in high-demand areas, like London, where you may be required to exchange contracts quickly.
THE BEST DEALS
Unsurprisingly, the best deals are reserved for those with larger deposits. A look at MoneySupermarket’s mortgage table shows that all of the top deals require a minimum deposit of 40 per cent. But the rates between 60 per cent LTV and 75 per cent LTV mortgages are narrowing, says Boulger – the difference between the best deals is now around half a per cent.
For low-deposit and first-time buyer mortgages (offering 90 per cent LTV), the best deal is almost 2 per cent higher. So it may be worth saving more before applying for a mortgage requiring a higher deposit.
However, house prices are likely to change over the next few years, driven by schemes to boost lending. And buyer optimism is high: a survey from Halifax found that 45 per cent of respondents are expecting price increases; only 12 per cent expect declines. So given that rates are low, it may be worth taking a plunge sooner rather than later.
But when looking at house prices, remember to account for inflation. The average house price in London is £371,000 according to the Land Registry – up by 5.9 per cent over the last 12 months. But accounting for inflation, prices have grown by just 3.1 per cent. Across the UK, house prices nominally grew by 1.9 per cent, but have fallen in real terms. So if you are considering buying a second home outside London, with a small deposit, make sure that you factor inflation into your mortgage calculations.
And while rates are historically low, research from Moneyfacts points out that mortgage arrangement fees now average about £1,500 – a 25 year high. Sylvia Waycot of Moneyfacts suggests keeping an eye on these hefty fees.
Thankfully, some lenders have been slashing them. Nationwide, for example, only charges £400 fees to first-time buyers, which is almost half the rate of the mortgages that are top of the first-time buyer tables. And many of its mortgages for home-movers and those remortgaging do not exceed £900.
It is easy to overlook higher upfront fees, especially when you are being enticed with attractive mortgage rates. But beware: they can easily turn a cheap deal into a costly one.