Archive for June, 2010
Mortgages. Higher Lending Charges Are Outrageous.
After you scraped together a modest deposit for your new home you may think you’re home and dry. Think again. On top of there’s the surveyors and solicitors to pay. Then the government want a slice. You’ve got to pay stamp duty at 1% of the property’s price (if the house costs more than 250,000 the rate of stamp duty increases see the information at the foot of this article). Phew! You’re lucky you’ll just make it you’ll be a homeowner at last!
Then out of the blue the mortgage lender sends you a new bill another 1,500 please Sir. They’ve called it a Higher lending Charge (HLC) and it’s charged if you borrow more than 90% of the value of the house. About 75% of all mortgage lenders charge it and 1,500 is about the average they ask for.
And guess what they money you pay won’t benefit you in any way whatsoever! Not one jot. You’re being charged for a form of protection insurance that protects the mortgage lender, not you. The HLC pays the lender if you default on your mortgage, your property has to be repossessed and the sale proceeds are less than the outstanding balance on your mortgage. In theory the HLC then pays out the shortfall to the lender but in practice many lenders carry the risk themselves so the HLC is just an extra fee to offset a higher lending risk.
But an HLC doesn’t let you off the hook! If your home is repossessed and there’s a shortfall, you still have to pay the shortfall back to your lender – they’re sure to chase you for the money.
Whilst most of the lenders who charge HLC’s will readily agree to add the charge to your mortgage, that’s little consolation. In any case this means that you’ll end up paying interest on top of the charge. Then, over a 25-year term, your HLC will have cost you closer to 2,700!
In our opinion HLC’s should have died out with the dinosaurs. If a lender is worried you’ll default, they shouldn’t have lent the money in the first place. And with all today’s hi-tec credit checks and the risk based assessments used to process your application, you’d think the lenders were doing enough to protect themselves. In any case you may also end up paying a small interest premium for a 90% plus mortgage so in practice you’re being charged twice for the same risk!
The Nationwide Building Society, who incidentally do not charge HLC’s, recently reported that during the last five years 1 billion has been charged in HLC’s by some 800,000 borrowers. It also found that just over 500,000 were first time buyers largely youngsters struggling to buy a home. We believe that HLC’s are just another money making ploy for the mortgage lenders. By the way, the Higher Lending Charge used to be called a Mortgage Indemnity Guarantee, but they are all the same – only the name is different!
We think it’s time for the Office of Fair Trading to open up the box and take a look inside in the same way as they did with credit cards. The OFT recently ordered many credit cards to reduce their charges by up to 40%. A bit of that magic would do wonders for Higher Lending Charges!
Current Stamp Duty rates on house purchases in the UK
Houses under 125,000 No Stamp Duty
Houses 125,000 to 249,995* 1%
Houses 250,000 to 499,995* 3%
Houses over 500,000 4%
*HM Inland Revenue rounds up house prices to the nearest 5. Therefore, a house sold for between 249,996 and 249,999 will be rounded up to 250,000 and they’ll charge you 3% Stamp Duty on the lot!
Information correct as from the April Budget 2006.
Mortgages. Exit Fees To Be Capped.
In the last 3 to 5 years we have seen rises of up to 450% in the exit fees charged by lenders when borrowers redeem their mortgage. But at last the Financial Services Authority (FSA) ha seen the light and is going to crackdown on these increases.
Lenders have been telling new borrowers about the exit fees currently charged, but the lender has retained the right to increase those charges at any time and without advising borrowers. This amounts to a free hand to increase these charges and many lenders have taken the opportunity gladly.
Take the Woolwich for example; they’ve increased their exit fee from what was 95 to 275. The Cheltenham & Gloucester has increased theirs from 50 to 225. The lenders have clearly been trying to penalise those of us who regularly switch their mortgage to get the best interest rates the so called rate tarts and at the same time line their coffers.
However, the FSA is now in talks with the mortgage lenders to bring them to heal. The FSA wants fees to be fully disclosed at the outset and for the disclosed exit fee to be fixed for the duration of the mortgage. The FSA hopes to have agreed a binding undertaking from the lenders by June this year.
On a wider front, borrowers should always remember to take into account all the charges and money saving offers when working out which mortgage is cheapest for them.
To illustrate this point, let’s say you wanted a 2-year fixed rate mortgage and were attracted by the offers from the Northern Rock and the Halifax.
Northern Rock currently charges an interest rate of 4.19% plus a 1.5% arrangement fee and an exit fee of 250. Halifax’s interest rate is 4.39% with an arrangement fee of 499 and exit fee of 175. Within Halifax’s package there’s also a free valuation and free conveyancing that typically could save around 750. So which mortgage deal is the cheapest?
Taking a 25 year repayment mortgage for 100,000 and costing it over the first two years with redemption at the end of the second year, The Northern Rock comes out at 14,671. The Halifax comes out at 807 cheaper at 13,864. And this saving doesn’t take into account the extra 750 valuation and legal savings offered by the Halifax. Therefore, assessed on this basis, the 4.39% headline rate offered by the Halifax is in fact the cheaper deal.
Another issue that will affect the true cost of your mortgage is whether the interest is charged on a daily, monthly or annual basis. On an otherwise like for like basis, annually calculated interest will always work out more expensive because for 11 months of the year, you are charged interest on money you have already repaid.
The best advice is to read all the small print! And remember that the lenders use all sorts of words to describe charges – application, arrangement, reservation, booking, completion and early redemption are all words to described charges or fees. Keep your eyes skinned!
Mortgage Terms and Definitions
The mortgage process can be a little confusing if you aren’t familiar with the terms used in the process. To help you out, here is a list of terms with corresponding mortgage definitions.
Broker: An independent mortgage professional that oversees the entire home loan process.
Lender: The business entity providing and funding the home loan.
Processor: Prepares your loan for underwriting. The processor makes certain your income is properly documented and verified, the appraisal is being performed, and title and escrow are opened.
Escrow: Works with title to certify payoff demands for all existing liens. Escrow is an independent group which disburses monies to all parties in the loan transaction and ensures full payment.
Underwriters: Make the decision to approve or deny the loan. Hired by the lender, their job is to review all aspects of the loan based on the lender’s approval guidelines.
Automated Underwriting: A computer generated loan approval. This automated process only takes minutes and is the quickest path to approval.
ARM: Adjustable Rate Mortgage. An ARM has a fixed rate for a specified amount of time. After the initial term, the loan becomes adjustable and the rate can fluctuate depending on market conditions. ARM payments are initially lower than fixed rate payments. This is an excellent option for people with damaged credit, those who plan to sell their homes short term or who simply want to save money on their monthly payment.
DTI: Debt to Income Ratio or your total monthly debt in relation to your gross monthly income. For example if you have 2,500 in total monthly debts with a total income of 5,000, your DTI is 50%. The higher the DTI, the higher the lender’s risk and 50% is typically the maximum allowable DTI.
Equity — The amount of vested or owned interest in your property. Subtract the total balance owed on the property from the appraised value to determine your equity.
FICO Scores: Most lenders use the FICO scoring system to qualify borrowers. The FICO score is a number assigned from each of the three main credit repositories (Experian, Trans-Union, and Equifax). This number is calculated based on your complete credit profile and takes into account late payments, balances on trade lines, inquiries for additional credit, judgments, bankruptcies, total debt, length of credit history, and more. The lower the FICO score, the higher the lender’s risk.
LTV: Loan to Value Ratio. For example: a loan amount of 75,000 on a home valued at 100,000 equals an LTV of 75%. Your equity would equal 25,000, or 25%. The higher the LTV ratio, the higher the lender’s risk.
Stated Income: Your own statement of income on the application versus income that can be independently verified. Use of stated income is an excellent option for self-employed individuals or those with hard to prove income.
Getting a mortgage for a home purchase can be stressful. If you understand the lingo being used, you will find it less so.