Home Movers Mortgage
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Richard Campo from Rose Capital joins us to talk to us about Home Mover Mortgages.
What do we mean by home mover mortgages?
These are mortgages geared for people moving home. Just to go back a step and explain the mortgage process, in 2014 the Mortgage Market Review looked at what led to the financial crisis, and two important phrases came out of that: ‘stress test’ and ‘affordability.’
Stress tests look at the potential impact of interest rates increasing over time – can you still afford the mortgage in the future if interest rates were to rise? Affordability is about your income and outgoings and the size of your mortgage payments.
In the past it was always perceived that you are a better customer if you have a mortgage history, but now banks simply look at you in terms of what you can afford, whether or not you are moving home or had a mortgage previously.
What costs need to be considered if you are moving home?
The main thing you have to play with is the equity in the property, which is essentially your deposit on the new home. If you’ve been in your home for a while you might find you have a much larger deposit and that’s a very good thing.
The smallest deposit you can have is 5% and then for every additional 5% you put down, the rate gets lower. A 40% deposit gives you the cheapest mortgage. If you put down a 25% deposit or more you find that mortgages get cheaper, which is because house prices have never gone down more than 25% in any one cycle, so a 25% deposit makes you a low risk to a bank.
If you are selling, another big cost is estate agent’s fees. That might be fixed fees or up to one or two percent of the property value. Do ask what the fees are because that can be quite significant on high-value properties.
Solicitors costs could be anything from a few hundred pounds to a few thousand pounds. When you’re looking at solicitors, go with a recommendation – whether it be someone you worked with when you bought the property, linked to the estate agent or broker or even a personal recommendation.
Another big one is stamp duty. That’s going to be a percentage of the property you’re buying, and you can use online tools to see what this will come to. If you are holding onto a property and buying a second, do bear in mind that there will be a 3% surcharge – online calculators will include this in reaching the total.
How much can I borrow as a home mover?
You can generally borrow about four and a half times your income. The maximum you can typically get to is around about six times your income if you’re a higher earner. If you earn over £75,000 to £100,000 most banks will offer you around five and a half times your income as standard.
If you’re deemed a high net worth individual, earning £300,000 a year or have £3,000,000 worth of assets, none of these rules apply so private banks can go outside the normal rules.
If your affairs are complex, with stock options, bonuses or you run a business that’s very profitable, talk to a broker because you can probably achieve a bit more than you might think.
What is porting?
It’s where you take a mortgage with you from your current lender onto a new property. It’s very common when you’re moving home. Most residential mortgage providers have a porting clause in the contract.
The clause states that as long as the bank deems the new mortgage affordable, you can take your mortgage onto a new property. That’s advantageous if you’re facing a large penalty to leave your mortgage early.
You can also borrow more at that point as well. As an example, you might have two years left on a five-year fixed rate mortgage. You could borrow more money to complete the purchase on a two-year fixed rate. Then, when your current deal comes to an end, all the penalties expire and you can move to a new lender for the full mortgage amount.
Can I increase the mortgage value when I port?
Yes – you can do that with your current provider, and you can actually do it with another provider as a second charge loan as well.
The typical situation is the example above. But a more complex case could be where someone is moving and has 11 months left on their fixed rate. It doesn’t make financial sense to pay those penalties now, and they don’t want to take a two-year fixed rate because that means two different end dates on the mortgage. So here they might choose top-up borrowing on a higher rate, penalty-free tracker. Then in eleven months they can refinance with a single mortgage
And again, this is where a broker has a lot of value – we might suggest ideas that you didn’t know were possible. And early repayment fees can reach tens of thousands of pounds so it’s important to get it right.
Can I port my mortgage if the new home is cheaper?
Yes, but this is where it gets a little bit messy. What you often find is that a mortgage product has a Loan to Value (LTV) limit. Let’s say you put down a 25% deposit initially and want to buy a lower value property. The bank will probably let you do that, but you can only borrow 75% of the new property’s value – which means you might have to reduce the mortgage to keep it within that threshold.
A second issue is that with most fixed rate deals, you can only pay off 10 percent of the mortgage balance without any penalty. So if you have a £100,000 mortgage and downsize, paying off more than £10,000 might then trigger a penalty. Again there’s ways of getting around this. We will explore the options for you.
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How do I decide whether to port or get a new mortgage?
There are two aspects to consider. The first is just numbers. Say for example, you took out a five year fixed mortgage two or three years ago, you’ll find that mortgage rates are now much lower. So it might actually make financial sense to pay the penalty to leave your mortgage and get a lower rate for a longer term – we are doing a lot of that right now.
The second factor is that you might want to move lenders because, for example, your situation’s changed. You might want to borrow a certain amount to buy a new property but your existing lender won’t offer you the full amount. Therefore it makes sense to go to another lender that will let you complete the purchase. Even if you are paying penalties to do that, it’s worth it if you will achieve your property goal – to put your child into a catchment area of a good school or be nearer family, for example.
What a broker will do is explore these factors and have a clear and honest conversation about what you want to do.
How does the equity in my home affect my options?
As I touched on, a 5% deposit will give you the most expensive mortgage you can have. A 40% deposit will be the cheapest mortgage you can get, and every 5% makes a difference to the rates. There’s a big drop once you reach a 25% deposit.
Is there anything else to consider when moving house?
The main thing is just understanding what you want to do and what’s possible. This is where it’s really worth engaging with a broker early. We’ll help you set budgets, talk about penalties, your timeframes and what approach makes the most sense.
A lot of five-year fixed rates for example, have penalties that drop 5,4,3,2,1 – so in the first year it’s five percent, second year four percent and so on. You might decide to move in July rather than June to save a few thousand pounds… It’s little things like that that you can talk through.
How can you assist if your client wants to keep their property but also buy a new home?
We do a huge amount of this. The technical term is Let to Buy, as you’re letting out your current property to buy a new one.
This is exactly what my wife and I did. We both had little one bed flats, we rented these out and bought a new property together. That’s completely possible and probably more affordable than you think.
If you can say to a bank that the rent on your existing property will cover the mortgage that you need, they will disregard it when you come to buy a new property. You convert your existing property into a Buy to Let and you can even raise more money to go toward the deposit if you want to, as long as that rent covers the mortgage ‘stress test’ to make sure the bank’s comfortable.
On your new purchase the bank only assesses you on the new mortgage you’re getting, not the background property. So you don’t have to sell. Some of the most affluent clients I have don’t sell properties. They hold on to them for a long time.
That’s not right for everyone, but if you do want to explore that, talk to us. You’ll find the rules more relaxed than you might assume.
Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.