Looking Beyond The Obvious

EDWARD CHECKLEY Partner, Private Finance mortgages@brik.co.uk

Picture the scene. A mortgage borrower is scanning mortgage best buy tables in order to find the best product for their circumstances. They filter the results to identify the best five year fixed rate and, with a range of competitive rates on offer, the solution seems simple. Job done! Or is it? 

It’s possible that by focusing on finding one suitable product borrowers are losing out. Indeed, it may seem counter intuitive but many borrowers are not exploring the benefits of taking out multiple mortgages. 

A prime example would be for older borrowers who are typically asset rich but income poor. They may be reaching the end of a long term mortgage and unable to refinance with conventional lenders. 

The options presented can seem unattractive, equity release is clear option but it has considerable disadvantages with significant breakage costs and compounded interest. If wishing to downsize in the medium term the breakage costs are likely to be punitive. 

FIG 1. Using income from self-employment, investments or pensions it may be possible to raise a mortgage which may clear a significant portion of the existing debt, the balance of which can be cleared by a compounding second charge mortgage with no monthly payments. 

This allows the first charge lender to ignore the second charge for affordability purposes. 

FIG 2. Buy to Let mortgages are now more regulated than ever. Historically many lenders would advance loans based on a light rental coverage calculation, often 125% of the mortgage interest rate.

Now it is common place for a 145% coverage of a mortgage payment calculated at 5.5%. For a property in central London yielding 3% the implications are significant. 

Landlords can become mortgage prisoners, unable to refinance their mortgage after the initial rate due to the new assessment of the rental income. 

FIG 3. A few lenders have attempted to solve this problem, however this often involves paying for a cost inflated product. By taking out a second charge there may be the possibility of reducing the overall cost of the mortgage, for example. 

All mortgage borrowers have unique personal circumstances which is why it is so important to seek independent mortgage advice. A mortgage broker can assist by assessing the feasibility of structuring such solutions and fully weighing up the pros and cons of implementing a single mortgage or multiple mortgages, ensuring the outcome really is the best possible solution for you.

FIG 1. 
Mortgage Amount: £500,000

One Mortgage Solution

Two mortgage solution

Type

Equity release

1st

2nd

Aggregate cost

Lending rate

5%

2.19%

8.50%

3.77%

Product

Term Tracker

5 year fixed rate

5 year fixed rate

 

Associated Balance

£500,000

£400,000

£100,000

£500,000

Total Cost

£138,141

£43,800

£50,366

£94,166

5 Year Saving

 

 

 

£43,975


FIG 2. 
Property Value: £1,000,000  Annual Rent £30,000 (Rental Yield 3%) 

Rental Cover

125%

145%

Stressed Rate

3.50%

5.50%

Maximum Mortgage

£685,714

£376,176

Loan to Value

69%

38%


FIG 3. 
Mortgage Amount: £500,000

One Mortgage Solution

Two mortgage solution

Type

Buy to let

1st

2nd

Aggregate cost

Lending rate

3.59%

2.49%

4.49%

 

Lending fee

2%

£1,850

£995

£2,845

Product

5 year fixed rate

5 year fixed rate

5 year fixed rate

 

5 year total Cost

£99,750

£51,650

£23,445

£75,095

5 Year Saving

 

 

 

£24,655


Looking Beyond The Obvious

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YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

© Private Finance Limited, 2017. Private Finance provides independent mortgage advice and arranges individual mortgage solutions for clients. Private Finance is a trading style of Private Finance Ltd, 21 Bedford Square, London WC1B 3HH, registered in England no. 3855776 and Private Finance Associates LLP (PFA LLP) of the same address, registered in England no. OC357301. PFA LLP is an Appointed Representative of Private Finance Ltd. Charges are based on the loan amount and the complexity of your needs and circumstances. Our maximum fee is 1% however typically our average fee has been 0.28%, i.e. £980 on a loan of £350,000. Private Finance Limited is authorised and regulated by the Financial Conduct Authority (FCA registration number 310566).

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