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First Time Buyer - Any Advice On Mortgage Type Suitable For Me?


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#1 ravedave

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Posted 07 March 2012 - 06:09 PM

Hi,

I'm looking for some advice on my first property purchase - which is to be a home for myself.

I have savings totalling 165k in various accounts earning from 1.5% to 3% in interest. (I am in my late 30's, don't smoke, rarely drink and work long hours). Some of this is locked (approx 40k) in for one more year in ISA's.

I am looking to purchase a house in the 150k - 170k price bracket.

I have just made an appt to visit an IFA to discuss my options but I'd like to gather some info so that I go into the meeting with my eyes open and am able to ask pertinent questions.

Firstly, I don't want to sink all my cash and near cash into the house. I appreciate that the return I am getting on my money currently is poor, but I need to have it near to hand in case I find a property which I need to act on.

So, Interest Only does not appeal to me - I'd rather pay it off as I go along. So repayment is appealling to me.

With the amount of savings I have saved over the years Offset is the one which interests me most as I can get better return on my money than it is getting currently - plus it is near to me if I need it for an emergency - so it is not locked into the property.

Whether to go for a variable rate of fixed is something I'm not sure about. A gamble on interest rates is something I'm not keen on as I am risk adverse. However, from what I am reading about BoE thoughts, the Interest Rate is not going to skyrocket any time soon, so it might be the best choice. Although a conversation with someone else convinced me that rates now are at an all time low and can only increase, therefore a long term fixed deal might be a better option than an offset.

Unless I have thought wrongly of offsets, is it the best option for me? I was thinking only putting enough into the deposit in order to get into a good LTV interest rate - hopefully no more than 30% - 40%. This means the rest can be put into an offset savings account it will be tax efficient and I'll have saved money tax free at whatever the IR of the mortgage is. I understand that my offset cash will not generate any interest money.

Some questions on my logic above:
1. Is offset a sensible approach?
2. If I have more than 50,000 to offset against the mortgage how does this affect me in terms of the 50,000 FSA guarantee if the provider goes belly up?
3. Does Offsets offer tracker style interest rates?
4. Is a long term fix worth considering at the minute? I assume that with the currently false low of the interest rate, it would be now a good time to go for a long term deal as the rates will only rise from here on?


Thanks.

#2 markyh

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Posted 07 March 2012 - 07:02 PM

Hi,

I'm looking for some advice on my first property purchase - which is to be a home for myself.

I have savings totalling 165k in various accounts earning from 1.5% to 3% in interest. (I am in my late 30's, don't smoke, rarely drink and work long hours). Some of this is locked (approx 40k) in for one more year in ISA's.

I am looking to purchase a house in the 150k - 170k price bracket.

I have just made an appt to visit an IFA to discuss my options but I'd like to gather some info so that I go into the meeting with my eyes open and am able to ask pertinent questions.

Firstly, I don't want to sink all my cash and near cash into the house. I appreciate that the return I am getting on my money currently is poor, but I need to have it near to hand in case I find a property which I need to act on.

So, Interest Only does not appeal to me - I'd rather pay it off as I go along. So repayment is appealling to me.

With the amount of savings I have saved over the years Offset is the one which interests me most as I can get better return on my money than it is getting currently - plus it is near to me if I need it for an emergency - so it is not locked into the property.

Whether to go for a variable rate of fixed is something I'm not sure about. A gamble on interest rates is something I'm not keen on as I am risk adverse. However, from what I am reading about BoE thoughts, the Interest Rate is not going to skyrocket any time soon, so it might be the best choice. Although a conversation with someone else convinced me that rates now are at an all time low and can only increase, therefore a long term fixed deal might be a better option than an offset.

Unless I have thought wrongly of offsets, is it the best option for me? I was thinking only putting enough into the deposit in order to get into a good LTV interest rate - hopefully no more than 30% - 40%. This means the rest can be put into an offset savings account it will be tax efficient and I'll have saved money tax free at whatever the IR of the mortgage is. I understand that my offset cash will not generate any interest money.

Some questions on my logic above:
1. Is offset a sensible approach?
2. If I have more than 50,000 to offset against the mortgage how does this affect me in terms of the 50,000 FSA guarantee if the provider goes belly up?
3. Does Offsets offer tracker style interest rates?
4. Is a long term fix worth considering at the minute? I assume that with the currently false low of the interest rate, it would be now a good time to go for a long term deal as the rates will only rise from here on?


Thanks.



If a fixed offset mortgage that was low enough and long enough exists could be a good product for you. First Direct (Part of HSBC , a UK bank that still makes money!) have done a great range of offset products for ages, nearly always at better rates than HSBC direct.

I took a First Direct Lifetime Offset base rate tracker in 2009 @ 1.49% over base and the first month i went live was March 09 when the BR was dropped to 0.5%. So for me the past three years have been way way better than Fixed product on offer in 2009 and interest rates would have to rise a lot over say a 3.99% fix for a long time before the last three years savings are "worse" over time than the tracker rate.

Best thing about offset products are they are I/O , rather than repayment but you set them up as repayment just by divinding the capital amount by the number of months of the mortgage term.

What is brilliant is that this way every month the outstanding mortgage capital amount owed drops the exact amount of that months capital payment. So you will find at the end of the first year your mortgage will have shrunk by say, 1/25th.

For me after 3 years seeing the mortgage 3/25ths less than when we took it out is a great feeling!

You don't get this with repayment because for the first 50% of the mortgage term the payements are skewed higher to interest than capital each month.

You would be very suprised after 5 years on a repayment mortgage how little the capital outstanding would have shrunk.

M

Edited by markyh, 07 March 2012 - 07:27 PM.


#3 manchester50

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Posted 07 March 2012 - 07:45 PM

85K is the amount protected now.

I'd echo the previous poster - First Direct do a very good range of offset products including tracker, capped and fixed up to 5yrs. Unless you expect interest rates to go up in the short term I'd lean towards a tracker (fixing in a couple of years), or a very long fix (i.e. 10 yrs)

#4 markyh

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Posted 07 March 2012 - 07:55 PM

Hi,

I'm looking for some advice on my first property purchase - which is to be a home for myself.

I have savings totalling 165k in various accounts earning from 1.5% to 3% in interest. (I am in my late 30's, don't smoke, rarely drink and work long hours). Some of this is locked (approx 40k) in for one more year in ISA's.

I am looking to purchase a house in the 150k - 170k price bracket.

I have just made an appt to visit an IFA to discuss my options but I'd like to gather some info so that I go into the meeting with my eyes open and am able to ask pertinent questions.

Firstly, I don't want to sink all my cash and near cash into the house. I appreciate that the return I am getting on my money currently is poor, but I need to have it near to hand in case I find a property which I need to act on.



Reading this again with your situation of being able to virtually by a house for cash but want "some" mortgage so you have access to emergency cash if needed then i'm convinced you need the exact same type of product as me, and i will explain why.

Any good trustowrthy IFA should advise you the same IMHO.

You need a Lifetime offset base rate tracker, and first direct srill do these with a current interest rate of 3.29% (or 2.58% if you want to pay a 1500 fee but don't do this you wont need too.

Why am I convinced of this? Well I will explain how the offset products work exactly.

You get three accounts, current account offset, savings account offset and mortgage account. what you have "borrowed" sits in the mortgage account. Your wages and bills all flow through the current account offset and this amount is "offset" against what is in the mortage account monthly so you pay less interest. As you know also what is in the savings account is "offset" against what is in the mortgage account monthly before interest is charged.

So effectively, if you have 100% of the value of the mortgage account sitting in the current and savings account you pay 0% interest every month because you have "offset" the whole debt so there is nothing for the bank to charge interest on!!!

To clarify.

You buy house 167k.

Put down 100k.

67k mortgage via lifetime offset baserate tracker @ 3.29%

65k cash into savings into "savings offset account"

2k wages into current account offset monthly.

Your monthly interest bill on the mortgage is ..................................................0.00, 0%.

This is because every month the 67k mortgage is "offset" against the 65k savings and 2k wages before interest is charged, and as they are the same there is nothing to pay interest on.

What is really cool about this is then you don't have to give a rats **** about what the BOE base rate is because even if it rises to 10% in 5 years time and they are charging you 12.79% (10% +2.79% baserate tracker) you don't care because every month there is 0.00 amount to apply the 12.79% too as the whole mortgage debt os offset monthly.

Also, what you then do is every month when you pay down the mortgage by 223 (67k / 300 payments (25 years)) you withdraw this 223 the next day from the savings offset account and put it into the highest interest ISA account you can find that year.

This way you only have the exact amount monthly in your offset accounts to ensure 0.00 interest charges and the value of the monthly capital repayments accrue in a positive interest paying ISA earning you more.

Then is interest rates do rise to 10% you will still pay 0.00 on the mortgage monthly but will earn 10% + on the ISA savings accounts.

makes sense? I envy anyone in this position, a very nice place to be financially.

M

Edited by markyh, 07 March 2012 - 08:05 PM.


#5 ravedave

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Posted 07 March 2012 - 10:10 PM

Cheers - thanks for those pointers.

Another question - what LTV do I need to get good rates? I appreciate that the lower the LTV the better the rate wil be, but is there a point where things make a significant jump? I only want to sink into a deposit the minimum needed to get a decent rate.

#6 manchester50

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Posted 07 March 2012 - 10:38 PM

Cheers - thanks for those pointers.

Another question - what LTV do I need to get good rates?


In your position, go for 65% LTV or better.

#7 Joan of The Tower

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Posted 07 March 2012 - 11:00 PM

If your IFA ia a commission-based one, run for the hills.

Look for a reputable, upfront fee based guy, who has no interest in flogging the best commission-paying product. Ask them about receiving the sales commission back (common practice for reputable advisers).

There are IFAs and IFAs, unfortunately. Don't get screwed by a guy who only wants to flog you the highest commission paying product, they are seldom the market leaders (hence the favourable incentives).


Look out Dave, you will soon be handing the keys back mate.



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Arthur: Knimbies of No, we are but simple hardworking families who seek affordable housing on the scrubland beyond these woods.
Knimbies of No: No! No! No! No! No! No! No! No! No!
Bedevere: Please stop opposing our reasonable demands!
Knimby of No: We shall say "No" to you... if you do not appease us.
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A SHRUBBERY!!!!


#8 markyh

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Posted 07 March 2012 - 11:35 PM

In your position, go for 65% LTV or better.


Agree, certainly for First Direct (and i guess HSBC) you need a 65% LTV (35% min deposit) to get the best lifetime tracker deal.

Other lenders will differ but the rule of thumb these days is roughly around 40% down for the best deals. However you will notice with HSBC in it's various guises you have not heard any recent press about them increasing their SVR rates or making people put 50% down for i/o mortgages etc.

But you have heard this from RBS, LLoyds, Barclays, Santander etc in the last two weeks. Now this says to me that HSBC must be suffuciently well capitalised already to pass Basel 3 requirements coming into force in the next few years so don't have to offer worse conditions to deter customers.

Also remeber when you speak to an IFA that they make commision and sometimes , although independent get better commisons from certain banks than others.

So work out the offset deals from HSBC and First direct websites first and see which way the IFA steers you. If he points you to say a Barclays offset mortgage that is worse rates than HSBC/ FD then query are there not better deals available and see if he mentions what you already know.

Also remember becasue of above and the fact that you are most likely to have 100% off the mortgage debt offset every single month then it is pointless paying any arragement fees of 500 or 1500 to get a lower tracker rate (which is usualy only 1% less anyway) because you are not going to have a mortgage interest bill every month.

So just look to compare the "fees free" offset rates of the various offset lenders that the IFA shows you.

M

#9 AteMoose

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Posted 18 March 2012 - 05:21 PM

Echo some of the other posters, + 1 for offset mortgage as it would be tax efficient.

I would fill it up with all your savings, you can always get it out, and it would be much more tax efficient/cheaper

why go to a financial adviser, imho they don't add any value and they need to be paid by someone in some way! Find the best offset mortgage deal online, then go to that establishment and buy it!

Edited by AteMoose, 18 March 2012 - 05:27 PM.

I have bought a newish (5 years) house in November 2006. I talked the vendor down 30% off peak 2004 price am am paying less than the 2002 price. I feel prices will continue to drop down to the 2001 price but saving for 5 years hopefully means i wont be stung. The price i am paying isn't much above the price the vendor paid for the place when it was new in 2000. However some idiot is trying to flog an identical house on my road for 55k above the price i paid, one month later!?!?! The housing market is frothy, no-one ever knows what the value of a house is, the value is what someone is willing to pay, make sure you pay alot less than the asking price.

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