On the surface mortgage lenders might look all alike – keeping an eye on what each competitor is offering and adjusting their deals to ensure they get their slice of the business.
But dig a little bit deeper and they can be markedly different from each other. Here are some things to bear in mind when shopping for the best rate on your Shared Ownership mortgage.
Not all lenders offer Shared Ownership mortgages
Shared Ownership is a very particular government scheme and not all lenders offer products suitable for this kind of ownership. Thankfully, there are services online - like Money.co.uk - that will allow you to view and compare lenders that do accept Shared Ownership applicants. This will give you some idea of what products are available at this time.
How do mortgage products differ from each other?
Choosing a mortgage involves more than just comparing APR. There is a large number of considerations that will impact the type of loan you will be able to obtain. Some of them include:
Loan to Value (LTV) - the size of your deposit
The loan to value (LTV) is the percentage of the value of the property that you want to borrow. In other words, it is the size of the deposit you are able to put down. Customarily, lenders require a minimum 10% deposit making your loan 90% LTV. There are, however, lenders who offer loans with only 5% initial deposit (95% loan to value) but be prepared to pay higher rates for those. Also, there are only a handful of lenders with such products so you will have a far less choice when it comes to picking your mortgage. In general; the higher the deposit, the better deal on the mortgage you are likely to get.
Types of interest rates
Usually, you will have three types of rates available, with an initial rate for the first two years. The types of rates are:
This is pretty straightforward; you are offered a rate that you will pay over an agreed period of time. Just like with a mobile phone contract, the rate stays fixed (hence the name) and will not change even if the financial environment (Bank of England base rate for example) changes in the meantime. Fixed-rate is welcomed by many people for providing certainty in terms of expected expenditure, especially in the early stages of the mortgage.
As the name suggests, a variable rate changes following the Standard Variable Rate of the bank which has issued the loan. The mortgage payments are less predictable but there is scope for your mortgage repayments to go down if the conditions on the financial markets change.
A Tracker rate is similar to the variable rate but it differs in that it 'tracks' the Bank of England's Base Rate. Again, this rate may change as the Bank of England's Base Rate goes up or down. At present, the UK interest rates stay at 0.25% but the Bank of England has raised the prospect of an interest rate rise, in an attempt to relieve the squeeze on living standards from surging prices and sluggish wage growth. If this happens, borrowers with a tracker rate are likely to pay more in their mortgage repayments.
Choosing the right rate is a rather complicated process and you may wish to consult a mortgage adviser who can suggest the best mortgage product tailored to your individual circumstances.
The length of the mortgage
Traditionally, mortgages have been offered for the duration of 25 years. Recently, however, with the ageing population and decreased affordability of many properties, especially in London, have led some lenders to offer to lend for the duration of 30 or 35 years. You will have to demonstrate your ability to repay the loan over that time which, in practice, may mean that you commit to postponing your retirement until the mortgage has been repaid.
Maximum age at application
There are many reasons why older people may wish to apply for a mortgage. They may have found themselves single after a divorce or it may be that they have not been able to get a mortgage earlier. In larger metropolises - and in London in particular - there is a large group of people who find themselves renting well into their forties and fifties.
Thankfully, most lenders accept applicants up to 70 years of age, with Barclays opting for 65. Again, as an older borrower, you will have to demonstrate to the lender your ability to continue making mortgage repayments now and in the future. There are also special types of mortgage directed at older people whereby you only pay the interest on your mortgage or do not pay anything at all, and the mortgage gets repaid from the sale of your house once you pass away or move into a residential care facility.
What is the minimum initial share that they will lend on?
Lenders might dictate the size of the initial share of your Shared Ownership property they will lend on. For example, Nationwide Building Society will lend on 25% initial share and above.
Are there any penalties for paying the loan early?
If you find you've got money to spare, paying off your mortgage can save you thousands of pounds. It's not as straightforward as it seems, though. With some, older mortgages when you decide to overpay might make a difference and you may be better off making one bigger payment at the end of the year rather than overpaying small amounts on a monthly basis, so it's always better to talk to your lender first.
You may also be penalised for paying your mortgage off before it's due. Most lenders will allow you to overpay by 10% annually if you are on the initial fixed, tracker or discount rate and remove all limits on over-payment once you are on the standard variable rate. This, however, is not a hard and fast rule and it's always better to check with your lender before making over-payments. If you do incur charges for overpaying your mortgage payments, the fees usually range between 1% and 5% of the amount overpaid depending on your mortgage - but, again, check with your mortgage provider as the charges vary from one lender to another.
Also, overpaying on your mortgage is not the only way to save money. You may find that remortgaging is a more financially-savvy solution.
Are you a foreign national?
If you are a foreign national, you may have to contend with a different set of rules than a British citizen applying for a mortgage would. This is particularly true when it comes to non-EU citizens as EU citizens tend to be treated like Brits as long as they have a steady income, money for the deposit, and traceable credit history for at least three years.
For more information read: "Mortgages for Foreign Nationals in the UK".
Most importantly, as your mortgage is likely to be the biggest financial commitment you take on in your life, it really pays to get good advice. We recommend that you contact an adviser from Peabody's panel of mortgage advisers, who specialise in providing mortgages for Shared Ownership.