Mortgages Made Easy

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Mortgages Made Easy Sinead McKenna 11 March 2009
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Mortgages made easy
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Mortgages Made Easy

• What is a mortgage and who needs one?
• Different types of mortgages.
• Different types of rates.
• Applying for a mortgage.
• Flexible options.
• Switching mortgages.
• Sub-prime mortgages.
• What about insurance?

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What is a mortgage?

• A loan to help you buy a property.
• Long term.
• Secured on the property.

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Who needs a mortgage?

• First time buyers
• Trade up or down buyers
• Switchers
• Investors
• People releasing equity

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Types of Mortgages

• Annuity/repayment mortgage
• Set off or off set mortgage
• Interest only mortgage.

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Annuity/repayment mortgage

• Monthly repayment includes capital (the amount
  you borrowed) and interest (the cost for what you
  borrowed).
• Loan will be repaid at the end of the term.

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Example

• 100,000 over 20 years at 5. Monthly repayment
  659.96.
• Year 1 repayments 7,919
• Capital 3,008
• Interest 4,911,
• Balance after Year 1 96,992
• In the early years repayments are made up of more
  interest than capital and that reverses in the
  later years.
• The longer your term the longer it will take to
  reduce the capital.

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Set Off or Off Set Mortgage

• Annuity mortgage plus current or savings account.
  
• Repay mortgage as normal.
• Balance on mortgage is set off with balance in
  Current and Savings accounts. Interest charged on
  the combined balance.
• Interest calculated daily.

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Example

• Bal. on Mortgage 265,000
• Bal. on Current Account 1,350
• Bal. On Savs Account 3,250
• Bal. For interest calculation 260,400
• You pay less interest.

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Interest Only Mortgage

• Capital remains the same for the whole term.
• You pay only interest every month.
• At the end of the term you have to repay all the
  capital.
• Normally investment properties.
• Some FTBs for first 1 or 2 years.

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What types of interest rates are there?

• Variable rate
• Fixed rate.

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Variable Rate

• Types of variable rates
• Standard variable rate
• Tracker variable rate
• Discounted variable rate
• LTV variable rate.

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What is the ECB?

• European Central Bank
• Once a month the Governing Council decides
  interest rate policy for Europe. It will be
  reported in the media.
• Objective is to maintain price stability.

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Standard variable rate

• Rate can increase or decrease in line with
  general rate changes.
• Lender can pass on rate changes in the ECB Rate.
• Changes will be announced in national papers.
• Repayments will change as rate changes but the
  term of the mortgage will remain the same.

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Tracker Variable Rate

• Not available.
• Rate will increase of decrease in line with
  movements in the ECB Rate.
• Fixed margin or percentage above the ECB Rate.
• Margin is linked to your loan to value. The lower
  the loan to value the lower the margin.
• ECB Rate is currently 1.5, up to date rate
  available on www.centralbank.ie.
• (Main refinancing operations, minimum bid rate)

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Discount Variable Rate

• Standard variable rate is discounted for a set
  period of time.
• Aimed at new customers.
• At the end of the discounted period, rate
  normally defaults to standard variable rate.

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LTV Variable Rate

• Rate depends on your LTV. The lower your LTV the
  lower your rate.
• Rate can increase or decrease in line with
  general rate changes.
• Lender can pass on rate changes in the ECB Rate.
• Changes will be announced in national papers.
• Repayments will change as rate changes but the
  term of the mortgage will remain the same.
• Not available from all lenders.

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Fixed Rate

• Interest rate is fixed at a certain figure for a
  certain period of time, e.g. fixed rate for 3
  years.
• When the fixed period is up you have the option
  of moving to standard variable, tracker variable
  or another fixed rate.
• Rate will not increase or decrease during the
  fixed rate term.
• Fixed rate penalty.

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Advantages of a Variable Type Rate

• Repayments may fall when interest rates fall.
• You can increase your repayments.
• You can pay off lump sums.
• You can apply for a payment break/holiday.
• The margin is less on a tracker rate or LTV rate
  when your LTV is lower.

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Disadvantages of a Variable Type Rate

• Repayments may increase when interest rates
  increase.
• More difficult to budget for repayments because
  of uncertainty with rates.

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Advantages of a Fixed Rate

• Repayments stay the same regardless of interest
  rate increases.
• Easier to budget because repayments do not
  change.

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Disadvantages of a Fixed Rate

• Repayments do not decrease when interest rates
  decrease.
• You cant pay off lump sums or increase your
  monthly repayments.
• If you switch mortgage to a different rate, to a
  different provider or repay it early you will pay
  a fixed rate penalty.

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Applying for a mortgage
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How is my mortgage application assessed?

• Lenders look at the following info
• Your income, inc. rent a room income
• Type and security of employment
• Whether you are borrowing on your own or with
  someone else
• Your savings
• Your outstanding loans
• Your credit history and rating
• If you have a guarantor
• The value of the property you want to buy.

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Your ability to repay

• Your mortgage repayment plus any other loan
  repayments should be 40 or less of your net
  monthly salary.
• Lenders will also do a Stress Test calculate
  repayment using Standard Variable Rate plus 2.

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For example joint application

• Borrower 1 Net monthly salary - 2,100, monthly
  car loan repayment - 252
• Borrower 2 Net monthly salary is 1,900
• Proposed mortgage repayment 1,600
• Monthly expenditure 1,600 252 1,852
• Monthly income 4,000
• Expenditure as a percentage of income is
  1,852/4,000 46
• Disposable income 2,148
• Without car loan 1,600/4,000 40
• Disposable income 2,400

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How long can a mortgage last?

• Terms vary from 10 to 40 years.
• Most lenders require that mortgage is repaid by
  the time the borrower is 65 years of age.
• The longer the term the more interest you will
  pay.

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How much of the value of the property can I
borrow?

• For FTBs its normally 90-92 of the value or
  purchase price of the property. (Some lenders
  offer 80 for apartments)
• For investment properties its normally 85 of the
  value or purchase price of the property.
• Mortgage does not include stamp duty, furniture,
  etc.

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Flexible options
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Increasing monthly payments and paying off a lump
sum

• Variable rate mortgages only.
• You can pay more each month accelerate
  repayment, e.g. pay an extra 100 pm.
• You can lodge a lump sum.
• Agree extra payments with lender in advance.
• This will reduce the term of your mortgage and
  save you money in interest.

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Example 250,000 over 20 years at 5.21
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Late or deferred start to repayments

• Available at the beginning of mortgage.
• You dont make any repayments for a few months.
• Interest will be charged and added to the balance
  of what you owe.

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Payment breaks

• You can
• Spread your repayments over a shorter no. of
  months, e.g. 10 instead of 12.
• Postpone repayments for a while.
• Agree beforehand with your lender.

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Example 250,000 over 20 years at 5.21
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Topping up your mortgage

• Releasing equity.
• Your mortgage is a lot less than your property
  value.
• You borrow more of the value.
• You can repay the top up at the same term as
  mortgage or in a shorter term.
• Mortgage rates apply.

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Switching mortgages
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Switching mortgages

• Switching you take out a new mortgage and use
  that to repay the old one.
• Some incentives
• Contribution to legal fees
• Cash incentives
• Contribution to valuation fee.

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Why switch mortgages?

• Better interest rates elsewhere.
• Your LTV is lower so you are a better risk now.
• You have kept repayments up to date so you are a
  better risk now.
• Cash incentive.
• Different mortgage products, e.g. set-off
  mortgage.

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Points to consider

• There may be a claw-back of the incentives, e.g.
  if you switch again within 5 years.
• If you currently have a fixed rate you may be
  charged a fixed rate penalty.

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Required Insurances
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Insurances that you have to get

• Mortgage protection to cover the lives of the
  borrowers for the same amount and term as the
  mortgage
• Buildings insurance to cover the rebuild or
  reinstatement cost of the property.

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Sub-Prime Mortgages
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Sub-prime mortgages

• Available to higher risk customers,e.g. people
  with bad credit rating, low incomes,
  self-employed.
• Higher risk higher interest rate.
• Rates vary from 6-10.
• If you have a sub-prime mortgage, review it
  regularly. You might be a better risk now.

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Comparing Sub-Prime Mortgage to a Repayment
Mortgage

• Repayment Mortgage
• 300,000 mortgage over 30 years at 5
• You repay 570,000 over term.

• Sub-Prime Mortgage
• 300,000 over 30 years at 8
• You repay 770,000 over term.

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To find out more, read

• Mortgages made easy.
• Managing your money.
• You and your credit rating.
• Life insurance made easy.
• Home insurance made easy.
• Life insurance and home insurance online
  surveys/cost comparisons.
• Log onto www.itsyourmoney.ie.

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Consumer Contact Detailswww.itsyourmoney.ieCo
nsumer Helpline 1890 77 77 77consumerinfo_at_ifsra.i
eInformation Centre, 6/8 College Green, Dublin
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Thank you

• Any questions?