| The mortgage debt (mortgage refinance)
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The mortgage debt
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Refinance Your Car Loan
Paying your monthly bills can always put a hole in your pocket at certain times of the month, so it really pays to find new ways to save money. Mortgage payments and car payments are both bills that will specifically take large chunks of your bank account.
Finding ways to save on your mortgage payment is not always that easy. But one of the easiest ways to save big bucks on your monthly... Read mortgage refinance article
Reverse Mortgage
Reverse Mortgage
After (40) years of bump, thump, bang and wang I ran into the Reverse Mortgage. What a great opportunity for us to cash in on some incredible growth over the last several years in the real estate market. While values bounce around up and down the overall trend has risen over the years. As a younger person I was busy raising a family and now its time for us. Finding such... Read mortgage refinance article
The mortgage debt
Kent Reliance Building Society is the first to make the never-ending mortgage facility available in the UK. First we had the flexible mortgage, which gave us the ability to overpay, underpay or take a payment break, now the never-ending mortgage has arrived. Also called the inter-generational mortgage and rather morbidly, the deathbed mortgage, it enables a parent to pass their home loan debt on to their offspring at death or in fact at any time. In theory, the children could then pass it on to their kids. While it is not an entirely new concept, it is new to this country and it may prove to be a useful option for some borrowers.
Kent Reliance Building Society is the first to make the never-ending facility available. The idea came about when it wrote to its members with interest-only mortgages asking them to consider how they were going to repay their mortgage. The society pointed out that it would consider giving borrowers the option of passing the debt on to their heirs or another person.
However, after Kent Reliance chief executive Mike Lazenby plugged the never-ending mortgage in a radio show, the society was inundated with letters from interested borrowers.
The never-ending option is now available on any of Kent Reliances mortgages which are repaid on an interest only basis. Normally, if someone dies with a mortgage, the beneficiaries have to sell the home to repay the debt or they have to go through the process of taking out a new mortgage which takes time. With the never-ending option, the existing mortgage would be transferred to the beneficiaries. The kids could take on the mortgage and live in the property or rent it out as a buy-to-let.
The building society said that this could help young people get on to the property market and it could be used to help parents release equity in their home to pay for care in their old age.
Kent Reliance says it conducts the usual regulatory checks to make sure this new feature is suitable for all applicants
One of the big advantages of the never-ending mortgage is that it could cut your estate's inheritance tax bill. The current inheritance tax threshold is £285,000 and mortgages are excluded from estates. So someone inheriting an estate valued at £385,000 but which included a house with a £100,000 mortgage on it, would not have to pay inheritance tax - without the mortgage they'd face a tax bill of £40,000.
Similar products are already in existence in Japan, Switzerland and Ireland. In Japan they have the 100-year mortgage. It was introduced because house price are so expensive there that the cost of a mortgage is spread over two or even three generations. Parents pay off a bit and then the children take over.
The Council of Mortgage Lenders advises that you should take independent financial advice before talking out such a mortgage and that if debt is going to be passed down to the next generation, then parents should discuss this with their children.
Halifax said that people would have to be aware that they would be paying a huge amount of interest and that you are always better off if you repay the capital as well. It added that while more people are now trying to repay their mortgage, this type of facility might be useful for some borrowers. It is considering introducing the never ending option itself.
Potential benefits of a never-ending mortgage
Paying interest only is cheaper than a repayment mortgage making home ownership more affordable.
Being able to pass on the mortgage debt means that children will be able to get onto the housing market at a level they can afford. As they will be taking on a mortgage for a home bought several years ago, the mortgage should be considerably lower than the current value of the property.
Parents could use the option to release equity in their home to pay for care services.
Borrowers can transfer the debt to a child at any time, as long as the child agrees.
Never-ending mortgages could cut the inheritance tax bill.
Inheritors can sell the home at any time to repay debt.
Borrowers can make repayments at any time.
Potential drawbacks of a never-ending mortgage
The never-ending mortgage means that you could still be paying a mortgage into retirement. House prices may fall (remember the 1990s?), leaving you or your heirs with negative equity. Take note - house prices are expected to be subdued over the next few years.
Extending a mortgage over 40 or 50 years from the standard 25 years dramatically increases the amount of interest paid. Over 25 years, a £100,000 interest only mortgage at 5% would cost £125,000 in interest and £200,000 in interest over 40 years.
The Financial Services Authority is already concerned about interest-only mortgages because around 22% of us have an interest-only mortgage and half have no investment vehicle in place to repay the mortgage.
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How to Shrink Your Mortgage Debt
With last month's 0.25% rise in the base interest rate now feeding into the cost of mortgages and more potential rises on the cards, the best way of staying on top is to shrink the mortgage. By just making small additional payments a month you can save thousands over the long term and take years off your mortgage.
To get your mortgage debt down you don't have to join the frugal society and recycle your tea bags or work round the clock to get extra cash to go towards the mortgage. Cutting back on booze and eating out will quickly free up some cash and you'll hardly notice the difference. Giving up smoking is the obvious one that will put pounds on in your purse as does staying away from the shops.
You do need to look carefully at your spending and see where savings can be made. If you are a regular saver you may be better off diverting this cash into the mortgage. With ordinary savings rates at around 4.75% and the standard variable interest rate on mortgages now 6.5%, you are better off paying more off your mortgage.
You could also look at ways of making money out of your home. Under the buy-to-let scheme you could rent out a spare room and earn up to £4,250 a year tax free, which you could use towards paying extra off your mortgage.
One of the easiest ways of reducing your mortgage burden is to find a cheaper mortgage and use the saving to pay a little extra each month. If you are one of the 30% of mortgage holders paying your mortgage at the standard variable rate, you need to do something about it. For example, with Darlington's discounted rate of 4.68% you would pay £566 a month on a £100,000 mortgage and £675 a month on if you were paying at the rate of 6.5%. Switching would save you almost £110 a month!
The problem with switching mortgages or remortgaging is the fees. Moving to a new lender can cost more than £1,000 for the arrangement fee, legal charges and surveyor's fees. For example, Yorkshire Building Society charges a booking fee of £595 on its 4.79% fixed rate mortgage. Don't forget there may be early repayment charges with the previous lender as well, especially if you are still in a special offer period.
You have to work what the cost of the fees are against the savings and when you will break even and move into profit. By the time you add in fees, sometimes the cheap rate on a mortgage deal isn't so marvellous after all. Always make sure you are paying interest daily and not annually, which costs an awful lot more.
Some lenders such as Abbey will pay for the cost of remortgaging. Abbey recently launched a Flexible Plus tracker mortgage which is 0.49% above the base rate for the life of the mortgage and currently charges 5.24%. Abbey said that if you pay fees on average of around £1,100 to switch mortgage, the new rate you are moving to has to be 0.8% cheaper over two years to repay the costs. The idea with the Flexible Plus is that you get a decent rate and you don't have to keep switching and incurring fees.
Look out for flexible features. Many lenders now offer flexible mortgages allowing you to overpay 5% or 10% of the debt each year without incurring a redemption charge. Lloyds TSB has just launched a fully flexible and fee free discount mortgage with an interest rate of 5.75% (if you have a loan to value of less than 90%) that allows you to make additional payments or repay the loan at any time without having to pay a redemption fee.
If you happen to have a nice little nest egg to play with and you want something flexible, the offset mortgage might be the answer. How it works is that your mortgage, bank account and savings are linked. Any savings you have and any balances you have in your current account are offset against the interest on the mortgage. For example, if you had a mortgage of £100,000 and savings of £20,000 you would pay interest on £80,000. You don't get interest on the savings but the big advantage is that over time your mortgage is paid off more quickly.
Virgin One said that by leaving an extra £100 in an offset mortgage each month on a 25-year £70,000 mortgage, you could save £23,618 in interest and repay the mortgage after 17 years. The example is based on an interest rate of 5.95%.
Whereas previously, these types of mortgages used to be more expensive than other home loans because you can add in all types of debt, including personal loans and credit cards, and get the same rate for all, they are now more competitive. Woolwich now charges 5.23% on its lifetime tracker offset mortgage and Royal Bank of Scotlands interest rate is 5.95% on its One Account - not bad against the standard variable rate of 6.5%.
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