January 2023: Neil Bishop of Mortgages for Business is here to answer your questions. This month he gives advice on the difference between variable and tracker mortgages and explains more about shared ownership. Plus, he explains the options for a would-be borrower with credit card debt
Are variable and tracker mortgages the same?
Question
I bought a home in March 2021 and my two-year fixed rate is ending in March 2023. A friend told me a tracker or a variable rate would be better this time around as they would give me more flexibility with interest rates looking uncertain.
Are trackers and variables the same thing? Or would I be looking at two different products here? Which generally offer the best value?
Answer
In essence, tracker and variable rates work exactly the same way. The difference lies in what base interest rate they track.
Tracker mortgages track an external interest rate. Most commonly, they follow the Bank of England Base Rate (BBR), which is currently 3.5%. For example, you may see a deal where the tracker rate is BBR + 2%. This would mean that your starting rate would be 5.5% (BBR 3.5% + 2% = 5.5%).
This deal would then track the base rate throughout a specified initial period. Your monthly repayments would then rise, fall, or stay the same throughout the initial period, depending on how the Base Rate moves.
Instead of tracking an external rate, a variable rate follows the lender’s own Standard Variable Rate (SVR).
As most lenders’ SVRs are pretty high, the deals on offer tend to be a fixed discount against the SVR. For example, you may see a deal which is ‘SVR -2.5%’, meaning that if the lender’s current SVR is 6%, your rate would be 3.5% (SVR 6% – 2.5% = 3.5%).
This deal would track the lender’s SVR throughout a specified initial period. The thing to consider with variable mortgages is that the lender decides the SVR can change at any time.
So, where we may have a good idea of how the Bank of England Base Rate will move, the SVR is completely down to the lender.
Regarding the best value deal, it is always best to speak with a broker who can look at each deal side by side and advise on the best route to take.
Shared ownership: How do I find out more?
Question
I’ve been saving for my first home, which I am hoping to buy through shared ownership. Can I purchase any property through shared ownership or do I need to go through an agent?
Also, do I need to speak to a lender or broker who specialises in shared ownership mortgages, or do all mortgages cover this?
Answer
Shared Ownership homes are offered to the market through your local Housing Association and Shared Ownership home providers.
Specific properties will be marketed as Shared Ownership, and the selling agent will be able to provide details of who the provider is.
Once you know who the Shared Ownership provider is, you need to contact them and register your interest. Each provider has their own criteria, which each buyer must meet, so you must complete this part of the process first.
Once you have found a property and had an offer accepted, you will need to speak with a mortgage broker. There are specific Shared Ownership mortgages, and not all lenders offer them. A whole of market mortgage broker will be able to find the best option for you.
Mortgage rejection due to credit card debt – what next?
I recently applied for a mortgage through a specialist broker as I had hoped to buy a flat. However, I was rejected for the loan because – according to the broker – the lender was a bit concerned about my credit card debt. I have £5k across two credit cards.
I’ve now lost the flat I had been trying to buy and I am very disappointed. Is there anything I can do to make my next application more successful?
I am trying to pay down the debt on my credit card but it’s hard at the moment with the cost of living so high.
Should I use some of my deposit to pay the debt? I have £10k deposit and wanted a 95% loan. If I pay off my debt I’ll have to save up again as I can’t get a higher loan than this.
Answer
I’m sorry to hear you’re having issues securing a mortgage; unfortunately, background debt is often the reason.
As a general calculation, most lenders will use 3% of your outstanding balance as a monthly payment for affordability, regardless of the actual payment. In this case, they will assume a £150 per month as a commitment. Some lenders may use a different calculation, but this is a good guide.
I would always recommend clearing down the debt, but I understand how this would impact your savings and cause a delay in the process.
However, partially clearing the debt would reduce the figure the lender is using in their affordability and may allow it to pass.
The lender’s online affordability calculators, which mortgage brokers use, are normally very accurate. By adjusting the potential figures, we could see how much your credit card debt would need to be reduced by for it to pass affordability.
By speaking with a whole of market broker, we can thoroughly test affordability with multiple lenders before proceeding to a Decision in Principle.
Can I use my company bonus to overpay my mortgage?
Question
I’ve been given a Christmas bonus at work of £1,400 and I want to use this to overpay my mortgage. Apparently, I can pay 10% but beyond this I will face a penalty.
My mortgage is for £160k and I currently pay £759 per month. Could I pay this all in one go? Or should I pay it down over several months?
Answer
What a good use of your bonus! Yes – you can use the bonus to make an overpayment. On your current mortgage, you can overpay by £16,000 at any point during the year without incurring any penalties.
It is up to you whether you pay it all off in one go or split it across several months. You may be able to do this online, or simply speak directly to your lender.
Meet our expert
Neil Bishop, head of residential at Mortgages for Business
As part of the residential desk at Mortgages for Business, Neil can offer advice on an extensive range of scenarios – from those looking to purchase their first home, to those with complex income streams looking to move or remortgage.
Before joining Mortgages for Business in 2022, he managed a team of five brokers at a new build specialist, sourcing finance for home buyers. He’s also the proud owner of a Green Blue Peter Badge!
Email kate.saines@emap.com to ask him a question
