How to Save £70pm and Make Your Bank an Extra 10 Grand!

 

There can be no industry other than banking that is so patronising in the way it treats it customers. Utilities come fairly close, but in order to be thoroughly nannied, try applying for a mortgage. In the thirty odd years since I opened my first mortgage brokerage, now is probably the worst time to try and get a loan to buy a house. It is still possible, but the processes that are now in place make it an entirely unpleasant affair. I was talking to a mortgage broker friend, who is still practicing, and he said that the job was now akin to that of a doctor managing a patient through a difficult course of treatment rather than helping someone achieve the purchase of a house.

A few years ago the whole mortgage industry was subject to the Mortgage Market Review. A whole new set of rules from which lenders now have to comply. Many of the new rules were long overdue and welcome, such as stricter rules on the qualifications needed in order to arrange a mortgage. But, by far the most contentious area though is the way a lender assesses affordability when determining how much they are willing to lend you. And that is where the culture of patting you on the head, saying “there there, it’s for your own good that we have turned you down” is getting more than a few people a tad annoyed.

Nobody is saying that responsible borrowing shouldn’t be based on the ability to repay the loan, a responsible lender should take into account both the financial history and current commitments of the applicant. But this is where I start to see some blurred lines. A lender will ask for at least six months bank statements, I don’t have a problem here, it’s the right thing to do. However, I see a difference when the statements show a commitment to a car personal lease plan that is costing  £150 a month and is a contractual obligation which impacts on affordability because you can’t get out of it for a number of years, and the fact that the statement shows you spend £15 a week on a takeaway.

For as long as I can remember, people’s spending habits have changed when they take on a mortgage, and  things like the weekly takeaway are first in the firing line when a tighter budget is needed. If you factor in the reality of an applicant currently paying more in rent than the proposed monthly mortgage repayment, then you can see why there is frustration when a lender declines an application on the grounds of affordability.

Which brings me to the lenders own interpretation of affordability.

There has been a trend for first time buyers to move away from the traditional 25 year mortgage and take loans of 30 years, or even more. The obvious reason for this is the lower monthly cost, which, at one level would seem to satisfy the more stringent affordability costs. But, while achieving this, it actually costs a lot more in the long run. So just how should affordability be defined?

The new rules put some considerable weight on not only the affordability at the start of the loan, but affordability should interest rates go up, so reducing the monthly cost by extending the loan period will actually have the effect of making the monthly repayments affordable in the event of a rate rise. Interest rates are incredibly low at the moment, and should they go up to 5% they would still be historically low. But what an effect it will have on repayments. A quick look at the table below will show that a £170k mortgage over 25 years will cost £719 a month at 2% interest. If that were to go up to 5% then the monthly repayment would rise by over £250 to £982 per month. So what happens if the loan is 30 years instead of 25? Well, on the face of it the monthly cost at 2% is now £628 and a rise to 5% would make it £912. A noticeable saving indeed.

But wait a minute, look at the total amount you will actually pay back. At 2% interest the total you will repay over 25 years is £215716, but over 30 years it will be £226207. An extra £10491! At 5% interest you will pay an extra £33683!! So, here’s the conclusion. In order to save you money, you will pay a lot more, and it is perfectly within the guidelines set out regarding affordability. In short, the current trend toward longer mortgage terms seems to be saying that the extra £10K which you will pay is more affordable than the extra £70 per month it would cost you to stay at 25 years.

Interest RateMonthly Repayment
25 years
Monthly Repayment
30 years
Total Repayable after 25 yearsTotal Repayable after 30 years
2%719628215716226207
3%802716240775258020
4%890811267187292177
5%982912294850328533
6%10781019323656366922

 

Please treat the above table a guide, it’s a good guide, but in reality the exact figures will vary slightly according to an individual lender’s application of interest rates.

Should you be told what to do with your own money?

Anyone who has read any of my blogs should have got the idea by now that I am passionate about people making decisions about their money based on asking the right questions and getting the right information. Last week I posted the picture shown below on twitter as a way of encouraging people to read a series of blogs on Equity Release. The response was amazing, with more views than I have ever seen before and a number of comments that kindly indicated that people found them useful. The picture below though did open a train of thought that I hadn’t expected. As you can see, the first thing written on it is the phrase “For the right person”. This obviously was a bit obscure to a couple of people who questioned the use of Equity Release for the purposes subsequently listed. had I not put “For the right person” in the picture, then I would probably had some sympathy with the argument. But I did, so there is no sympathy! However, it did raise the idea of just what you should be allowed to do with your own money?

 

In a blanket reply someone dismissed all the suggestions on the list as not being appropriate as a reason for taking an Equity Release plan. If you haven’t read my blogs on Equity Release, it may be a good idea to have a quick look here for an idea about just what they are. Dismissing anything in such a way is obviously just as daft as saying it is a brilliant idea for everyone, but a more fundamental question goes along the lines of “If I own a house and I meet the criteria to take an Equity Release plan, who’s business is it but mine what I use the money for?”

When I was actively involved in arranging these plans, the application always asked what the money was to be used for. I never had a problem with the provider questioning the answer or turning the application down because they didn’t approve of the purpose. I’d like to think this was because a serious discussion, including all the consequences of taking the plan, were talked through thoroughly first.

More than most products, an Equity Release plan is personal. Sometimes the reasons for taking one out are obvious. Take the “Home improvements” idea and look at it from two extremes. A couple in their seventies have mobility problems, and they are set to become worse. With no other means available to them an Equity Release plan will provide the funds to install rails around the house, fit a stairlift and turn a bathroom into a wetroom. All of these things will improve their quality of life many fold. The next situation involves a couple of the same age, no health issues and a life long obsession with steam trains. After years of planning they have finally decided to convert their loft into a model railway, complete with purpose built access to the loft and only the best quality scenery and engines. It may be that those who feel that Equity Release should only be used for “proper” reasons would approve of the first couple but not so the second. But why?

Far beyond the debate about whether a model railway is a good use of money is the more disturbing question about who has the right to tell someone what to do with their own money? Do these people who disapprove of model railways confront BMW drivers because the car is on finance and the owner should have bought a cheaper vehicle that could be bought outright. I might actually have some sympathy with that argument, however – it’s none of my business!

The fact is that everybody’s circumstances are different as are their needs and aspirations. If you are thinking of taking an Equity Release plan then what you want the money for is important, but it’s important to you-no one else!