Hands up class! Who’s got a question about mortgages?
Sjaene Higgins Mortgage Operations Manager at Wesleyan, the specialist financial services mutual for teachers.
When I speak with teachers across the country, it’s clear they’ve got a lot on their plates. They love their work and want the best for their pupils, but many feel overworked, underpaid and unappreciated.
Outside of work, there are struggles too. We’re in the midst of a cost-of-living crisis, prices are rising and wages aren’t keeping pace.
What’s more, interest rates continue to climb. For almost two years, they languished at record lows, bringing relief to mortgage holders and offering hope to those with ambitions to get on the housing ladder for the first time. But
This should be good news for savers, but so far banks have dragged their feet when it comes to passing the Bank rate on to consumers, though we’ve seen variable rate mortgages go up almost instantly. And we can confidently imagine rates will rise further before the end of the year, with the Bank of England signalling they will hit 5% during 2023.
For many people, their mortgage is their biggest monthly outgoing, so that’s understandably causing concern. So, at a time like this, what are the key questions teachers should be asking about their mortgages
What is happening with interest rates and what does it mean for the short and long-term?
At the moment, interest rates are on the up. Even the best economic brains can’t predict exactly what will happen next with complete certainty, especially over the longer term. But at the time of writing, the prevailing view seems to be that the Bank of England base rate – which high street banks use to calculate their own lending interest rates – will keep rising into 2023.
Markets currently expect the Bank to set interest rates at slightly less than 5% next year, before falling back a bit during 2024, possibly to around 3.5% to 4%. But this should be taken with a pinch of salt; opinions vary and, as we’ve all seen, events like a change of government can have unforeseen implications.
Should I fix my mortgage deal and how long for?
With a fixed rate mortgage, the amount of interest you pay is set for a certain period, which may be fixed for up to ten years. That means that, whatever the Bank of England does to base rates, the amount of interest you pay doesn’t change during that period.
The idea is that fixing a mortgage can protect you against rates going up. Of course, the opposite is also true; if the Bank of England rate goes down, you could be stuck in a situation where you are paying over the odds.
A fixed rate mortgage will generally have a higher interest rate than a tracker or variable rate mortgage, where interest rates rise and fall with the Bank of England base rate, though not always by the same amount. Lenders tend to set their variable rates a little higher than the bank of England base rate, and this can vary a lot, so it’s worth shopping around.
A difference of 1% might not sound a lot, but over the lifetime of a mortgage, it can add up to many thousands of pounds.
Whether you’re a first-time buyer, looking to re-mortgage or investigating switching your mortgage to another lender, it’s a good idea to run through the numbers over the lifetime of the mortgage. Often this can be done with advice from experts who can help make sure you’re getting the best deal for your circumstances.
How do I get ready to remortgage?
There are a few reasons why you might want to remortgage. Maybe you want to try and get a lower interest rate. Or maybe you’ve already paid for your property and now want to borrow some cash, using your home as security. Perhaps your circumstances have changed and you can now afford to make overpayments, but your current deal doesn’t allow it.
Either way, lenders want to be confident you can pay back your mortgage loan and they can reject your remortgage application if they have any concerns. But there are things you can do to make yourself as attractive as possible to mortgage providers.
Generally, the more equity you have built up, the better deal you can demand. Currently, lenders are unlikely to take you on unless you have at least 5% equity, but if you’ve already paid for 40% of your home or more, you should be able to secure a better rate. If you’re getting ready to remortgage it may be worth considering putting a lumpsum into the mortgage to help secure a better rate, and reduce your overall debt. This can help to bring down monthly payments and reduce the length of your mortgage.
Lenders will also want to check your credit score too, so it’s worth looking at this well in advance. There are things you can do to improve your credit score – such as building up credit with small loans and credit cards and paying it off each month – but it can take time to demonstrate that you can manage debt. And lenders are also obliged to check that you can afford the remortgage repayments, not just now, but also if interest rates were to go up in the future.
Be aware that changing your mortgage provider may come with fees; there could be an exit fee or early repayment charge to end your current deal, and your new lender might have product or application fees, so include these in your calculations.
And before you make your mind up, it may well be worth giving your current lender an opportunity to offer you a better deal before you jump ship. Many will offer existing customers more preferable rates than new customers and there are deals to be had.
Should I add other debts to my mortgage?
Mortgages can have among the lowest interest rates of any debt, so it can be tempting to consolidate other debts into your mortgage. But this should only be done with much caution. After all, a mortgage is secured against a property, so if things go wrong, you could even lose your home.
And mortgages are long-term loans, typically repaid over 25 years or more. So, although the rate is low, it builds up over a longer time and ultimately can mean that debts end up costing more, despite being on a lower interest rate. In some cases it can actually be cheaper to borrow at a higher rate of interest and pay it off more quickly.
If you are able to keep up the same level of repayments, it can pay to shift an expensive credit card debt, for example, onto your mortgage. But it’s worth exploring all the options, like personal loans or balance transfers, too. And make sure you do your sums carefully.
I’m a first-time buyer, how do I get on the housing ladder?
The most common way to buy a house is to save up a deposit, then borrow the remainder of the cost in the form of a mortgage from a bank or building society. You’ll usually need at least a 10% deposit in order to buy your first home.
In most cases, the bigger your deposit, the better deal you can get on your mortgage, so you’ll pay less back to your lender in interest payments over the course of the mortgage term. If you borrow less, your monthly repayments can be lower too.
But we know that teachers can sometimes struggle to save, especially at times like this when the cost of living is so high, and there is the challenge of affordability too with properties closest to schools often costing more. But there are schemes to help. For example, there are shared ownership schemes, where you buy a share of a property, typically between 10% and 75%, and pay rent on the rest. This helps bring down the initial deposit required, and some schemes prioritise key workers, including teachers. You can increase your share of the property later, when you can afford it.
First time buyers in England may also qualify for the First Homes scheme, where they can get 30% to 50% discount on a new build home. You can look for new homes in your area that are advertised by developers as part of the First Homes scheme. Other government schemes come and go, like the Help to Buy scheme, which just ended on October 31. So, it’s worth keeping an eye out for any new help that becomes available.
How do I get the best deal I can?
The difference between a good mortgage deal and a bad one can cost you hundreds of pounds a month. But, as a busy teacher, you’re unlikely to have the time to trawl through the market.
Working with an adviser can help, but make sure they are fully qualified and regulated. This should mean you are getting quality advice and if you don’t, you can turn to the Financial Ombudsman Service to investigate if things go wrong. They should also be able to search the whole market to find you the best deal, but some advisers only work with a small selection of mortgage providers, so make sure you ask first.
Check how they get paid too. Some advisers will charge you a fee for their advice, but others will earn a commission from the mortgage provider that they recommend, which won’t cost you anything. Either way, they should be transparent. And don’t be tempted to pay any fees upfront; a mortgage adviser should only earn their money once the deal has been completed.
The housing market can be difficult to navigate, but you don’t have to go it alone. A specialist adviser can help you save and guide you through the mortgage minefield so you can achieve your long-term financial goals and make the dream of home ownership a reality.
For more information visit www.wesleyan.co.uk