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Council Home Buyers ( Right to Buy Mortgages ): eBook

Introduction:

Dear Council Home Buyer ,

At Mill - House Mortgage Solutions we are impartial & give advice from the whole of market .

We aim to provide you with all the information you need to answer your questions , as well as make an informed decision .

Choosing the right Right to Buy mortgage is not an easy decision to make . However these are the critical decisions thousands of Council Tenants are making each and everyday .

Can You Afford a Mortgage ?:

The first & most important question any council home buyer must ask themselves is can you actually afford a mortgage ?

Some of the most crucial elements , which will effect your borrowing ability , are as follows ...

• The Amount of Deposit / Discount you have

Although many lenders offer Mortgages up to 100 % of the reduced property value , some incur additional charges or increased interest rates .

A substantial deposit can do more than just secure you a better deal though , as most lenders will reduce the amount of money they are willing to lend on high loan to value applications .

However if you need to borrow more than 100 % of the reduced property value... there are still many lenders who offer what you need .

Remember : Many of the Mortgage Lenders Mill - House Mortgage Solutions deal with offer mortgages to people in such circumstances , please contact us to discuss your situation .

• Your Income:

Your income will form the basis of the Mortgage lenders decision as to whether to lend you the money you want . Most calculate how much to lend you based on a multiple of your income . However more & more are switching to affordability based assessments which can be more suited to individual requirements . In most instances proof of income will be required .

If you are not able to provide proof of income , it does not necessarily mean you cannot have a mortgage . Instead you may have to consider Self - Certification of your income . In short this means the Mortgage Company trusts the information you give them & do not ask for any additional proof . Understandably though this results in a higher risk for the mortgage lender & usually results in higher interest rates .

• Your Financial Commitments

All Mortgage Lenders will asses your existing financial commitments to ensure you can afford the mortgage you are applying for . Many have specific guidelines surrounding areas of poor financial conduct ( as detailed below ).

• Your Financial Background

As mentioned above your previous financial conduct will be taken into consideration by the Mortgage lender when they assess your application .

All Mortgage lenders have specific guidelines on how to view your financial background . They also each consider negative financial data in various different ways .

If you have limited or no financial background , due to never having obtained credit or loans before , many lenders will limit the % of the property value on which they are willing to lend against ( typically 75 %).

If you have obtained previous credit , however failed to maintain this & run into difficulty , each company will take a different view on your circumstances depending on their internal policies .

If you have a poor credit history , CCJ's , missed payments , defaults , it need not mean you cannot find a Mortgage .

We recommend that if you have fears concerning your credit file , you should obtain a copy of your own report ( for around 5 . 00 ) prior to making an application for a mortgage .

Remember : Many of the Mortgage Lenders Mill - House Mortgage Solutions deal with offer mortgages to people in such circumstances , please contact us to discuss your situation .

How does the Right to buy Scheme Work ?

First launched in 1980 , the Right to Buy scheme contributes to the Government's aim of a decent home for all , offering everyone the opportunity of a decent home and so promote social cohesion , well being and inter - dependence .

You may have the Right to Buy if you are a secure tenant of :

• a district council ; or

• a London Borough Council ; or

• a non - charitable housing association or other registered social landlord

• a Housing Action Trust

This scheme allows people who have been council tenants for over two years to buy their homes at a discount ( five years in the case of new public sector tenants who took up their tenancies after 18 January 2005 ).

You will only be able to purchase under the scheme if your house or flat is a separate property and is your only property .

You cannot buy your property if a court makes a possession order , which says that you must leave your home . Neither can you buy your home if you are an un - discharged bankrupt , have a bankruptcy petition pending against you , or have made an arrangement with creditors ( people you owe money to ) and you still owe them money .

You may be able to exercise the Right to Buy jointly with members of your family who have lived with you for the past 12 months , or with someone who is a joint tenant with you .

Any land let together with your home ( for example , gardens and garages ) will usually be treated as part of your home .

The level of discount you receive is dependent on how long you've been resident in the property . However the discounts available are subject to the maximum limits available in the area the tenant lives .

Maximum Discounts available under the Right to Buy

Correct as of 20 / 08 / 2006

38 , 000 in the South East ( except if your home is in the local authority areas of :

• Chiltern

• Epsom & Ewell

• Hart

• Oxford

• Reading

• Reigate & Banstead

• Tonbridge & Malling

• Vale of White Horse

• Watford

• West Berkshire

where the maximum discount is 16 , 000 );

34 , 000 in the Eastern Region ( except if your home is in Watford where the maximum discount is 16 , 000 );

30 , 000 in the South West ;

26 , 000 in the North West and the West Midlands ;

24 , 000 in the East Midlands and Yorkshire and the Humber ;

22 , 000 in the North East ;

16 , 000 in Wales ;

16 , 000 in London ( except if your home is in Barking and Dagenham or Havering where the maximum discount is 38 , 000 );

Your landlord can tell you which discount limit applies to you .

The Reasons to buy your Council Property :

There are 4 main reasons why people buy their Council property ...

To invest in property without the need of a deposit :

As many mortgage lenders will allow you to use the Right to Buy schemes discount as your deposit , many deals normally reserved for low LTV applications become available to you . Also with the discount you may be able to purchase a property which would normally far outstretch your own borrowing ability ( based on your personal circumstances ).

Home Improvements :

Many mortgage lenders will allow applicants to borrow some of the discount back ( normally subject to maximum percentage of the properties value ) for home improvements . Home improvements are sometimes more necessary for Council Home Buyers than normal First Time Buyers as they are often in a poorer state of repair .

To secure the family home :

As a council tenant , there is little likelihood of eviction . However it IS still possible , as are mandatory changes to the internal / external appearance of your home . By purchasing the property yourself you will be able to decide what happens to it , and when .

To make a profit :

Although the council will claw back the discount allowed on any new Right to Buy purchase if the property is sold within the first 5 years , after this time you are free to sell the property for it's FULL market value & retain all the profits ( subject to relevant tax liabilities ).

For all these reasons and more it's easy to see why over 1 . 6 million council tenants in England have used the Right to Buy scheme to purchase their previously rented homes . In many cases , it has encouraged more affluent tenants to remain in the neighbourhoods they have lived in for many years , helping to create stable , mixed income communities .

Types of Mortgage Available & Related Costs :

There are various types of mortgages available :

• Fixed

Here the interest rate charged is fixed for a set period ( i . e . 2 yrs ) before reverting to the lenders standard variable rate . Usually there is an Early Repayment charge if you redeem the Mortgage before that period ends . Typically you will be charged a non - refundable booking or arrangement fee to secure a Fixed mortgage rate .

Benefits : As payments fixed for 2 years a Fixed rate provides security and enables people to budget effectively . They remain unaffected by rises / falls in interest rates .

Drawbacks : As usually tied into deal , unable to take advantage of interest rate reductions . If its necessary to make an unplanned redemption of your mortgage , in the deal period , a large fee is usually payable . Also , If interests rates have risen , there can be a dramatic increase in rate when coming out of a Fixed tie in period .

• Tracker's

Here the interest rate youre charged tracks another interest rate . Usually either the lenders own Standard Variable Rate or the Bank of England base rate . As the rate fluctuates , movements in interest rates usually result in a knock on movement to your mortgage payment . Arrangement or Booking fees on these mortgages are usually refundable , or dont even get charged , if the mortgage doesnt proceed . Many trackers are available without a tie in period , as they do not have a deal period to speak of .

Benefits : Allows the customer to benefit from reductions in interest rates causing a reduction in their mortgage payment . If you want a short - term deal for your mortgage , a tracker can provide a temporary solution until your circumstances change . If you can comfortably afford fluctuations in payments , these mortgages mean you do not have to change your mortgage regularly to secure a new deal .

Drawbacks : Rises in interest rates result in higher mortgage payments . Uncertainty over the future interest rates makes budgeting effectively difficult .

• Discounted

Here the interest rate youre charged tracks another interest rate during the deal period , similar to a tracker mortgage . However this rate is discounted for an initial deal period , making it more attractive to customers by reducing the initial monthly cost . Once the deal period has ended the rate payable reverts to the lenders standard variable rate . As the rate fluctuates , movements in interest rates usually result in a knock on movement to your mortgage payment . Usually there is an Early Repayment charge if you redeem the Mortgage before that period ends . Arrangement or Booking fees on these mortgages are usually refundable , or dont even get charged , if the mortgage doesnt proceed .

Benefits : Allows the customer to benefit from reductions in interest rates causing a reduction in their mortgage payment . Attractiveness of initial rate usually in comparison to available Fixed rates .

Drawbacks : Rises in interest rates result in higher mortgage payments . Uncertainty over the future interest rates makes budgeting effectively difficult . If its necessary to make an unplanned redemption of your mortgage , in the deal period , a large fee is usually payable . There can be a dramatic increase in rate when coming out of a discounted mortgage tie in period .

• Stepped

Here the deal period is set over a timescale ( i . e . 5yrs ) however the rate charged changes each year . The rates charged are usually set at the start of the deal . Once the deal period has ended the rate payable reverts to the lenders standard variable rate .

EG

Year 1 Year 2 Year 3 Year4 Year5

1 % 2 % 3 % 4 % 5%

These rates can be stepped up or down & are designed to accommodate people who expect changes in their circumstances in the forthcoming years .

For example , if you are a young professional and expect your income to grow steadily you may wish to pay as little as possible now , on the basis youll pay more towards the end of your deal period .

As with Fixed mortgage deals usually there is an Early Repayment charge if you redeem the Mortgage before that period ends . Typically you will be charged a non - refundable booking or arrangement fee to secure a Stepped mortgage rate .

Benefits : Depending on your circumstances , these mortgages can be perfect to support your forthcoming life changes .

Drawbacks : If forthcoming changes in your life do not go exactly as planned , incremental increases each year could seriously effect your ability to pay your mortgage . As usually tied into deal , unable to take advantage of interest rate reductions . If its necessary to make an unplanned redemption of your mortgage , in the deal period , a large fee is usually payable . Also , If interests rates have risen , there can be a dramatic increase in rate when coming out of a reducing Stepped mortgage tie in period .

• Capped

Here the interest rate youre charged tracks another interest rate during the deal period , similar to a tracker mortgage . However this rate gets capped at a set level at which point it will not rise any higher , irrespective of market changes . This level is determined prior to commencement of the mortgage . After the deal period has ended the interest rate payable will revert to the lenders standard variable rate . As with Fixed mortgage deals usually there is an Early Repayment charge if you redeem the Mortgage before that period ends . Typically you will be charged a non - refundable booking or arrangement fee to secure a Capped mortgage rate .

Benefits : In many ways there are a mixture of a fixed and tracker mortgage . You capitalise on interest reductions , however can effectively budget on the set capped interest level .

Drawbacks : Due to low demand for these types of mortgages , there are fewer options available . Cap on interest rate is usually set higher than available Fixed rates . If its necessary to make an unplanned redemption of your mortgage , in the deal period , a large fee is usually payable . Also , If interests rates have risen , there can be a dramatic increase in rate when coming out of a Capped mortgage tie in period .

• Current Account and Offset

Right , heres the tricky one to explain !!!

Current Account and Offset mortgages work in conjunction with your bank account .

With a Current Account mortgage , your mortgage IS your bank account . Your balance shows accordingly ( i . e . 195 , 000 ), your salary can be paid in & all transactions are dealt with as they would be on a normal account . In most instances you can have a check book & debit card !

As you are charged interest daily on the account ( as with most mortgages nowadays ) any money surplus to your advised payment , at any given time , results in less interest being charged . This way the higher the amount & longer you leave money in your account , the less interest you pay .

With an Offset mortgage , your bank account and any other accounts you have ( savings etc .) are Offset against your mortgage . This means before they work out how much interest to charge you on your mortgage they take the balance of your other accounts off your mortgage balance . Creating a similar result as to Current Account mortgages above . The more you have in your accounts the less interest you pay . Its important to note you usually stop receiving interest on your current accounts .

The key difference between the two is a Current Account mortgage is ONE account . An Offset mortgage remains several independent accounts . Although a Current Account mortgage is a slightly more effective way of overpaying , some prefer not to have direct access to large amounts of money and or have no desire for a continual reminder of their mortgage balance !!!

Usually Current Account mortgages & Offset mortgages do not have tie in periods . They therefore do not have early repayment charges . Many will have varying arrangement fees , some refundable some not .

Benefits : People with large amounts of money in savings or investments can use this money to save interest on their mortgage . Either option can help you pay off your mortgage early . Some can be used by sole traders and simple partnerships to offset business accounts .

Drawbacks : Usually this style of mortgage has high interest rates , meaning you need to take advantage of the features of these mortgages to make them worthwhile .

+ Many more !!!

Its important to remember not all deal periods will run in line with the tie in period , within which you must pay an early repayment charge .

Each option provides a different level of security as to the cost of your mortgage repayments .

To discuss which type of mortgage would best suit your needs , please contact Mill - House Mortgage Solutions & well be more than happy to discuss this with you !

However whichever option you choose , each of them entail many of the same associated costs :

• Booking Fee / Arrangement Fee

An Arrangement fee will be charged by most Mortgage lenders to cover the administration costs of setting up the mortgage account . A Booking fee will be charged to reserve a special deal rate ( typically on fixed rate mortgages ).

• Higher Lending Charge ( HLC )

A Higher Lending Charge will be made by most Mortgage lenders on high Loan to Value applications ( typically over 90 %) to cover the additional risk of losing money in the event of reclaiming the property . This fee has taken the place of the MIG premium previously charged by many lenders , which became unpopular due to negative press coverage in the late 1990's .

It's rare for mortgage lenders to lend over 85 % of a properties true vaule on Right to Buy applications , hence this fee is usually not applicable .

• Early Repayment Charge

An Early Repayment Charge will be made by most Mortgage lenders on capital repayments within an initial deal period ( typically the same term as the discounted or fixed rate deal ). The charge is normally made as a percentage of the figure being repaid .

• Valuation Fee's

Many Mortgage lenders will insist on the use of their own approved valuers at the cost of the applicant . It's best to check with the relevant Mortgage Lender on their accepted valuation procedures .

• CHAPS / Funds Release Fee

The CHAPS / Funds release fee is made by most Mortgage lenders to cover the related costs of transferring the funds to your solicitors upon completion of the mortgage application .

• Sealing Fee / Closure of Account Fee

Mortgage lenders charge a Sealing Fee / Closure of Account fee to cover the administration costs of closing the account when you redeem the mortgage .

Since recent pressure from the FSA ( Financial Services Authority ) many mortgage lenders have ceased charging a Sealing / Closure of account fees . However some continue to charge them and others have simply re - classified the fee as an administration charge .

It's important to remember all the above costs will be in addition to your own solicitor's costs , deposit & stamp duty ( where applicable ).

Remember : Some Mortgage Lenders Mill - House Mortgage Solutions deal with offer deals with FEE's FREE options , which our advisers would be happy to go through with you .

Ways of Repaying your Mortgage :

In Addition to choosing the right type of Mortgage , you need to consider the most appropriate form of Repayment .

There are three options available ...

Interest Only ( IO ), Capital & Interest ( C & I ) & Mixed ( MIX ).

• Capital & Interest ( C & I ) or Repayment Method :

With the repayment Method you pay off the capital as part of your regular monthly payment . Your monthly payment will contain an element of repayment of your capital in each payment alongside the interest due . The proportion of each will change through the term of the mortgage .

Repayment mortgages have certain advantages ; the debt will reduce with each monthly payment you make , albeit that you will be paying mostly interest in the early years , with the capital repayments making up only a small part of the total monthly premium .

As the debt reduces , the amount of capital repaid increases ; this would normally reduce the debt against the property .

Continuing to make all payments when due guarantees the mortgage will be repaid in full at the end of the term . When repayment is selected many lenders will be more flexible about rearranging payments and altering terms as and when this is necessary .

• Interest Only ( IO ) Method :

With the interest only method , only interest is payable over the term and the capital is intended to be repaid at the end of mortgage by an appropriate repayment vehicle such as ISAs , PEPs , pensions , unit trusts or endowment policies . People have been known to utilise more than one of such repayment methods to repay the debt at the end of the term .

Interest Only mortgages were most popular in the late 1980's when most commonly sold alongside an endowment policy designed to repay the debt & make a modest profit . However in recent years the shortfalls experienced on many endowment policies had led many to opt for the additional security of the C & I or repayment method .

• Mixed Repayment ( MIX ) Method :

With the mixed repayment method , the applicant selects a proportion of the debt on which to pay C & I and a proportion of the debt on which to pay interest only . The applicant would also need to put provisions is place to repay the interest only section as outlined above .

They each have their advantages & disadvantages .

The main advantage of C & I as a repayment method is that this method provides the security of repayment over a given period .

Interest Only may not be able to provide the same security , however it does enable the customer to utilise the investment potential of the accompanying repayment vehicles .

Using a mixture of each method ( MIX ) enables the applicant to have some security of repayment with an added investment potential normally only enjoyed by those who opt to go Interest Only .

Most First Time Buyers opt for the additional security of the C & I method , however lenders will offer all three options in most cases .

Which is Best for You ?:

Call NOW on 0845 508 3252 to receive FREE ADVICE on which type of Mortgage & Repayment method suits your needs best.

Our opening hours are 9 : 30AM - 7 : 30PM Monday - Friday & 9 : 30AM - 1 : 30PM on Saturdays .

Please either ;

call us on : 0845 508 3252 (calls from UK landlines charged at local rates, mobile phone rates vary by cellular service provider)

or

e - mail us at :info@millhousesolutions.co.uk

or

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or

Write to us at : 9 Leopard Court Norwich NR3 1NN

We aim to respond to all our enquiries within 24 hours of receipt . Within 1 hour wherever possible .

To speak to one of our Advisers about your own Mortgage OR anything in conjunction with it

• Telephone: 08455 08 32 52
• Email: info@millhousesolutions.co.uk
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