Picture the scene. A mortgage borrower is scanning mortgage best buy tables in order to find the best product for their circumstances. They filter the results to identify the best five year fixed rate and, with a range of competitive rates on offer, the solution seems simple. Job done! Or is it?
It’s possible that by focusing on finding one suitable product borrowers are losing out. Indeed, it may seem counter intuitive but many borrowers are not exploring the benefits of taking out multiple mortgages.
A prime example would be for older borrowers who are typically asset rich but income poor. They may be reaching the end of a long term mortgage and unable to refinance with conventional lenders.
The options presented can seem unattractive, equity release is a clear option but it has considerable disadvantages with significant breakage costs and compounded interest. If wishing to downsize in the medium term the breakage costs are likely to be punitive. So without further ado we run some examples.
▲ Fig 1.
Using income from self-employment, investments or pensions it may be possible to raise a mortgage which may clear a significant portion of the existing debt, the balance of which can be cleared by a compounding second charge mortgage with no monthly payments.
This allows the first charge lender to ignore the second charge for affordability purposes.
▲ Fig 2.
Buy to let mortgages are more complex than ever before. Historically many lenders would advance loans based on a light rental coverage calculation, often 125% of the mortgage interest rate. Now it is common place for a 145% coverage of a mortgage payment calculated at 5.5%. For a property in central London yielding 3% the implications are significant.
Landlords can become mortgage prisoners, unable to refinance their mortgage after the initial rate due to the new assessment of the rental income.
▲ Fig 3.
A few lenders have attempted to solve this problem, however this often involves paying for a cost inflated product. By taking out a second charge there may be the possibility of reducing the overall cost of the mortgage, for example.
All mortgage borrowers have unique personal circumstances which is why it is so important to seek independent mortgage advice.
A mortgage broker can assist by assessing the feasibility of structuring such solutions and fully weighing up the pros and cons of implementing a single mortgage or multiple mortgages, ensuring the outcome really is the best possible solution for you.
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