United Kingdom Mortgage Market

Introduction

The UK’s market is continuing to strengthen, with the economy recovering and interest rates at their lowest ever.  

“Price growth is continuing to run at a robust pace, with the price of a typical home 9.5% higher than in March 2013. There is little doubt that the recovery in the housing market is now firmly established, with activity levels picking up and house prices recording their fifteenth successive monthly increase in March” – Robert Gardner, Chief Economist, Nationwide

London is giving cause for concern, however, as soaring house prices hint at a possible property bubble in the nation’s capital. 

UK housing prices are being boosted by 4 factors: (1) Immigration and population growth, especially in London, (2) Interest rates have reached record lows, with a large expansion of the money supply through "quantitative easing", (3) London’s financial boom, and (4) Construction activity remains week.

Interest rates in the United Kingdom are at an all time low.  The Bank of England’s key rate has remained unchanged over the past four years.  The spread between the key rate and the average mortgaged rate has widened to around 3-5 percentage points from less than 1% in 2006-2008. 

In March 2014, average interest rates for types of mortgages with 75% loan to value were: 

  • 2.37% for 2-year fixed rate mortgages (FRMs)
  • 2.97% for 3-year FRMs
  • 3.47% for 5-year FRMs
  • 2.83% for tracker mortgages
  • 4.43% for SVR mortgages

Rates have not changed despite recent evidence that the UK economy is recovering.

United Kingdom Property Rights

There are no restrictions on foreign ownership in the UK. Offers are not legally binding in the UK, however, they are in Scotland. Therefore, in Scotland it is important not to make an offer when you are not fully prepared to act on it. After making an offer, it is strongly advised that potential buyers take part in a survey.  Surveys are useful to detect potential problems in the building.  There are two different kinds of surveys: a building survey, which will cost around £500-£1000 ($986-$1973) or a home buyer's report, which is cheaper, around £300-£500 ($592-986). Surveys are negotiable, so take advantage of that. Conveyancing is the legal transfer of property.  You will need a solicitor or licensed conveyor for this step. Negotiate during this step as well, and clarify whether VAT or disbursements are included in the quote. The conveyance process may take a minimum of two weeks, but is not unusual for the process to take up to 2-3 months because a search a Local Authority Search as well as a Land Registry search are required (these searches are both for the buyer’s benefit). After the conveyance process, a 10% deposit and a transfer contract complete the sale. 

Round trip transaction fees include lawyer’s fees, notary fees, registration fees, taxes, and agents’ fees.  Solicitors and conveyancers fees are based on the amount of time spent on the transaction and are generally negotiable. Some charge a fixed amount while others charge a percentage of the sale.  Buyers must also complete, sign and lodge a Land Transaction Return with the Stamp Duty Land Tax. Some areas are exempt from tax.

Financing Options

Fixed Rate Mortgage

The interest rate will remain the same throughout the period of the deal—typically 1 to 5 years, though it is possible to get a ten year fixed rate.  If you opt for a fixed-rate mortgage, you’ll have the security of knowing exactly how much your mortgage will cost for a set period of time.  This is great for budgeting, however, you will be tied in for the duration of the deal, so if interest rates fall you cannot take advantage of lower rates. 

Tracker Mortgage

The interest rate on a tracker mortgage is linked to the Bank of England base rate and is a variable rate mortgage.  If the base rate changes, so will your mortgage rate, i.e. if the base rate is .5% and you take out a tracker mortgage with a rate that is 2% above the base rate you will pay 2.5% and if the base rate increases to 1% you will pay a rate of 3%.  Tracker mortgages are most commonly available for 2 to 5 years.  If you want to get out of the mortgage during the term, you will be charged a penalty. 

Discount Mortgage

Discount mortgages are another type of variable mortgage.  The interest rate is linked to the lender’s standard variable rate.  This is different from the Bank of England’s rate and is significantly more risky because the lender can change their SVR even if there hasn’t been a change in the BoE rate.  Make sure you will be able to afford your payments if they were to rise, as it is not uncommon for lenders to raise the rate. 

Offset Mortgage

This type of mortgage is complicated because it links your savings to your mortgage debt.  Rather than earning interest on your savings, that money is set against your mortgage so you pay less interest on that debt.  For example, if you have a £100,000 mortgage and £20,000 in savings, you would only be charged interest on £80,000. However, your monthly repayments will be calculated off of the original £100,000. Therefore, you end up clearing your mortgage more quickly and save yourself thousands of pounds in interest.  You will have the choice of fixed or variable rates with this type of mortgage. The rates on this type of mortgage are typically more expensive so if you have a small amount of savings it may be more prudent to stick with a normal mortgage. 

 

Contact
Name *
Email *
Phone *
Type of Enquiry
Comment