How do my City clients structure their mortgages?
Craig Beesley - Mortgage Broker for Busy and Professional clients
Mortgage Specialist - making mortgages easy for busy clients
In this article I am going to be sharing the various different methods I use with my City based client to structure their mortgages. Whilst there is not a one size fits all strategy - there are a number of different and innovative ways to set up your mortgage to make it optimal for your circumstances.
The days when a straightforward 25 year repayment mortgage were spoon-fed as standard to virtually every client....by brokers with little imagination .....and worse little understanding of different clients....are thankfully becoming a thing of the past.
The trick, especially for my professional and City based clients is to put you back in the driving seat, and put you firmly in control of your mortgage and it's cost, terms, length and features.
If you are looking to take control and make your mortgage work for you....rather than the other way round then of course feel free to get in touch! Here's a few strategies that I and my clients are using.....
THINKING OF YOUR MORTGAGE LIKE A CREDIT CARD....
So what am I talking about here!? Credit cards are bad right! ....... just to explain - I am not suggesting you borrow on your mortgage like you would on a credit card.
What I want to encourage you to do is start thinking about paying down your mortgage a bit like you would your credit card. No one wants a credit card balance and the trick is of course to try and pay it off as soon as possible to avoid the interest costs. BUT with your credit card you have flexibility. You have a minimum payment that you HAVE to pay but it is generally quite small...HOWEVER you can choose to pay more as and when you want to or can afford to. In other words it is in your hands as to how quickly you pay down the debt, but dependent on circumstance you know your committed payment is pretty small.
For a lot of my City clients this approach is perfect. We structure their mortgages in such a way as to keep the payments to a minimum...but with the flexibility to pay off extra when it suits them, such as when they get bonuses, or realise share options.
This suits them because for many of them cashflow can be variable throughout the year, they may have costs to meet at certain times and be in receipt of large amounts at other times. Crucially this puts them in control to a large extent as to how much they pay and when!
So what structures and methods do we use?
1) LENGTH OF TERM
We seem pre-programmed to think of debt in the shortest possible terms - clients often baulk when I suggest 35 or 40 year mortgage terms.
TO BE CLEAR when I say this I am NOT suggesting for a minute that you should keep your mortgage for 40 years. What I am doing is using the trick of extending the term to drive down the cost of the monthly payments. What this means is that the amount that you have to pay is kept low and manageable. If you switch jobs, travel for a year or have unplanned expenses and need a low mortgage payment for this period you are sorted - you have already effectively pre-planned for this eventuality.
What I am suggesting here is that you use other means to pay off your mortgage....and more quickly!
2) OVERPAYING
Sounds simple right? but often people sleepwalk into deals where they can't overpay or where this facility is very limited in scope. I tend to steer clients to deals where there is an automatic allowance to pay off 10% of the mortgage balance (in addition to the standard payments) per year without any charges.
On a £1 million mortgage that means you can slice £100k per annum off the balance with no penalties. So although your committed payment may be low - you are in charge and have the flexibility to pay down your mortgage much faster. Your are in control - not the mortgage lender.
3) PAYMENT TYPE
When you set up your mortgage, as long as you meet the banks criteria, then you could be eligible for putting either all or part of your mortgage on an interest only basis.
Why would you want to do this? Again many clients recoil in horror if I suggest this but if you think it through it is another sensible way to cut the monthly costs. It again cuts down and keeps your 'committed payment' as low as possible.
As an example - one of my clients would eventually be downsizing and moving out of London when his 3 kids grew up, he would not need such a big house or mortgage in the future. For him he did a 'part repayment' & 'part interest only' mortgage with the idea that sale of his property would enable him to clear the existing mortgage left (the interest only balance) and still buy a new home with the remaining equity.
Another client who went all interest only had an investment portfolio that would clear his whole mortgage when it matured. So why bother using his cash to pay off the mortgage now...when it would be cleared in one hit later on.
For most of my clients though the attraction is to keep costs low and STILL give them that same flexibility to pay extra as and when they want or choose to. For the majority of my customers that consider it - we usually end up mixing it up with part repayment and part interest only so they have the comfort of knowing that the balance is still reducing with every payment.
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4) OFFSET
Offset mortgages are an under-utilised form of mortgage that can be absolutely fantastic. In the right clients hands it can drastically reduce the length and cost of your mortgage.
Offsets work effectively like a set of scales. On one side is your mortgage....on the other is your savings. The savings are used by the lender to offset the interest charged on your mortgage.
Lets imagine you have a £100,000 mortgage and were paying £500 per month. Of this, for simplicities sake, lets assume £250 is interest and £250 is paid off of the balance.
Put simply if you had a £100,000 mortgage and £100,000 in your mortgage offset account then you would pay no interest on your mortgage (conversely you get no interest on your savings) Your mortgage payments, if for example you kept them at the full level of £500 - would all go on reducing the balance rather than paying part balance part interest.
The alternative use would be to use the offset to reduce the payments you have to pay on your mortgage by reducing the interest costs charged monthly and just paying the part that pays down the balance - in this case reducing your payments from £500 down to just £250.
If bonuses are put into offset or you deposit your savings here you can cut many years off of your mortgage length - sometimes by not even paying a penny extra!
***savings kept in your offset account are able to be withdrawn and are accessible at any time**
5) MAKING SURE YOU SWITCH PROPERLY!
I cannot begin to tell you how many intelligent and professional clients I come across who either forget, ignore or cannot be bothered to sort their mortgage out when it comes to the end of its deal.
Many take the easy choice and stick to a deal with the existing lender, many commit the cardinal sin (that lenders love) and slip onto the standard variable rate.
It is so important to have someone look at your current deal and see what you could get next.
Let me give you a recent example:
The client was about to switch with his current bank who had done what we call an 'indexed valuation' on his home. When I checked it - it was way lower than real market value. The rate they offered on a switch was therefore for a higher loan to value than it should have been and as a result attracted a higher rate34meant the rate offered was 2.19%
Upon looking at his deal I managed to obtain him a rate of 1.65% with another bank - a significant saving.
So simple to do and although it meant filling in a fact find and supplying some documents he's saving a fortune as a result. THIS CAN BE CHANNELLED INTO PAYING OFF HIS MORTGAGE EARLY INSTEAD OF WASTING IT ON A HIGHER INTEREST RATE
SUMMARY
There are lots of ways you can make your mortgage work for you - rather than the other way around. In this article I have largely focussed on cutting costs and giving you flexibility but there are of course many different scenarios and circumstances.
Most important is what will work for you and your circumstances.
If you want to explore your mortgage options please get in touch for a friendly and free chat.
07740 284270
craig@themortgageconsultancy.co.uk