UK mortgage question

[JennyC]

Hi! I just made a new account as my other is too obviously me to disclose so much personal info!

My husband and I are looking to buy our first home, and have been talking with a mortgage broker about our options. He has a stable job earning £28,000 gross, while I am self-employed (~£25,000 taxable income). I have 9 months of full-time earning accounts and a few previous years where I was freelancing part-time. Confirming what we'd previously read, the broker said that it would be best to apply for a mortgage in his name, then re-mortgage later for better terms when I have a couple of years of full time earnings.

The best deal that she's found is a 40-year term. As UK mustachians will know, we can only have a few years at a fixed interest rate, but she suggests remortgaging after that.

The two options that she outlined are as follows (both using his income only):

2 Year Fixed Interest rate at 2.0%, 40 years - ~£390/month
5 Year Fixed Interest rate at 2.5%, 40 years - ~£430/month

She recommended we take the 2-year option with the lower interest rate (and lower payment) and remortgage at the end of the fixed period when I will have ~3 years of full-time self-employed earnings and can be added to the mortgage to bring the term length down.

I'm just wondering if anyone has any thoughts. Initially I thought it would make sense to take the longer fixed rate as interest rates could well rise, but if we're going to remortgage at the end of the term either way I don't suppose there's much in it.

Apparently there's a 3% fee if you make additional payments during the fixed interest period, and after that you can pay off an additional 10% of the principle a year.

Thanks in advance for any thoughts :)

[SpreadsheetMan]

40 years??? I didn't even know that was possible.

To get some context what does the property cost and how much are you borrowing?

[JennyC]

I didn't either!

We have a £40k deposit and are approved up to £133k. This is an approval in principle so we don't have a set house price yet, but I expect it to be perhaps £160k.

[SpreadsheetMan]

Given that you are going to re-mortgage as soon as you can prove income (and not run to term) then the 2year option looks like a reasonable choice. You can get a new mortgage on a more normal 25yr term pretty quickly and it looks like your combined net income (£3k5?) would be more than sufficient to cover all expenses (+saving) after that with lots of margin for rate increases.

Downside would be that you get hit with a 2nd lot of arrangement fees (£1k-ish?) quite soon. Is that significant in your plans?

Do you have a good cash buffer for decoration / maintenance / emergency fund?

And finally, just to play devils-advocate - what is the cost trade-off of waiting until you have the 3 years of accounts and doing the final mortgage deal then?

[JennyC]

Thanks for the advice!

Yes, we have a separate emergency fund and money set aside for renovation. The reason for the speedy move on this is that we know of a repo that will be sold soon and would like to be positioned to act quickly, assuming we can get a decent price. If not, we're happy to wait for another deal.

Thanks again. :)

[Kwill]

I didn't realize that UK mortgages couldn't have fixed rates over the length of the loan. Combined with penalties for early repayment, that seems a real disadvantage for the borrower. Are there also penalties or extra fees for remortgaging in a couple years?

[SpreadsheetMan]

I didn't realize that UK mortgages couldn't have fixed rates over the length of the loan. Combined with penalties for early repayment, that seems a real disadvantage for the borrower. Are there also penalties or extra fees for remortgaging in a couple years?

I think you can commonly get fixed up to 10 years max. but the rates get less good the longer the fix as the risk to the lender rises. (typically)

There are always penalties for re-mortgaging inside the fixed term and also extra fees for the new mortgage.

[dreams_and_discoveries]

I know 30 year mortgages were becoming more common, but not heard of 40 years!!! Why  do you need a 40 year mortgage - would a 30 or 25 year not be  affordable? What age are you?

You usually need at least 2 full tax years accounts when self employed to get a mortgage, so going for the 2 years fixed makes sense if you can then remortgage with your income included.

[wespellitmoustache]

Hi Jenny,

We're about to remortgage and are going for a 5 year fix as likelihood is that rates will rise in the next year or so.

Make sure to sense check your choice of mortgage advisor and what they recommend - both with others and main provider deals on the market right now. We're looking to remortgage at about 1.7%, but that might be because we have a lower LTV than you and might be seen as a lower risk.