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With Such a Low Base Rate Why Are Fixed Rate Mortgages So Popular?

As we move into yet another year with the Bank of England Base rate still at its record low of 0.5 per cent the millions of borrowers with variable and tracker rate mortgages continue to benefit from low repayments at a level unprecedented in living memory. Many financial experts are expecting that the Base Rate will remain at this historic low maybe for as long as 3 more years. Even though unemployment in the UK is reaching close to the point where Mark Carney, the Governor of the Bank of England, suggested the base rate could be reviewed, other factors in the economy look likely to prevent any imminent rise.

So given the current economic situation in the UK one might expect that more home owners would take advantage of the low rates by taking out a variable or, at the very least, a tracker mortgage deal. It is rather surprising then that the Council of Mortgage Lenders have published data that indicates that more than 80 per cent of new mortgages were agreed on a fixed rate basis in 2013. Not only is this an unexpectedly high proportion of fixed rate deals being agreed but it is the highest proportion since these data began to be recorded over twenty years ago so includes plenty of data from the pre credit crunch era. Even in 2010 only 50 per cent of home buyers chose a fixed rate deal when the average interest rate was 4.44 per cent.

So why might so many people be choosing fixed rate mortgages in preference to variable or tracker loans?

The simple answer could be that the best fixed rate deals are now at the same interest rate levels as the most attractive tracker loans. With fixed rates now as cheap as the equivalent tracker deal, it makes sense to opt for a fixed rate with the added security of knowing that repayments will not go up for the period of the fixed rate. The same cannot be said for tracker deals as repayments on this basis have the potential to rise and it may be this uncertainty governing the majority decision to fix and gain some protection. This could be seen as particularly important in the light of recent controversial decisions by certain banks - most notably the Bank of Ireland - to increase the margin above the Base Rate that they charge on tracker deals; something borrowers thought could not happen on a tracker loan.

The level at which fixed rates are set is partly determined by expectations of how the Bank of England Base rate will change in the coming months and years. With low rates anticipated for some years to come and with banks and building societies having access to less expensive funding through government schemes designed to boost the property market the effect has been to drive down the price of fixed rates.
For those about to agree a large mortgage, whether for a new home purchase or just to re-mortgage an existing home it appears that a fixed rate deal offers the least risk with equivalent monthly payments. But it is always worth talking to a mortgage broker and checking the small print of any agreement.

Tips for Choosing a Mortgage Lender

It is natural for home buyers to focus on the search for the perfect mortgage. However, if the perfect loan comes from a less than perfect lender, you can easily get in trouble. That is why it pays off to research and compare the different loan providers in order to pick the right one for you. Use some practical advice that will help you with this task.

License

The mortgage lender that you choose to work with must be licensed to provide home loan products and services in your area. This is the first and foremost requirement that must be met. You can now check whether a loan provider is licensed online. It will take no more than a few minutes. You simply need to visit the Consumer Access web page of the Nationwide Mortgage Licensing System (NMLS) and use the tools and information available there.

Service Criteria

Once you confirm that the home loan provider is licensed, you can move on to evaluating their service. There are five main criteria that this service must meet. These include honesty and reliability, communication and assistance and expertise. It is easy to evaluate a provider based on these criteria. You simply need to evaluate them based on the initial dealings that you have with them and on the reviews of other customers.

The perfect mortgage lender is honest and keeps their word. If you find that there is considerable difference between the quote that you have got and the loan ad you first saw, then it is best to stay away from this company as it may attempt to mislead you again. It is essential for the provider to establish good communication with you as a lender. They should respond to your calls and queries timely and give you all the attention that you require.

You should get all the assistance which you require when you compare the different types of loans available and when you are making your application. The more information and advice you can get the better. It is easy to recognize if the loan provider or more precisely their representative has expertise. The professional will explain everything from the application to the closing in detail and give you an overview of the main financing options available to you. They will be able to answer each and every question sufficiently quickly and confidently.

Product Criteria

You should evaluate the diversity, quality and affordability of the mortgage programs offered by the lender that you consider working with. Check what types of programs the provider offers. The more they are the better. You should be able to select from fixed-rate programs, variable-rate and other high-risk programs and government-backed programs as well.

You must check what interest rates the lender offers. Your best bet is to ask about the rate on the 30-year fixed-interest loan. If it is competitive then the rates on the other programs should be competitive as well. It is equally important that you request a breakdown of the closing cost and get a precise estimate of its size. This will help you greatly in evaluating the affordability of the programs.

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Securing Mortgage Loans With Bad Credit: It Is No Dream

It might come as a surprise that the chances of securing approval on a mortgage loan with bad credit is not as impossible as many believe.

The reality is that securing approval on applications for any loan, even with a low credit score, is possible as long as the key criteria are met. Once that is done, then there is little reason for lenders to turn the application down.

Of course, low scores do have an influence, with the affordability of mortgage loans affected directly by the interest rates that lenders charge, and the rate affected by the perceived risk associated with the applicant. Understanding the significance of bad credit is important when putting together an application strategy.

The Influence of Bad Credit Scores

The influence that bad credit scores have on the approval process is not actually as great as many people think. So for someone seeking a mortgage loan with bad credit to their name, it is not so impossible to be given the thumbs up.

This is because lenders agree that the reasons for a low credit rating can vary, and do not necessarily mean the applicant cannot be trusted to repay their debt. These scores are calculated by hard evidence, but does not reflect the situations. So, a sudden loss of employment may result in a personal loan being defaulted upon, but a restored employment changes the situation again. When it comes to securing approval on applications for a loan of any kind, lenders are happy to examine other factors.

For mortgage loans, despite the sheer size of the debt being taken on, elements like current income, employment security and the amount of excess income available for monthly repayments are of greater interest than a credit rating.

Credit Scores on Interest Rates

Where credit scores do have an influence is the interest rate that is charged by the lenders. Higher rates are down to the fact that lenders are perceived to be accepting a greater risk, and need to recoup their money. And this is where applicants for mortgage loans with bad credit are affected.

For example, an applicant with a credit score of 600 will pay a higher interest rate that one with a score of 700. So, even with the same mortgage sum borrowed, over the same term and from the same lender, the former will have higher monthly repayments than the latter. When it comes to securing approval on applications for such large sums, this is an important factor to consider.

It is important to realize, however, that lenders will reject an application for mortgage loans on the basis of the affordability of the repayments, rather than the scores themselves.

The Debt-to-Income Ratio

Assessing what is affordable comes down to the something known as the debt-to-income ratio, which is effectively an assessment of the amount of income available to cover new debt. Those seeking mortgage loans with bad credit hanging over their heads can see their application succeed if the ratio is within the 40:60 rate that is deemed acceptable.

This ratio means that no more than 40% of the available income can be dedicated to repaying the new debt. An applicant with excess income of $1,000 per month will not be allowed to take on a debt that requires payments of more than $400. So, securing approval on applications is not simply down to income, but how much 40% of that income is.

The ratio exists because of the need to handle unexpected expenses, like medical costs and other emergencies. Statistically, it is these sudden expenses that cause so much havoc with repaying mortgage loans. So, having 60% in reserve for these unforeseen costs is important.

When it comes to strengthening applications for mortgage loans with bad credit, there are a few areas that should be addressed. From the basic requirements associated with such large loans to the amount of available income there is to take on additional debt, these areas are effectively the key to success.

The basis of this fact is that securing approval from lenders does not depend on the credit rating that an applicant has. Instead, the credit ratio is central to convincing lenders that the required monthly repayments is affordable, while the size of the down payment is equally telling.

So, when seeking approval on an application for a mortgage loan, these are much more significant areas to pay attention to.

Basic Requirements to Meet

Like every other financing deal, there are requirements that must be met before an applicant can qualify for a loan package. When it comes to applicants seeking mortgage loans with bad credit to their names, these requirements are particularly acute.

The key criteria is nothing particularly special. Applicants must prove they have full-time employment, and are earning a sufficient income to make the monthly repayments. Securing approval from lenders also depends basic legal criteria, such as proof of age (over 18), and citizenship.

Further requirements stated, depending on the policies of individual lenders. Some insist employment must have been held for a minimum of 6 months, while others require proof of efforts to improve their financial situation before applying for a mortgage loan.

Ensuring the Right Credit Ratio

A key concern for those applying for mortgage loans with bad credit is the credit ratio that lenders view so highly. Known also as the debt-to-income ratio, it relates to the degree of debt that an applicant already has and, therefore, the ability to take on any further debt.

The ratio is set at 40:60, which means that only 40% of the available income can be dedicated to paying off debts. This means that securing approval from lenders principally depends on meeting the ratio standard. If the available income, after existing debt and expenses is taken into account, extends to more than 40%, then the application will be rejected.

In this respect, the credit history of the applicant is meaningless. All that matters is that the ability to repay the mortgage loan exists in the first place. Once that is confirmed, the likelihood of getting the thumbs up is greatly improved.

Providing A Down Payment

Any applicant that is able to provide a down payment makes a very positive impression with the lender assessing their application. Often, the reason that applicants seeking mortgage loans with bad credit get the green light is that they have as much as 10% of the property value available as a down payment.

The reasons rest in the fact that to gather such a large sum of money requires a considerable amount of effort and discipline, so the applicant obviously is showing a real commitment to the responsibilities involved. This does absolutely no damage when it comes to securing approval from lenders that might otherwise have been unsure about trustworthiness of the applicant.

But, in practical terms, making a down payment means the required mortgage loan is also reduced, thereby lessening the risk and the principal debt. It also reduces the required monthly payments, the interest rates and making everything that little bit more manageable.

Hilary Bowman is a Financial Expert who specializes in Loans for People with No Credit and Bad Credit Loans.

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