mortgage question

[gingeroots]

I am clueless about this subject and I'm asking for a friend .

He's hoping to get a mortgage on a right to buy council flat valued at #450,000,he will get a discount of almost #100,000 .

He's 60 .He's hoping that telling the mortgage company that he'll work until 75 and can manage a longer term mortgage will get him slightly lower rates . But in reality he plans to retire and sell after 5 years .

But surely you cant take out a mortgage for say 15 years and then in 5years time pay it off without incurring some kind of financial penalty from the mortgage company ?

Can you ?

You can get mortgages that don't have any early repayment penalties.

It could be difficult to get a mortgage at that age though. Usually lenders would want to see the loan paid off before retirement age, and it's not really enough to say 'I know I'm applying for 15 years but actually I'll pay it off in 5' because they'd not want you to do that either.

Oh, but a mortgage without early redemption penalties would likely have not as good an interest rate as one that does tie you in...

Not my speciality, but I think you can do this. Some mortgages have penalties for overpayments above a certain percentage, and some will charge a fee/fine for terminating a mortgage during an initial fixed term, as you say. Not sure how much these would be in the context of the proceeds from his sale, but might be worth it.

Isn't there also some timeframe in which the council can claw back money/the flat if the RTBer tries to sell on? Sorry, being vague as I don't know much, but I remember something about this.

When you say your asking for a friend - you mean you're actually asking because he's asked someone who is clueless about mortgages to post on a non specialist Internet forum? (with all respect to those who are specialist or experienced who post here!)

If your friend wants advice, he could start with a whole of market mortgage broker, like London & Country.

That sounds like a challenge to me, a mortgage at 60 for that kind of money. It's not a case of saying you'll work til 75. Mortgage companies have their own idea about what is nominal retirement age.

And of course you can pay a mortgage off whenever you like. Plenty of products without redemption penalties too, and not at punitive rates.

That sounds like a challenge to me, a mortgage at 60 for that kind of money. It's not a case of saying you'll work til 75. Mortgage companies have their own idea about what is nominal retirement age.

Absolutely this-I'd be very surprised to find any mortgage company that would agree to that.

Generally speaking, the mortgage tie-in period is equal to the initial rate period (eg if the interest rate is fixed for 2 years, the mortgage could be repaid after 2 years without incurring an early redemption penalty). However, the two issues your friend will have are firstly his age at the end of the term - lenders will apply a reasonability test to his job (although it's technically illegal for an employer to force anyone to retire at a certain age anymore, eg a mechanic or a roofer would be much less likely to sustain their job to age 75 than eg an office worker).
If your friend is expecting to receive a good pension that could be proven to be sufficient to support the mortgage repayments, this could work for several lenders.
The second issue is the pre-emption period applied by the HA for a set time limit after the date of purchase, whereby he wouldn't be able to sell on, let out, or remortgage the property without incurring a heavy penalty. It used to be (and possibly still is) a blanket 5 years across all councils but may have changed - his RTB Section 125 document will confirm.

Most mortgages only have redemption fees within the offer period. So if you get a two year fixed rate, you'll get stung if you redeem in that time, but after that fixed rate period the rate jumps to "standard variable rate" and the limitation stops. That's the point you'd typically remortgage on to a new deal.

Getting a mortgage at 60 would be a challenge though I think!

Yes to PP on claw back - but the time period isn't too restrictive. After 5 tears you can sell freely. Before 5 years you have to pay back a % of your discount... 80% after a year, 60% if after 2 years etc.

There are specific right to buy mortgage products... I don't know if they have any special features or if they're just a marketing gimmick. I suppose with the discount they might offer a good LTV rate without you having an actual deposit.

What's his income and deposit like? Is he in a good pension scheme?

At the age of 39 I had a mortgage agreed with a 36 year mortgage which would have taken me to the age of 75. Like your friend I had no intention of keeping this going all that time. I secured it by showing my pension statement (final salary pension scheme) and showing that the lump sum I would receive at the age of 65 would be more than the amount of mortgage left outstanding at that time.

In reality though, I overpaid my monthly repayments throughout the 2 year deal period, at the end of which I rearranged the loan to end at age 65.

Your friend should be cautious about this plan though. It's a plan formed on the assumption that significant house price rises over the next 5 years will create a nice little equity lump for him. If he's lucky this could work. But in the event of a "Leave" vote next week, some economic experts are predicting interest date rises and house price crashes with the economy taking years to recover, if at all. Your friend could end up in negative equity - owing the bank not much less than £350,000 but unable to sell the house for enough to repay the loan.

Thank you all so much ,that's really helpful .

The rules re selling the council flat are that it can be sold after 5 years .

I would think he has a good pension and we're trying to persuade him to use a legacy to increase his deposit .

Thank you again for the help .