Mortgages in the UK?

[Quz]

I am an American home-owner living in upstate New York. I enjoy Mumsnet chats and have recently been reading a lot of threads where mortgages are mentioned, though not usually the prime topic. (Usually, the topic is generally about increased cost of living.) It seems that mortgages in the UK work differently than they do in the U.S., and I am curious about that. Do I have this right? You all have to redo your mortgage every few years, and the terms (interest rate, etc.) change when you do? Can someone explain to me what the "usual" mortgage arrangement is in the various countries of the U.K., and what some of the available but less often used arrangements are? I seem to recall something about an interest-only option? Not planning to move or anything; just a curious Social Scientist with nothing better to do on a Saturday night than ask strangers this sort of question. 😂

Mortgages in the U.K are various.

When someone takes out a mortgage, they can choose a standard variable rate - whatever interest their bank chooses to charge (not a great idea), or a tracker which is Bank of England base rate plus 1 or 2%, or they can choose a Fixed rate for normally 2 or 5 or 10 years.

Fixed rates give certainty of monthly cost and could work out cheaper if rates are rising, or can be very costly if rates fall. There is also the risk for some that at the end of the fixed period, if they have poor credit, they may struggle to find another deal, and be forced to pay standard variable rate which can be very expensive.

I've always chosen a tracker because I'm not bothered about predictability and prefer to pay market rate.

I don't know how American mortgages work.

You don’t have to remortgage at the end of a fixed rate - you can remain with your current lender for the remainder of the term but your rate will default to their standard variable rate.

The mortgage is for a term of typically 20-30 years. Most people choose a product with the interest rate fixed for 2-10 years. Once the fixed rated finishes you go on to the bank's standard variable rate, which is typically very expensive, or you remortgage to a new fixed rate product. There are also trackers which track the Bank of England rate plus a percentage.

Mortgages are hitting the headlines at the moment as the Bank of England has put up rates substantially and hundreds of thousands of fixed rate deals taken out when interest rates were very low are coming to an end. People are having to take new products at much higher rates, which is causing financial issues when many other household costs have also increased recently.

American mortgages are usually for either 15 or 30 years, with the latter being most common, and they pay the home off at the end. Theoretically you can get a mortgage from your local bank and pay the same payments for 30 years, as my parents did. You can refinance at any time, but you will pay closing costs each time you get a new mortgage.

You can get interest only mortgages here but they are much less popular than they used to be. Instead of paying off the capital, you just pay the interest each month and then you pay the loan lump sum at the end of the term. The idea being that you invest in a product that will pay out a large amount at the end of a long term e.g. an annuity to cover the capital lump sum payment. There were problems with these mortgages in the 1990s as several investments failed or paid out significantly less than predicted, leaving people short.

Just before the financial crash lots of people were sold interest only 100% mortgages and took them without understanding how they worked. They are now widely (rightly) seen as unsuitable for most people and generally people go for repayment mortgages.

We have much shorter fixed term interest rates than in America or most of continental Europe where you can get a 20-30 yr fixed rate. No idea why mortgages have developed like that here...

Endowment not annuity, sorry. Annuity is for pensions. Loads of people were mis-sold endowments and they paid out much less than expected.

Buy to let mortgages are often for interest only. The LL investor often uses the rental income to pay the interest on the mortgage and keeps the property for many years and over time acquires equity. At some point in the future they will sell the house, release their equity and pay off their mortgage and have a lump sum left. They will have to pay Capital Gains Tax to the government.

canadian mortgages are the same as uk i believe. you can lock in your interest rate for a variety of terms.
Mortgage terms and amortization - Canada.ca
this might help explain it to you.

Lots of good info here! @MintJulia So, as @LifeExperience stated, most commonly American mortgages are for 15 or 30 years, but can also be written for 10 or 20 years. The advantage of a shorter term is a lower (fixed) interest rate, but of course your required monthly payment will be lower with a longer term. I don't believe any mortgage product in the U.S. has a prepayment penalty, so you are free to make additional payments to the principle so that you can pay it off sooner and decrease the total interest paid. There are other types of mortgages, which I will mention below.

@MintJulia @BillyBraggisnotmylover The fixed vs. variable "default" is one of the most significant differences between U.S. and U.K. mortgages. But we aren't "stuck" with a higher interest rate, if rates decrease. In the mid-nineties a man I was dating refinanced a house he had purchased only 2 or 3 years prior because interest rates had gone down so much. He had been paying extra on his 30 year mortgage to pay it off in 20. With the refinance, he was paying the same to his bank each month, but for a 15 year mortgage. (Of course you have to have very good credit to refinance.)

@Edwardandtubbs @caringcarer This is what we call a "Balloon" mortgage. They aren't used very much, but I can see the appeal of them for buy to let. I would have thought that the financial crisis would have soured banks on those.

Speaking of the financial crisis...@eurochick made the point that has been bothering me a bit. Most people in the U.S. choose fixed-rate mortgages, but there did used to be Adjustable Rate Mortgages (ARMs) that folks would use to qualify for a higher loan amount than they would with a fixed-rate. They started out at a lower interest rate than a traditional fixed rate at the same point in time, but the interest rate would automatically reset after 5 years, so at that point the monthly payment would increase substantially. Banks were using these a LOT in the years leading up to the financial crisis and that played a major role in both the financial crisis itself and the extraordinary numbers of home foreclosures (that's what we call it when the bank takes your home because you are unable to pay the mortgage) that happened before/during/after the banks were failing. Knowing that variable rates are the norm there, and seeing interest rates go up as they have (here as well), it makes me a little nervous for you folks.

@greenspaces4peace Thank you. Yes, it does appear that the Canadian system is more like the U.K. system than the U.S. system.

@Quz No tax deduction on mortgage interest payments in Canada.

I don't believe any mortgage product in the U.S. has a prepayment penalty, so you are free to make additional payments to the principle so that you can pay it off sooner and decrease the total interest paid

This appears to be a key difference between US and UK mortgages. In the UK, anyone taking a fixed rate will face early repayment penalties if they want to change their mortgage during the fixed period.

These can be substantial so make it uneconomical to change the product. The product is often transferrable, so if you want to move house, you can keep the mortgage with the same terms, and usually then take out another mortgage for the additional cost of your new home, on whatever terms are available at the time.

But if you find that interest rates go against you and drop, you're effectively stuck on an expensive product. Also if you want/need to sell without buying another property, eg if you separate or are moving overseas, you could have to pay thousands of pounds as an early repayment penalty.

Fixed rates usually allow overpayment by 10% each year (not sure what the 10% relates to - initial amount or current balance) so this could be a substantial sum and more than many could afford to overpay anyway.

The other thing to note is that MN is an affluent demographic, so the large mortgages and massive overpayments when the bonuses roll in that people on here talk about are probably not typical of the UK as a whole.

Another feature of UK mortgages is that there can often be a substantial arrangement fee so it's always a balancing act as to how much of a fee is worth paying to change your mortgage, because it can often add significantly to the cost, and make it not worth it if your mortgage is small, especially for a 2 year product. Although paying a higher fee often comes with a lower rate, so likely worth it for larger mortgages. This has to be worked out on a case by case basis. I strongly suspect this is deliberate and the banks/mortgage advisors encourage people onto short term products with fees so they can take a regular income from people switching their mortgage all the time.

Because we bought many years ago in a cheaper part of the UK, we've only ever had a relatively small mortgage that is now paid off. However for the last 15 years of us having a mortgage, which was from just before the financial crash of 2007 to last year, we had a lifetime tracker that was 0.3% above the Bank of England base rate, so as well as it not being worth us paying fees every 2/5 years to get a new fixed rate, the interest we paid was very low and up until the rates started rising a year or so ago, less than what we could earn by saving separately, or often by just leaving money in our current accounts - the mortgage interest was around 1% and the savings/current account interest was 3-5%. So when rates rose recently, we just used the savings we'd built up to pay the mortgage off, as savings rates haven't risen anywhere near as fast (this is a topic in this weekend's newspapers, that the banks are currently making a lot of money due to this).

@greenspaces4peace Heaven forbid that someone in the U.S. with annual property taxes higher than my entire annual principle/interest/taxes/insurance payment should also have to pay their income taxes!

@Quz im just a little jealous of my friends south of the boarder. Taxes in Canada are more on everything.

@BarbaraofSeville We also have arrangement fees. We refer to them as closing costs. I took out my mortgage in 2000 (high interest rates) and thought about remortgaging a couple of years ago, but when I looked at what was left to pay in interest (I made extra principle payments so had just 4 years left on the mortgage), I would have lost money to do that.

Mortgage transfer is another key difference in our mortgages. We can't do that! Right now we have lots of people staying in their current homes with a low-interest mortgage because if they sell and buy something else they will have a much higher interest rate (so much higher payment). Folks trying to downsize would end up paying the same or more for a smaller home as they are for the larger home they want to get out of. We don't have enough "small" homes, so there's also a lot of competition for good ones.

I can't say for certain one way or the other, but I do know that in the U.S., the tax burden (as a % of total income) is higher on low-income folks than on high-income folks. Depending on where you fall, you could find yourself paying more or less than you do in Canada. (Though again, I don't know anything about the Canadian tax system, so can't say for sure.)

Your total tax burder also depends on where you live in the U.S. Most states have a State Income Tax that is in addition to Federal Income Tax, but some do not (Florida and Washington, for example). Sales Tax is also set locally, so which items are exempt from sales tax is determined by the state. I pay sales tax on all clothing purchases in N.Y., but in CT., my sister only pays sales tax on clothing items over $100.00. (I think that's accurate, but even if it isn't, the point I'm making is.) Also, the rate of sales tax is set at both the state and county level, so I pay a higher rate of sales tax where I live (8%) than most of the state (which I believe is around 7%.)

In addition to inequities in how income tax is calculated, everyone who earns less than $160,200 this year pays Social Security Tax on 100% of their earned income, whereas anyone who earns more is exempt from paying Social Security Tax on everything over that amount. Therefore, the % of their income used to pay the tax is less than the % of income paid by lower income folks.

@greenspaces4peace I should also have said: Some of us are jealous of the health care available to our northern neighbors; Certainly the cost of medications is envied by all of us who are aware of the differences in cost!

One of my nieces was living in Canada (student) when her first child was born and she very nearly died in childbirth. She walked away from that (eventually gave birth to three more) owing not one penny (American or Canadian😂). That would have been a lifetime of debt hanging around their very young adult necks if she had given birth in the U.S. My ex-H's sister had a child in the mid-90s without health insurance to cover because her H had recently switched jobs. She used to joke that she would be paying $5.00 a month for that child for the rest of her life.

@Quz though you may pay for it through the teeth, many US hospitals give excellent and much better care from a technology perspective.
a friend was travelling from bc to arizona, suffered a kidney stone attack in utah. her daughter also has a hx of kidney stones. the care my friend received in utah (one day) took her daughter four years to receive in bc.

thanks to additional travel insurance all was covered.

@greenspaces4peace Yes, I have heard that the "wait time" for treatment in Canada can be extraordinarily long. Wait times have increased here since the Affordable Care Act was enacted in 2015. More people with coverage means more patients for the doctor to see.

There are a couple of things I want to comment on regarding the example of your friend and the treatment that she received in Utah...

I suspect that your friend ended up in an ER (Emergency Room)? ERs are legally required to provide life-saving care regardless of ability to pay (which means some type of health insurance). Whether or not one would receive further testing, procedures or hospitalization once the life-threatening condition is taken care of very much depends on ability to pay.

There are two (related) elements of our healthcare system that come into play here. The first is that health insurance companies and health care providers have contracts with one another for the provision of services. Not all health care providers have contracts with all insurance companies. These contracts stipulate how much the insurance company will pay for particular services, and when the health care providers agree to the contract, they are agreeing to accept that payment as "payment in full." That amount will include our co-pays, co-insurance, etc., so a lot of the time the insurance company doesn't actually pay that amount. Here's where it gets really fun...

The amount that is paid for a particular service changes from one health insurance company to another and one health care provider to another. Literally, the amount that the insurance company will pay for the same service at provider A is different than they will pay to provider B (with the same credentials). We never know until we get our statements what the cost was. Our co-payments don't change as they are a flat $ amount, but co-insurance is usually a % of the charge, so that's always a lovely surprise.

Now, if you receive medical care from a health care provider that is not "in network" with your insurance company (or you do not have health insurance), they do not have to limit what they charge YOU, to what your insurance company is willing to pay, so anything over that amount is billed directly to you. So the same service will cost an out-of-network patient considerably more than an in-network patient. Example: years ago (2001/2002; before Affordable Care Act was enacted in 2015), I dropped the employer coverage that we are permitted to continue (at full premium cost) for 18 months after leaving an employer, because the premium went through the roof and I simply did not have almost $300 a month for health insurance. At the time my only regular healthcare cost was one medication that my insurance company was paying the pharmacy $75.00 a month for, so was planning to just pay out of pocket. When I got to the pharmacy, they said, "That'll be $300.00" !!!!!! Literally 400% of what they had been getting for the same thing when I was using insurance. (That's when I got interested in how our insurance/healthcare system works.)

Obviously I don't know the details of your friends billings and payments, and I have no idea how travel insurance works regarding payment of medical services. Nor do I know (with certainty) what facility she went to initially, or was admitted to from the facility she initially visited. What I do know is that if the facility was going to be able to charge their top tier prices and they would be covered by insurance, they were going to treat her. (Because they seldom actually get paid that much for their services.)

The bottom line is that access to healthcare in the U.S. is very uneven. Folks on Medicaid often find it difficult to obtain care because so many healthcare providers do not accept Medicaid patients (government reimbursements for services are lower than private health insurance). Even folks on Medicare (government insurance for folks 65+) face challenges for that reason. Different health insurance companies have different thresholds for determining whether or not a particular service is "medically necessary." If they say it is not, they will not cover the service. I am sure that your friend had no one but her doctors deciding whether or not the treatment that she received was medically necessary. That alone saves a lot of time when seeking treatment for any condition in the U.S. It would not usually be that efficient.

Sorry this was so long...It's all really complicated. And by the way...I'm glad that your friend was able to get that taken care of so effectively and quickly. I hope to never know, but I understand that kidney stones are very painful. I hope that her daughter has hers taken care of now, too.

thanks @Quz interesting complex stuff and sad for those who struggle with it all.
canada simplifies the ordeal but it pricy and a relatively "hidden" payment as it comes out of personal taxes plus many add on by topping up with small personal plans my blue cross medical and dental for 2 is near $300 a month.

I find it funny (in a sick, ironic sort of way) that you know a Canadian who experienced American healthcare at it's finest, and I know an American who experienced Canadian healthcare at it's finest.

Nice chatting with you, @greenspaces4peace