Mortgage seekers must get a grip on reality

UK property owners have lost touch with reality when appraising new mortgage interest rates. That’s the astonishing conclusion a new study by unbiased.co.uk has reached, anyway.

The research showed that average UK homeowners would only apply for a fixed-rate mortgage at 3.3% or less.

Similarly, 16.6% of people would not switch from a tracker mortgage unless they could secure a fixed rate deal at 2%.

This view is unrealistic in the current climate, as the website notes.

But is it any different for contractors looking to buy a home or remortgage?

Homeowners are ‘out of touch’

Homeowners have become so used to Bank of England‘s 0.5% base rate that they’ve lost touch with reality. Those are the words of the website’s chief executive.

The current low-interest environment has clouded people’s judgement. Compared to historic averages, around 4-5%, they have a distorted view of what reasonable mortgage rates are.

Contractors securing mortgages on their contract rate alone

Contractors securing a mortgage based on their contract rate need to be diligent. If they don’t uphold their current rate, their mortgage could become unaffordable.

A s an example, contractors can secure a mortgage based on 5 times their annual gross contractor earnings. Depending on the lender, salary annualisation is calculated over either 46 or 48 weeks.

Using 48 weeks, a contractor on a daily rate of £500 could potentially borrow £600k. But lenders base this affordability on two criteria:

• being able to command and sustain a future contract rate of £500/day;
• the honesty of the contractor applying for a mortgage.

Why honesty is the best policy

Lenders want to avoid situations where contractors can no longer afford their repayments.  If the contractor relaxes on their earnings because they’ve landed their mortgage, it spells trouble.

So it’s critical you remain realistic. Evaluate what you can potentially borrow and repay based on your sustainable contract rate. The last thing you want is a lender to retrospectively see your application as fraudulent.

KPMG: mortgage fraud down, but still on the radar

Meanwhile, mortgage fraud in the UK is on the decline, reports KPMG. In the second half of 2010, just 13 cases were reported. That’s a drop of 8 from the corresponding period the previous year.

By value, the total dropped from £96 million to slightly under £12.5 million. Despite this, last year the UK faced the most ever fraud cases, albeit a large proportion of these targeted public funds.

KPMG suggested that the drop in mortgage fraud could be accounted for as financial institutions now deal directly with large-scale organised fraud.

The biggest mortgage fraud threat still comes from professional criminals, though. They alone instigated £709 million of the UK’s total fraud in 2010.