New EU ESIS mortgage illustration document – how to find what you need
Confused by the new EU ESIS mortgage illustration document which replaced the old style document for many mortgage lenders earlier this year?
Can’t find the key information you need?
We are not surprised, the layout is a new ESIS document bears little similarity to the old KFI document.
Where can I find what I need on the ESIS Document?
A single line description of the recommended product can be found in section 3 (main features of the loan)
It would be in bold type and look something like this Offset 3 year 2.19% Fixed until 31/08/2019 Purchase 75% LTV
For good measure this information is also quoted in section 4
How much are my monthly payments?
Handily our European Beaurocrat friends have decided to split this key information across two boxes (5 and 6) which often also gets split across two pages.
Box 5 quotes the repayment frequency (which is monthly), Box 6 quotes the amount of each instalment.
It looks something like this:
36 payments at a fixed rate of 2.19% £1,407.79 GBP
264 payments at a variable rate, currently 3.99% £1,678.83 GBP
Your income may change. Please consider whether you will still be able to afford your monthly
repayment instalments if your income falls.
The interest rate on part of this loan can change. This means the amount of your instalments could
increase or decrease. For example, if the interest rate rose to 10.99% your payments could increase to £3,183.02.
Don’t panic about the ridiculous figure in the last sentence (refer to paragraphs on this page regarding APR/APRC)
DO YOU NEED A MORTGAGE QUOTE?
What will my mortgage rate be?
In section 3 your initial rate and ongoing rate will be quoted in this format
Step 1 of your mortgage is a fixed interest rate of 2.19% that will apply from completion until 31 August 2019.
Step 2 of your mortgage product starts after 31 August 2019, and the rate that will apply is XYZ Bank’s Standard Variable Rate, currently 3.99% for the remaining term of the mortgage.
For good measure this information is also quoted in section 4
How much will I pay in total?
For those of you who like to frighten yourselves seeing the total figure to be paid over the term of the mortgage this is in section 3 and is quoted in this format
Total amount to be reimbursed: £496,250.56
The amount is illustrative and may vary, in particular in relation with the variable of the interest rates
This means that you will pay back £1.53 for every £1 borrowed.
Where do I find fees payable?
Lenders application fees are listed in section 4 under ‘costs to be paid on a one off basis’
Costs to be paid on a one-off basis:
• Transfer of Funds Fee: £25.00 payable up front.
• Redemption Fee: £195.00 payable on redemption.
• Booking Fee: £1,499.00 payable up front.
• Valuation Fee: £465.00 payable up front.
There will be a section underneath which says ‘Costs to be paid regularly’
Costs to be paid regularly
This section has little value and will probably quote ‘None’ as UK mortgages do not usually have regular costs levied other than the interest payable.
Where can I find APR (annual percentage rate)
What we used to call APR is now quoted as APRC (annual percentage rate of charge). This is the total cost of the loan expressed as an annual percentage.
Some clients get focused on this figure which, within the UK market, can mean very little.
If you are taking a 25 year mortgage with a two-year fixed rate to start, your APRC may be based on 2.19% interest for two years followed by 3.99% interest for 23 years. Clearly you are unlikely to stay on a 3.99% interest rate for 23 years after your initial fixed-rate ends.
Take APRC with a pinch of salt.
All you can do is pay off your mortgage as soon as possible. This is the best way to reduce your total cost.
My illustration says I have to pay 11.66%!
Have you seen a paragraph in section 4 that says?
Because part of your loan is a variable interest rate loan, the actual APRC could be different from this APRC if the interest rate for your loan changes. For example, if the interest rate
rose to 10.99%, the APRC could increase to 11.66%.
The new rules require that the lender quotes a potential cost to your mortgage if interest rates rise to their highest level over the past 20 years.
That highest level may come back, it may not, if it came back without warning we will all be in trouble!
Are there early repayment charges?
Early repayment charges are set out in section 9 in very much the same format as on the previous KFI style document.
Can I overpay without charge?
Details of overpayment options will be set out in section 10 ‘flexible features’
Also outlined here would be any option to port the mortgage.
Under section 11 ‘the rights of the borrower’ you will find details of your right to reflect before committing yourself to the mortgage.
What is the point of this reflection period?
Little point in the UK, we understand it has more relevance in some places elsewhere in the EU where a borrower may have two or three mortgage offers on the table of which some must be discounted.
Who is the ‘Supervisor’?
In section 15, for Supervisor read regulator, in case of the UK, the Financial Conduct Authority.
How much will my capital reduce by each year
Section 7 gives a repayment table showing your capital reducing.
The most common question we get asked is why the reduction in capital is a few hundred pounds to start with and then becomes several thousand pounds.
This is because the table quotes month by month reduction through year one with subsequent years based on annual reduction.
You will see that the level of capital reduction increases as your mortgage matures. This is normal and to be expected. As your mortgage size reduces, the interest payable reduces, and therefore more your payment goes to reducing capital.
Further points to note
At the bottom of section 3 you may see a security address quoted for the lending “This loan would be secured against 65a, Bath Road, Bristol, B53 7LH”
Do not panic if this address is incorrect. Some industry mortgage illustration systems will generate your illustration with a current residential address if no specific property address is entered. Speak to your broker.