The financial trends of today and tomorrow will no doubt be influenced by a number of factors, an important one being the financial trends of the international market. Take the current credit crisis, heavily influenced by the US financial market and their sub-prime market. Lending to sub-prime individuals was something left to the loan sharks and under-hand dealers in previous generations; with the major banks changing their stance on such individuals and opening up their credit arms to them they left themselves vulnerable. The reason for avoiding such individuals in previous years was based on their likelihood of defaulting on payments and renegading on the agreement,  leaving the lenders to pick up the tab.

The risks associated with lending to the sub-prime market came to fruition and the various economies that adopted the risky lending stance are now suffering accordingly. The UK mortgage market took a battering and one of the results has been the removing of the 100% mortgage and the increase in rates offered as well as more stringent checks on an individual’s financial capabilities.

In the wake of the international credit crisis the US market has seen an increase in assumable mortgages. While these aren’t currently available in the UK they may jump the pond and land on our shores at any time so future buyers do well to find out what they are about. An assumable loan is an alternative to a typical mortgage where the buyer goes to the bank and asks for a sum of money, to help cover the costs of purchasing their new home. An assumable mortgage allows the home buyer to take over the seller’s existing mortgage.

The reason this option is proving to be increasingly attractive in the US market is that it allows the buyer to take advantage of a lower interest rate. If the seller is currently paying 5.5% on their mortgage and the best interest rate available to the buyer is 7.6% then it is hugely beneficial for the buyer to ‘assume’ the mortgage. Of course this arrangement has to be approved by the lender as they have to ascertain the buyer’s financial capabilities and ability to commitment to the purchase. It is also important to note that the buyer still needs to source the remaining amount for the cost of the property, for example if the house is being sold for £220,000 and the assumable mortgage amounts to £180,000 the buyer needs to find the remaining £40,000.

This is usually done in the form of a loan which will undoubtedly be taken out at a higher rate than the mortgage, this still spells out a saving for the buyer, as rather than having to pay a higher rate on the whole amount they will only have to pay it out on a part of the amount and then enjoy the savings that come from the lower rate associated with the mortgage.

As beneficial as this arrangement is, it is not without its risks. The lender can change the terms and conditions of the loan for the buyer according to their credit and any risks that may get thrown up. The new terms and conditions need to be carefully considered before the final signatures are scrawled. Similarly for the seller, the lender sourced by the buyer for the remaining amount may stipulate that the seller is responsible for the loan amount if the buyer happens to default . In such an instance the seller could be left with a hefty amount to pay even after the assumption has taken place. To avoid this, sellers can release their liability in writing at the time of assumption, protecting their financial future.