A mortgage is a sum of money borrowed from a
bank or building society in order to purchase a property. The
money is then paid back to the Lender over a fixed period of time
together with accrued interest. There are many different types
of mortgages and there will be one out there that best suits you.
TYPES OF MORTGAGE
There are essentially two different types of
mortgage:
-
Repayment only, (capital and interest mortgage)
-
Interest only, (endowment mortgage)
Repayment only.
Your monthly repayments consist of repaying the
capital amount borrowed together with accrued interest. On your
mortgage statement which you should receive annually, you will
see that the amount borrowed decreases throughout the term.
ADVANTAGES
-
At the end of the term, you are safe in the
knowledge that the total amount of the debt has been repaid.
-
Overpayments and lump sum payments into your
mortgage account can be made reducing both the interest and
capital amounts repayable.
-
Life assurance cover is not always necessary
in taking out this type of mortgage.
DISADVANTAGES
-
There may be financial penalties for making
lump sum/overpayments into your mortgage account.
-
Repayment mortgages are not portable and
if you move house on a regular basis, you may find that the
amount repayable increases or does not significantly reduce.
-
If you have no life assurance cover in place
and die before the loan is repaid, the property will have
to be sold to repay the debt owed.
Interest only.
With this type of mortgage, only the interest
is paid off every month. The borrower also takes out at the same
time, an insurance policy. The monthly repayments therefore consist
of an interest payment, together with a monthly payment into the
insurance policy. At the time the mortgage comes to the end of
its term, the insurance policy is surrendered or sold and should
pay off the capital amount borrowed. (This is not always the case
and you should seek independent financial advice on which policy
you have taken out).
There are essentially 3 types of interest only
mortgage:-
-
Endowment
-
ISA Plan
-
Pension
Endowment
The more common type of interest only mortgage
which also provides life assurance cover and a fixed payment for
investment. The fixed payments are based on the amount of the
loan together with the mortgage terms and are designed so that
the amount invested covers the initial loan.
ISA Plan
Again, life assurance cover is provided. Monthly
payments are made directly into an ISA savings scheme.
Pension
Life assurance cover is provided and monthly
payments are made into a pension fund. When the benefits are eventually
taken, the mortgage is repaid using tax-free cash from the remainder
of the fund. The plan holder can then drawn a pension from the
balance of the fund.
ADVANTAGES
-
If the proceeds of the plans exceed the amount
required to repay the mortgage, then this is received as a
cash lump sum by the borrower.
-
The plan is portable if you move house and
payments will only be altered if you borrow an increased sum.
-
Some plans are tax-efficient.
DISADVANTAGES
-
If the plans' proceeds do not achieve the
amount expected, then there will be a shortfall. The borrower
remains liable for any shortfall when redeeming the capital
amount borrowed. Regular checking of the policy fund itself
by the borrower and the lender should minimise any risk. If
the plan is not reaching its expected target, the borrower
can increase their payments into the policy.
-
Cashinin the plans early may result in financial
penalties. These will be provided for in the initial agreement.
INTEREST RATES ON MORTGAGES.
When you have chosen the right mortgage for you,
whether it be a repayment or an interest only mortgage, you will
need to consider the 4 main mortgage rate options available.
-
FIXED
-
VARIABLE
-
CAPPED
-
DISCOUNT
Fixed Rate Mortgage.The amount you repay the
lender each month can be at a fixed interest rate for a certain
period of time, regardless of the interest rate in the market
place. However, it is usual for lenders to only offer a fixed
rate for say two years, because they are unsure what the interest
(base) rate will be at that point in time. Lenders therefore provide
for a variable rate of interest to apply to your mortgage for
a set period of time. Financial penalty payments may apply if
you redeem your mortgage early. It very much depends on the individual
lender as to whether or not they tie you into this situation beyond
the fixed rate period.A fixed rate mortgage is beneficial in that
it allows you the confidence of knowing that your mortgage repayments
will remain the same throughout the fixed rate period. If the
interest rate is high, then you will be saving money each month
because usually the fixed rate is lower than the interest rate.
Alternatively, if your fixed rate is higher than the interest
rate, you will be paying higher monthly repayments that under
a variable rate.
Variable Rate Mortgage.Your monthly repayments
will differ depending upon the Bank of England's base rate. If
the interest rate falls, so will your monthly repayment. Conversely,
if the interest rate rises, your mortgage repayments will also
rise. Variable rate mortgages tend to be less restrictive and
do not have the same "tie in" periods as fixed rate mortgages.
Capped Rate Mortgage.This is a combination of
the above two in that mortgage repayments will vary depending
upon the variable rate of interest. The interest charged will
not exceed a set amount, known as the capped rate. If the variable
interest rate is 7% for example, then that is what you will be
charged. If the capped rate is 7.5% but the variable rate is 8%,
your monthly mortgage repayments will not exceed the capped rate
of 7.5%. This type of mortgage interest allows you to budget more.
Again, with all types of mortgage, there is the risk of "tie in"
periods and penalty payments for early redemptions.
Discounted Rate Mortgage.The Lender offers a
discount on the standard variable rate for a fixed period. For
example, the variable rate may be 5% with a discount of 1.5%.
The rate would therefore be 3.5%. If the variable rate rose to
say, 6%, then the rate payable would rise to 4.5%. The disadvantage
of having a discounted rate mortgage is that the lender may insist
you pay a financial penalty for early redemption. They may also
insist that at the end of the discounted rate, you take a variable
rate mortgage with them.
What is Cashback?Cash-back is becoming increasingly
common on all mortgages, none more so than standard variables.The
Lender as an incentive, will offer you a lump sum of cash once
the mortgage has been taken out. The amount will vary from lender
to lender and on the size of the mortgage. The amounts can range
from £200 to a few thousand pounds. However, if you redeem the
mortgage within a set period set by the lender, the lender may
request that you repay the cash-back.
No RedemptionSelecting the 'No redemption' option
means that the mortgage schemes on screen will allow you to repay
the loan in full at any time without penalising you.
Most mortgage schemes, in return for offering you a lower initial
rate, will require you to stay with that scheme at least for the
period of the Discount, Fix or Cap, and often longer. If you wish
to repay the loan in this time, or you remortgage with another
lender, you will have to pay a redemption fee which can vary from
a few hundred pounds to over £2000 depending on the lender and
scheme.
With 'No redemption' mortgages you will not have to pay this redemption
fee (although there may still be other costs such as sealing fees
and legal fees.)
As a consequence of not tying you down to the offered rate, the
rate offered on these schemes will usually not be as competitive
as for rates with redemption penalties, making them most suitable
for those who are likely to keep track of current rates and wish
to remortgage quickly if they find a better rate, or those who
may have to repay their loan in the first few years.
No OverhangSelecting the 'No overhang' option
means that the mortgage schemes on screen will allow you to repay
the loan without penalty once the intial scheme period has ended.
Most mortgage schemes, in return for offering you a low initial
rate, will require you to stay with that scheme at least for the
period of the Discount, Fix or Cap, and often longer. If you wish
to repay the loan in this time, or you remortgage with another
lender, you will have to pay a redemption fee which can vary from
a few hundred pounds to over £2000 depending on the lender and
scheme.
With 'No overhang' mortgages you will only have to pay this redemption
fee if you redeem the loan or remortgage whilst you are still
subject to the scheme's special rate. Once you have reverted to
paying the lender's Standard Variable Rate (SVR) you will be able
to redeem the loan without penalty (although there may still be
other costs such as sealing fees and legal fees.)
As a consequence of not tying you down to the lender's SVR, the
rate offered on these schemes will usually not be as competitive
as for rates with redemption overhangs, making them most suitable
for those who wish to benefit from a lower initial rate without
needing a very low initial rate, and who are likely to want to
remortgage to another Discount, Fix or Cap once they are no longer
benefiting from the initial rate.
FlexibleA Flexible mortgage is designed to let
you to make extra repayments when you have extra money, and to
reduce or even skip payments when necessary. They are often a
good choice for people whose income can very, such as the self-employed,
or families who might be able to overpay most of the year but
need extra money at Christmas. Usually you will have to build
up a reserve through overpayments before you will be allowed to
underpay or skip payments. Another benefit of Flexible mortgages
is that most schemes are offered on a Daily interest recalculation
basis, as opposed to the monthly or even annual recalculation
traditionally used by lenders.Monthly or annual recalculation
means that there is a time lag before the amount you have paid
is deducted from the mortgage debt, and hence before your interest
payments are reduced. Daily interest rate calculation means that
overpayments and lump sum payments immediately reduce your total
debt, saving you interest immediately. Over the term of a mortgage,
this can make a big difference to the total amount of interest
you pay. The only catch is that most Flexible mortgages do not
offer large or lengthy Discounts or low-priced Fixed rates, although
the Flexible Variable rate is often lower than the lender's Standard
Variable Rate (SVR)
Adverse CreditIf a borrower has a history of
poor credit usage then this is described as Adverse Credit. Poor
Credit history can include County Court Judgements(CCJ), Bankruptcy,
Mortgage arrears or any late payments on credit arrangements.
ArrearsThis describes the amount the borrower
is behind in his mortgage repayments schedule. The amount is usually
measured in either pounds or months.
BankruptA Corporation, Firm or individual who,
via a court proceeding, is relieved from paying all debts once
assets have been surrendered to an appointed third party designated
by the court.
County Court Judgements (CCJ)An adverse ruling
by a County Court against a person who has not satisfied their
debt payments with their creditors. Once the ruling has taken
place it will be recored against the persons credit history and
will appear every time a credit search is done for the next seven
years. If a person has a County Court Judgement against them it
will have to be satisfied before they can get a mortgage. They
will also find that the mortgages they can get will be at a higher
interest rate.
DefaultFailure of an individual to make payments
on a mortgage at the correct time or to not comply with the mortgage
companies requirements.