Mortgages ::

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.

  1. FIXED

  2. VARIABLE

  3. CAPPED

  4. 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.

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