|
Mortgage Lenders A-Z | Mortgage
Examples | Mortgages Guide |
| Other Mortgage Links |
Mortgages Guide
A Guide To 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, (ISA, pension or endowment mortgage)
Repayment only
Your monthly repayments consist of repaying the capital amount borrowed
together with accrued interest. On your mortgage statement, normally received
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.
In the early years of a repayment mortgage the majority
of the monthly repayment is interest rather than capital. For borrowers
moving house regularly, this can result in little of the capital being
paid off.
If you have no life assurance cover in place and die
before the loan is repaid, the mortgage will still need to be repaid.
This may result in the property having to be sold to repay the debt owed.
Interest only
With this type of mortgage, only the interest is paid off with each mortgage
payment. The borrower also takes out at the same time, an alternative
‘repayment vehicle’ (method of paying off the mortgage) such
as an ISA, pension plan or endowment policy. More information about endowments
(which in the 1980’s and 1990’s were extremely popular), ISAs
and Pension plans are below. The most important fact about an interest
only mortgage is that the monthly repayments do not repay any of the outstanding
capital balance. As a consequence it is important that the payments are
maintained into the repayment vehicle otherwise it will not be possible
to pay off the mortgage at the end of the term.
· Endowment
· ISA Plan
· Pension
Endowment
The most 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 term and
are designed so that, at maturity, the amount invested and earnings are
sufficient to pay off the mortgage. Much maligned in the press because
of the poorer investment growth rates achieved in a low inflationary environment
this form of investment is less popular these days. Note there is no guarantee
that, when the endowment matures and ‘pays out’, the balance
will be sufficient to repay the mortgage.
Nonetheless millions of borrowers have one or more endowment
policy and as a rule of thumb these should not be cashed-in early and
certainly not before seeking advice from a suitably qualified financial
adviser. Customers cashing-in an endowment policy in the first few years
after inception can receive less than the amount invested. Existing endowments
can be used to support a new mortgage with any ‘additional lending’
over the value of the projected maturity balance being covered on a repayment
basis or with an alternative repayment vehicle e.g. an ISA. It is also
worth pointing out that historically the returns on endowment policies
have been pretty good (provided they go full term).
Endowments provide life assurance so that in the event
of death the mortgage is paid off.
ISA Plan
The Individual Savings Account (ISA) is a tax free method of saving. Using
an ISA as a repayment vehicle is growing in popularity but due to the
ISAs complexity it is only for the financially sophisticated or borrowers
taking advice from a suitably qualified financial adviser.
Pension Plan
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 draw a pension from the balance of the fund. This product, which
tends to be used by the self employed, is only for those taking advice
from a suitably qualified financial adviser.
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.
· Some plans are tax-efficient.
Disadvantages
· If the proceeds of the repayment vehicle do not achieve the amount
expected, then there will be a shortfall. The borrower remains liable
for any shortfall on the mortgage hence the outstanding balance will need
to be paid off from other resources. 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 payments
into the policy or invest in another product to cover any anticipated
shortfall.
· Cashing in the plans early may result in financial
penalties. These will be provided for in the initial agreement. In addition
the lender has no way of tracking some of the more modern repayment vehicles,
such as an ISA, which will result in some instances where a borrower lets
an investment lapse forgetting or not realizing it is to be used to pay
off the mortgage. This will result in situations where there is no method
of paying off the mortgage and the lender will only become aware at the
end of the mortgage term.
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
CAPPED
DISCOUNT
VARIABLE
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. It is common for lenders to offer rates fixed for a
period of 2 to 5 years, but shorter and longer periods can be found in
the market. At the end of the fixed rate (or ‘benefit’) period
the rate will normally convert to the lenders Standard Variable Rate (SVR).
It is normal for lenders to charge up-front fees in the
form of booking and/or arrangement fees. In addition lenders frequently
apply an Early Redemption Charge (ERC) for fixed rate mortgages. This
acts as a ‘lock-in’ making an often heavy charge for borrowers
paying off their mortgage early. Watch out – the ERC can sometimes
last longer than the fixed rate period e.g. a 3 year fixed rate with a
5 year ERC.
Capped Rate Mortgage
A capped rate mortgage is very similar to a fixed except that if the variable
rate drops below the capped rate, the borrower will make payments based
on the lower variable rate. However should rates increase the payments
will be ‘capped’ and will not rise over the capped rate. So
as a rough ‘rule of thumb’ a capped rate is better to have
than a fixed if all other factors are equal. Again, as with fixed rates,
up-front charges and ‘lock-ins’ are common.
Discounted Rate Mortgage
The Lender offers a discount on the Standard Variable Rate (SVR) for a
specific period of time. For example, the variable rate may be 5% with
a discount of 1.5%. The initial pay rate would therefore be 3.5%. If the
variable rate rose to say, 6%, then the rate payable would rise to 4.5%.
As the discount is linked to the standard variable rate, the borrowers
payments will increase, if rates rise – so there is no certainty
in budgeting. However should rates decrease the borrower will benefit
from lower payments.
It is still possible to have up-front charges for discounted
products and an Early Redemption Charge is common.
With discount mortgages borrowers need to watch out for
‘payment shock’. Some short term discount products offer a
‘deep discount’ e.g. 4% off for 1 year. In such circumstances
the borrower will be facing a significant increase in their monthly mortgage
payment at the end of the discount benefit period.
Variable Rate Mortgage
Borrowers paying the Standard Variable Rate will have their payments increase
or decrease as the lender adjusts the rate in accordance with market conditions.
FEATURES AND OTHER BENEFITS OFFERED WITH MORTGAGES
There are other key features and benefits to be considered when determining
the best mortgage for a prospective borrower.
FLEXIBLE / LIFESTYLE MORTGAGES
CURRENT ACCOUNT MORTGAGE (CAM)
CASHBACK
FREE LEGALS OR CONTRIBUTION TOWARDS CONVEYANCING COSTS
FREE VALUATION OR REFUND OF VALUATION FEE
OTHER BENEFITS
Flexible / Lifestyle Mortgages
A Flexible or ‘lifestyle’ mortgage is designed to let you
to make extra repayments when you have extra money, and to reduce or even
skip payments when necessary. Borrowers will normally have to build up
a reserve through overpayments before being allowed to underpay or skip
payments. The main benefit of flexible mortgages is that many schemes
are offered on a Daily or Monthly Interest Calculation basis (sometimes
referred to as ‘daily rest’ or ‘monthly rest’).
Until the arrival of flexible mortgages most, if not all, UK lenders were
charging interest on an annual basis which meant that borrowers making
over-payments were not getting the benefit straight away because it could
be a year before the capital was reduced by the over-payment. Whereas,
on a mortgage where the interest is being calculated on a daily basis,
any over-payment reduces the mortgage balance immediately hence the borrower
will be charged less interest from the next day. Without going into detail
to explain this feature the up-shot is that over-paying the mortgage on
a monthly or regular basis, even by a relatively small amount, will reduce
your mortgage term by years (hence saving payments).
Many flexible mortgages come without any Early Redemption
Charge so the borrower is not ‘locked-in’ to any particular
lender. In addition the interest rate charged is often lower than the
usual Standard Variable Rates charged by the other more ‘traditional’
mortgage lenders.
The flexible mortgage concept was imported from Australia
so occasionally you may hear them referred to as ‘Aussie style mortgages’.
Current Account Mortgage (CAM)
A flexible mortgage linked to a current account. These mortgages take
the benefits of the flexible mortgage and use the funds held in the current
account to offset the interest e.g. on a particular day a borrower has
a mortgage balance of £50,000 and has £2,000 held in the current
account. The customer is charged mortgage interest on £48,000 i.e.
the mortgage balance minus the positive balance held in the current account.
Some of the newer entrants into this sector are also
linking savings accounts, credit cards and personal loans into the mix.
For a borrower wanting one home for their finances this
is an attractive option.
Cashback
The Lender, as an incentive, will offer 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 a flat fee e.g. £200
to a percentage of the loan e.g. 3% of the loan.
Normally the cashback is offered as a package of benefits
e.g. linked with a discount, but pure cashback products are not uncommon.
Mortgages offering a 5 or even 6% cashback can be found which would mean
a borrower taking a £70,000 mortgage would receive £4,200
on completion (at 6%).
As you would expect lenders apply an Early Redemption
Charge with cashback mortgages. Typically a borrower will be locked-in
for 5 to 7 years where a substantial cashback has been paid.
Free Valuation or Refund of Valuation
A free valuation requires no up-front payment from the mortgage applicant
whereas a refund will only be made when and if the mortgage application
completes. Hence an applicant paying for a valuation and then not proceeding
due to, say, a poor valuation, will not have their valuation fee refunded.
Other Benefits
A whole range of other benefits can be applied to mortgages including
the significant benefits of no Mortgage Indemnity Charge and no Early
Redemption Charge. See below for more information about these features.
OTHER FEATURES / CONDITIONS AND CHARGES ASSOCIATED WITH MORTGAGES
Early Redemption Charge (sometimes referred to as a ‘redemption
penalty’)
Given that the mortgage market is very competitive many mortgages are
sold as ‘loss leaders’ i.e. the mortgage has to be held for
a number of years before the lender breaks into profit. As a consequence
lenders frequently ‘lock-in’ borrowers by applying Early Redemption
Charges for those paying off the mortgage early. Charges can be significant
e.g. 6 months interest or repayment of the amount of benefit received,
be it cashback or reduced interest. The period an Early Redemption Charge
applies can vary. Sometimes it will match the period of the discount/fix
but often it can go beyond the benefit period e.g. a 5 year discount with
a 7 year ERC. This is referred to as a ‘redemption overhang’.
On this subject see ‘No Redemption’ and ‘No
Overhang’ below.
No Redemption
Selecting the 'No redemption' option means that the mortgage schemes on
screen will allow you to repay the loan in full at any time without applying
an Early Redemption Charge.
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 an Early Redemption Charge which can cost £thousands (6 months
interest is common) 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 being ‘locked-in’, the
rate offered on these schemes will usually not be as competitive as for
mortgages 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 Overhang
Selecting the 'No overhang' option means that the mortgage schemes on
screen will allow you to repay the loan without penalty once the benefit
period has ended i.e. the mortgage does have an Early Redemption Charge
but it does not last longer than the fixed, capped or discount period.
This means that a mortgage with, for example, a discount to 31st January
2006 will have a redemption charge to either the same date or a date prior
to this.
The Early Redemption Charge can represent a significant
sum although the amount will differ between lenders and between products.
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 locking-in the borrower 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.
Mortgage Indemnity Charge (sometimes referred to as a High Percentage
Lending Fee)
For high Loan to Value (LTV) mortgages i.e. where the loan is not much
less than the value of the property, it is common practice for the lender
to take out a form of ‘insurance’ to protect against some
or all of the losses incurred if the property needs to be taken into possession
because of serious arrears. It is common practice for lenders to pass
this charge on to the borrower. Depending on the amount of loan and the
LTV the Mortgage Indemnity Guarantee charge can be a significant cost
e.g. a £47,500 mortgage on a purchase price / valuation of £50,000
would result in a £750 charge on a typical MIG charge of 7.5% on
a normal lending limit of 75% loan to value. Most lenders have a different
name for this charge i.e. it may not appear on the mortgage Offer as Mortgage
Indemnity Charge or High Percentage Lending Fee.
There are some important facts to understand about the
mortgage indemnity charge. It acts as a form of insurance for the lender
not the borrower. This means that the lender can claim part or all of
its ‘losses’ incurred repossessing the property from the insurance
company providing the MIG cover. Note that even after repossession the
former borrower will remain liable for any sums owing (shortfall between
selling price and mortgage outstanding plus arrears, lenders legal costs
and any other charges applied to the mortgage) and can be pursued by the
insurance company for payment at a subsequent date.
Valuation Fee
The amount charged to conduct a valuation of the property on behalf of
the lender. It is important to note that the valuation is carried out
on behalf of the lender – not the mortgage applicants! Frequently
lenders include an administration fee as part of the valuation fee collected
to cover the costs of arranging the valuation. The valuation does not
represent a detailed inspection. For peace of mind it may be appropriate
to obtain a ‘Housebuyers Report’ or a ‘Full Structural
Survey’. These are more detailed than a lender valuation but they
produced on behalf of the applicant. They are more expensive than the
lenders valuation.
Booking Fee and Arrangement Fee
Both are up-front fees charges levied at the outset of the mortgage.
A booking fee will normally be required with the application
form. A booking fee is paid to reserve funds on a mortgage product that
has limited funds available e.g. a first-come, first-served fixed rate.
Booking fees are often non-refundable, so if the mortgage applicant cancels
the mortgage application before completion the fee will not be reimbursed.
An arrangement fee is typically charged on completion
of the mortgage. Arrangement fees are common on fixed and capped rate
mortgages. Frequently they can be added to the mortgage hence the fee
does not become an ‘out of pocket’ expense.
Legal Fees
It is necessary to have a solicitor or licensed conveyancer to act on
behalf of the mortgage applicant and the lender in the house purchase
or remortgage transaction. The costs will be greater for house purchase
than for remortgage. It is the role of the solicitor or licensed conveyancer
to note ownership of the property on the title deeds; note the lenders
interest in the property; register with the Land Registry and conduct
searches to identify if there may be factors which could affect the property
e.g. coal mining search to check for subsidence; check to see if there
are some planned major road developments going through the back garden
etc.
Insurance
Lenders will insist that the property is adequately insured, with a suitable
Buildings Insurance Policy, as it represents security against the mortgage
debt. A buildings policy covers against storm damage, fire, flooding etc
and relates to the fabric of the house or flat etc. It is normal for lenders
to check that any policy arranged is adequate and a fee will sometimes
be levied to check the policy, if the borrowers take a policy other than
the one sold or recommended by the lender. In addition, borrowers will
need a Contents Policy that provides cover for the contents, such as carpets,
TV’s, furniture etc. Most lenders and insurance companies offer
a combined Buildings and Contents Policy. In the past some lenders have
made their insurance compulsory with some very competitive mortgage products
although this is less common now.
Another form of insurance common in the mortgage industry
is a Mortgage Payment Protection Plan. This policy is designed to offer
income protection against unemployment, sickness and redundancy. This
form of insurance has become more important as the Department of Social
Security has steadily withdrawn the benefits available. This form of insurance
is not compulsory.
Professional Seo Services Helps in Boosting Your Online Business. With the help of professional seo services you can increase your online marketing and get more customers.
|
|
Another form of insurance is Mortgage Indemnity
Guarantee. This is covered above.
Other Charges
There are a whole series of other fees that some lenders apply in certain
circumstances e.g. arrears, late payment, removing the lenders name from
the Title Deeds at the end of the mortgage. Under the terms of The Mortgage
Code of Practice the lender will, before a mortgage applicant takes a
mortgage, provide a tariff covering the repayment of the mortgage, including
charges and additional interest costs payable in the vent of arrears and
will advise of any other charges for services before or when the service
is provided.
OTHER TERMINOLOGY
Adverse Credit
If 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.
Arrears
This describes the amount the borrower is behind in his mortgage repayments
schedule. The amount is usually measured in either pounds or months.
Bankrupt
A 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 recorded 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.
Default
Failure of an individual to make payments on a mortgage at the correct
time or to not comply with the mortgage companies requirements.
If you have any problems/queries please e-mail us at
YOUR HOME IS AR RISK IF YOU DO
NOT KEEP UP REPAYMENTS ON A MORTGAGE OR OTHER LOAN SECURED ON IT. ALL
LOANS ARE SUBJECT TO STATUS. SECURED LOANS ARE SECURED ON PROPERTY
|
