Guide to Mortgages
This Guide is supplied for general information only. You should seek specific advice for your individual circumstances before acting on any suggestions made. A mortgage is the name given to a loan secured on property. It is usually used to buy the home although it is becoming more popular to consider a new mortgage, where the property is already owned, to access a more competitive mortgage product or to raise capital for other purposes, such as school fees or business investment. A mortgage is a long-term loan and has traditionally run for a fixed period, typically 25 years. However, most mortgages are flexible enough to allow for early repayment or, if your circumstances dictate, the term can be extended beyond the original loan period. Mortgages were once the preserve of building societies and the high street banks, however recently far more competition has entered the market and there is now a raft of lenders offering mortgage loans on residential property. This expansion in the number of lenders has lead to a vast array of different loan packages. Nowadays there are loan deals to suit most people's needs, whether you are buying your first home, a retirement cottage or perhaps an investment property.
What different types are there? Although there are many different types of mortgages products on the market, generally they can be split into two basic types:
Repayment mortgages are normally quite flexible as it is sometimes possible to extend the term of the loan but only with the written permission of the lender. Also, it is normally possible to increase the capital repayment of the loan so decreasing the term, allowing you to repay your debt early.
In order to clear capital, at the end of the loan term, you must have an amount equal to the outstanding debt. Most people achieve this by making regular contributions to a savings plan; this plan is targeted to accumulate an amount sufficient to repay the outstanding debt at the end of the mortgage term. Any such savings plan (e.g. Endowment Assurance or ISA plan) should be kept under regular review.
The latest addition to the mortgage range is a combined system of current, savings and mortgage accounts. The mortgage element will still be a repayment, interest only or flexible loan, but the amount of money in your current and/or savings accounts are taken into account considered when the lender calculates the interest due on your mortgage. For example if you hold a savings account with a balance of £1,000, this amount will be considered by the lender when calculating the interest due by effectively reducing the total mortgage by an amount equal to your savings. Such arrangements are known as offset mortgages. You may also find a ‘drawdown’ mortgage, which is helpful
if you have a property that requires renovation. You receive a basic amount,
but as you complete renovation work on your home, further amounts become
available for you to draw down as and when required.
Different lenders will offer you different incentives to take out a mortgage with them, for example:
Some lenders will charge you an early repayment charge if you redeem your mortgage early, or want to pay off a part of it. Please note where immediate offers such as these are provided it is common for lenders to charge you an early repayment charge should you repay your mortgage during the early years of its term. What should I think about when choosing a mortgage? >To assist you to narrow down the search for your new mortgage, you should first decide which payment method best suits you. Whether it is to be a repayment or interest only. To help you decide on the method most suitable for you, it would be sensible to take into account your attitude to risk. Only a repayment mortgage can guarantee, assuming all mortgage payments are maintained properly, that your mortgage debt will be repaid at the end of the original mortgage term. Always shop around for the best rates, but be sure you are comparing like with like. To do this check the overall cost of comparison of the loan. You also need to bear in mind that the interest payments in respect of fixed rate mortgages can rise or fall once the initial 'fixed' period ends. Therefore your planning should always include the possibility of changes to future interest payments. If you are intending to sell your home in the near future, check whether there are any early repayment charges attached to the mortgage or if your mortgage deal will allow you to take the mortgage on to the next property. Check what arrangement fees the lender charges and whether these are refundable should you decide not to proceed midway through the application process. Check for additional costs such as higher lending charges and buildings and contents insurance. Consider using a mortgage broker and taking independent financial advice, this can save you a lot of time checking the differences between the various lenders; it can also help clarify which mortgage package best suits your circumstances. More information on interest only mortgages If you elect to have an interest only mortgage then your payment to the lender only represents the interest due on the outstanding debt. In order to repay that debt then, you would normally use an additional savings vehicle. This is likely to be one that enables you to build a fund of money from which you can clear the mortgage at the end of the agreed term. The lender may also expect you to have sufficient life assurance cover to enable your next of kin to repay the debt if you die during the term of the mortgage. The three most common savings vehicles used for mortgage repayment are:-
All types of ISA are free of capital gains tax. So, if your ISA increases in value, you make a 'capital gain', but you do not have to pay capital gains tax on this increase.
If pension benefits are provided by your employer, these cannot normally be taken until you actually retire from that employment. If you are looking to pay off your mortgage earlier than when you retire then a Pension may not be the appropriate repayment vehicle for your needs. Since part of your pension fund is being used to clear the mortgage debt, you should be aware that your income in retirement will reflect this fact as less money will be available for the provision of income. Careful consideration needs to be given to this repayment method. You would be wise to seek advice from your financial adviser before adopting this approach.
The use of these arrangements has been very popular in the past but has received negative press coverage during in the 1990s. There is some suggestion that many of the problems were associated with poor advice when homebuyers first took out the endowment policies along side their mortgage loans. It must be understood that endowment policies are long-term investments, the value of which may rise and fall in line with the stock market. However over 25 years, they may yield more than the amount you need to pay off your mortgage although there are no guarantees available. There are three types of endowment policies:
Please note that none of the above methods are guaranteed to repay your mortgage at the end of the mortgage term. If you have any questions or concerns about your mortgage repayment method, please contact us What is Higher Lending Charge? If you take out a mortgage for 75% of the value of your home the lender will normally ask you to provide additional security to cover their potential loss should you default on the loan. The most common method of providing this additional security is for the lender to effect an insurance policy (the premiums for which will be pay for by you). The lender uses the money received from the insurance policy to cover the costs they suffer involved in the repossession and resale of the property. Please note that after any claim the insurer will normally look to recover, from you, any payments they make to the lender. The amount they will try to recover would include any legal fees they have suffered during the process. What about protecting my mortgage payments? There are now very limited state resources for meeting mortgage payments. It is sensible to look at insurance policies that pay out if you lose your job or are unable to work because of illness. Mortgage Payment Protection Insurance policies generally pay out up to 12 months’ mortgage payments. They are frequently combined with other insurances such as critical illness or permanent health insurance. What other costs are involved when buying a house? In addition to your mortgage, you should bear in mind the following one-off costs at the time of purchase (or re-mortgage if you are changing mortgage lenders):
What is a CAT standard mortgage? A CAT standard mortgage meets the requirements set up by the government for fair Charges, easy Access and decent Terms. To achieve the government’s mortgage CAT standard:
Click here to contact us What if I can’t meet my mortgage payments? Contact your lender as soon as you realise you have a problem. Although your mortgage is secured on your home, lenders see repossession as the last resort: they stand to make more money from your mortgage than the sale of your home. Lenders may work out a plan with you to reduce your payments for a time or stop them temporarily, and work out a new term for your mortgage. Click here to contact us |
Your property may be repossessed if you do not keep up repayments on your mortgage..