Mortgages

 
Mortgages

What is a mortgage?

A mortgage is a loan that is secured (guaranteed) by a property. If you default on the repayments the lender can repossess and sell your home to get their money back. The rate of interest on the loan is set by the lender and called the standard variable rate (SVR). Generally you can get a mortgage loan three to three and a half times your income, or two and a half to three times the joint income of you and your partner. Most mortgage lenders allow you to borrow up to 95% of the value of a property.

What types of mortgages are there?

There are two basic types, interest-only and repayment.

The option you choose is determined by the way you want to repay your loan.So first decide how you want to repay:

Interest only

You repay only the interest on your loan. This will not pay off the capital so it is usually sold with an endowment policy, ISA or pension plan i.e. a type of investment requiring regular monthly investments over the mortgage term calculated at an amount such that with growth and reinvesting at the end of the mortgage term there is a pot of money large enough to pay off the capital borrowed. There is a risk that the investment will underperform leaving you to make up any shortfall.

Repayment

Less risky than above as a repayment mortgage requires you to pay back both interest and loan capital, so at the end of your mortgage period there is no money owing. To begin with you pay mostly interest but later you begin repaying capital and the total will begin to decrease.

Now decide what sort of mortgage you want:

Discount mortgages

These are mortgages with a reduction on the standard variable rate for a fixed period. Usually around 1.5% below SVR for 2 years. After the discount period ends, your mortgage rate reverts to the SVR. This type of mortgage is appropriate for someone needing to make savings in the early days of owning a property however note the rate can change as it is fixed to the SVR.

Fixed mortgages

With a fixed rate, your payments stay the same no matter what happens to the base rate. A rise in rates will leave you paying less than people on other schemes.However the disadvantage is that if interest rates fall you are left paying an uncompetitive rate.

Tracker mortgages

Suitable for borrowers who believe base rates might be on a downward trend. The interest on the mortgage stays a set margin above the Bank of England base rate for the duration of the loan (generally about 1%) although some products will offer an initial discount.

Interest rates on trackers tend are more competitive than SVR mortgages but not as competitive as some short term discount mortgages.

Capped mortgages

These allow you to pay either the capped rate or the lender’s SVR, whichever is lower.

Offset mortgages

Link your current account and your mortgage. Any extra cash in the current account is used to offset against the amount you owe on the mortgage, so you pay less interest.e.g. if you have a mortgage of £100,000 but have £5,000 in your account, you will pay interest only on £95,000.

Flexible mortgages

This permits you to pay more money off your mortgage when you have money to spare, or alternatively take a payment holiday if you are struggling. Some lenders permit you to overpay each month and withdraw the extra cash if you need it later or permit you to pay off your mortgage early. Remember capital you pay off early will save you interest payments

Rates on these accounts can be higher than other types of mortgage loans, but they can be useful for people whose income is variable.

 

Here are some other tips to take into account:

Penalties

Obtaining a discount might seem desirable, but you could be locked into a high SVR after the discount period finished. Some lenders include a term that once your discount period ends you have to stay with them on their variable rate for a fixed period (usually anything up to 5 years). This is particularly important if you have received a cash back deal. You could be given up to £3,000 in cash, but made to repay it if you move to another lender within a certain period.

Mortgage indemnity guarantee (MIG)

If you can only afford a small deposit, you might have to pay MIG insurance. This covers the lender in case your house is repossessed and sold for less than the value of the mortgage. Many lenders will charge MIG on loans where the deposit is less than 10% of the purchase price. This can cost as much as 1.5% of the mortgage. So it might be cheaper to find a loan that has a lower headline rate but does not require MIG.

Buy-to-let

A growing number of people are taking out second or third mortgages to buy properties to let out but usually more expensive – about 1% higher.

Remortgaging

Lenders are falling over themselves for your business, and people are willing to rapidly change loan providers to get the best deal. We suggest you seek advice from a mortgage broker or IFA on what offers are suitable. If you are seeking advice ensure your broker is truly independent and not tied to a particular lender. There is a code of conduct from the Council of Mortgage Lenders which good brokers should adhere to.

Remember before you move to ask your existing lender what they can do to persuade you not to remortgage elsewhere?

Interest calculation

Understand how interest on your account is calculate daily, monthly or even annually? This is important as you may want to pay off your mortgage early or make lump sum contributions into it. Daily calculation means you benefit immediately; annual calculation means you may have to wait for your repayment to be taken into account.

 

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