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Types
Of Mortgages
Variable Rate
The interest rate changes when the Lender changes
its lending rate. Variable Rate Mortgages are often
calculated annually and means any changes in mortgage
interest rate are not reflected in your repayments until
the Lenders recalculation date. Variable rate mortgages
can be the Lender's Standard Variable Rate or some other
variable rate determined by the Lender according to
the particular product. A Variable Rate mortgage allows
you to take advantage of any falls in interest rates
but any saving here must be balanced against the risk
of any future rate rises
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Fixed Rate Mortgages
The Interest rate is fixed for a specific period
which can be from a few months to the full mortgage
term. Repayments are not affected by fluctuations in
the prevailing variable rate, so, if the variable rate
drops below the fixed rate your repayments will remain
the same. This type of mortgage gives you the security
of knowing exactly what your repayments will be for
the life of the mortgage. After the mortgage term the
interest rate will normally revert to the Lender's Standard
Variable Rate. There may be financial penalties if you
decide to change your mortgage during the fixed rate
period or even for a while after the scheme has ended.
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Discounted Rate Mortgages
The Lender gives a percentage discount from
their Standard Variable Rate for a period of time which
can be from a few months to the full mortgage term.
This type of interest rate is normally offered to first
time buyers or people with high levels of equity. Generally,
borrowers with a larger deposit will be offered a greater
discount. Discounts help soften the financial blow of
moving house but mean that after the discount period
ends, repayments will rise sharply. Your repayments
will fluctuate with interest rate changes but will remain
at the set level below the prevailing rate for the mortgage
term. There may be financial penalties if you decide
to change your mortgage during the discount period or
even for a while after the scheme has ended.
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Stepped Rate Mortgages
These come in various forms. They can be
discounted for a number of years with the discount rate
reducing during the scheme period, or even short-term
fixed rates followed by a discounted period. Some schemes
even offer a combination with a cashback to help with
moving costs. Many schemes are only available on an
exclusive basis.
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Capped Rate Mortgages
The maximum rate of interest you pay
is fixed for a certain period of time. If the interest
rate rises above the set capped rate your repayments
will remain at the capped level. If they drop below
the capped rate your repayments will also fall in line
with the lower interest rate. This type of interest
rate gives a level of security should the base rate
rise but also takes advantage of lower interest rates
should they fall. After the mortgage term the interest
rate will will normally revert to the Lender's Standard
variable Rate. There may be financial penalties should
you decide to change your mortgage during the capped
rate period or even for a while after the scheme has
ended.
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Cashback Mortgages
With a Cashback mortgage, the Lender can offer
a single cash payment once the purchase or remortgage
is completed. This can amount to several thousands of
pounds which can be us to help towards moving costs,
home improvements or new furniture. Cashbacks can also
be Staged over a number of years or even combined with
discounted or fixed rate mortgages. The Lender will
normally require you to pay back the Cashback if you
decide to move your mortgage within an agreed period
of time.
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Base Rate Tracker Mortgages
The newest type of mortgage. The interest
rate is variable but set at a premium (above) the bank
of England Base Rate for a period or even the term of
the mortgage. The interest rate fluctuates with the
bank Base Rate fluctuations and usually change immediately
a bank Base Rate change is announced. The biggest advantage
of this type of mortgage is that usually there is little
or no redemption penalty. This also means that interest
can be saved on the mortgage without penalty, by overpayments,
and these savings can be quite significant.
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Flexible Mortgages
This type of mortgage is relatively new.
The interest rate can be discounted, fixed, capped or
variable and has the big advantage that it is calculated
daily or monthly instead of annually. This means that
the capital repayment of the loan will affect the interest
charged on the outstanding balance immediately. By making
regular overpayments, interest saved on the mortgage
over the term can be quite significant. Further, most
lenders will allow funds to be drawn from the account
up to the original mortgage balance or even allow repayment
holidays.
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Current Account Mortgages
A combination of a Flexible mortgage and a current
account. The Lender sets a maximum borrowing limit on
the account which included the balance of the mortgage.
Provided the borrower remains on course to repay the
mortgage before they retire they can increase their
borrowings by withdrawing money from the current account.
A cheque book is issued to facilitate this and money
can be withdrawn for any purpose as long as the maximum
limit is not exceeded.
Lenders normally
require borrowers to pay their salary into the account
each month and calculate interest on a daily basis.
Any money paid into the account is set against the mortgage
and any which is left over at the end of the month reduces
the outstanding balance on the account. Providing the
outstanding balance is reduced regularly, this would
have the same effect as making an overpayment on an
ordinary Flexible Mortgage therefore potentially saving
thousands of pounds over the life of the mortgage.
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Pension Mortgages
Another form
of an interest only mortgage is the pension mortgage.
This offers an additional investment plan for those
you have a personal pension scheme. A personal pension
is a stockmarket based investment that benefits from
tax relief and tax free growth. A pension pays a tax
free lump sum and a monthly taxed income on retirement.
The lump sum is normally used to pay off the mortgage.
There is also the benefit of a tax relief, from up to
40%, for the pension contributions for a sector of the
higher rate of taxpayers.
Your debt will
remain constant throughout your mortgage period and
you may be required to be investing a life cover plan
should you die before you retire. Also the lump sum
cannot be used for other purposes. You therefore need
to ensure that your level of pension contributions is
sufficient enough to maintain your required standard
of living during retirement.
To see if this
if this mortgage type is best for you then just fill
in our application form and one of our many advisors
will contact you within the next few hours.
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Jargon Explained
APR = Annual
Percentage Rate. You will see this quoted on many
different financial products. It is a reasonable attempt
to show an "equivalant" rate of interest "per
year", as an alternative to the total charges that
apply. It should allow you to compare competing products,
but it is not completely reliable since some lenders
calculate it differently. It should tale into account
all charges: up-front and on-going.
Capital & Interest Mortgage (same as a Repayment
Mortgage) Your monthly payments are made up of two
components. One component will partly reduce the amount
you have borrowed; the other part will pay off the total
interest accrued in the previous month. Therefore the
amount you owe reduces increment by increment.
Conveyancing The legalities of transferring a property
from thold owner to the new one. You can do this yourself
(there are plenty of books on the subject), but normally
you would use a solicitor.
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Endowment Policy This is a life assurance policy
(i.e. paid into monthly and steadily increasing in value,
enhanced by bonuses of various designs). A lender will
accept this as the means of paying off an Interest
Only mortgage, in one go at the end of the life
of the mortgage (they will be designed to mature at
the same time). If the economy does well (i.e. stocks
& shares) then an endowment policy might end up
being worth more then the amount of the mortgage. After
you've paid it off you can pocket the difference. However
if the economy does badly such a policy might not accumulate
to the level of the mortgage, and you will have to match
the shortfall some other way. There is no means of being
certain how the economy will fare, when the period of
a policy extends to 25 years or so. Always take advice,
at regular intervals.
Freehold This is when the property and the land
it rest on are sold together. It is "free"
of any other ownership interests.
Interest Only You make monthly payments to the lender,
thereby continually paying off the interest accruing
on the mortgage. The amount repayable at any time throughout
the period of the mortgage should remain the same (perhaps
with minor fluctuations).
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ISA = Individual Savings Account. You can choose
different types of ISA. They are a good way of saving
as they are tax free. The money you put in is used to
buy shares or some other long term investment. A lender
may allow you to use this as security for your mortgage.
Leasehold Where the land on which the property stands
is owned separately (by someone else). This typically
applies to flats, but also to other property. The home
owner is therefore obliged to pay rent, known as ground
rent, usually a tiny fee every year. The lease will
state the number of years. A mortgage lender will insist
it is a long period, perhaps 60 years.
Level Term Assurance (A feaure of Endowment
policies) If the policy holder dies, then the next of
kin does not inherit the onus of the mortgage repayments
- on the contrary the policy guarantees to settle the
mortgage outright, there and then. Instead the next
of kin stands to inherit a fully paid-off house.
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LTV = Loan to Value. This is the ratio (expressed
as a %) of the amount borrowed to the value of the property.
Therefore, for a £75,000 mortgage on a £100,000
property the LTV is 75%.
MGI = MIG = Mortgage Guarantee Insurance/Mortgage
Indemnity Insurance. The borrower is usually required
to pay for this special insurance policy (though the
lender will actually make the arrangements). This policy
protects the Lender in case things go wrong and they
can't get their money back. For example if a homeowner
fails to pay them back: while the Lender might reposses
the property they might then discover it is unsellable!
Usually the cost of the policy is added onto the mortgage
so you don't have to shell out for it with cash.
Mortgage A common type of loan (typically more than
£25,000) enabling you to buy a property. The property
can be confiscated by the Lender should you fail to
keep up with regular repayments (for some Lenders this
is truly a last resort, for others it is not. You may
wish to ask your Advisor about this).
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Negative Equity In an economic slump property values
can decrease. This creates "negative equity"
i.e. where the value of your home drops below the amount
you borrowed to buy it. If, one year after borrowing
£80,000, your house is valued at £75,000,
then it has a negative equity of £10,000.
PEP = Personal Equity Plan. These are no longer
available, replaced by ISAs.
Personal Pension This is a savings plan, into which
you make monthly payments, usually until you retire.
It will increase in value, hopefully enhanced by the
success of the Economy (stocks & shares). You cannot
draw money out until a specified age (usually 55). Then
you may be able to withdraw a portion of it as a lump
sum. After this you may take a regular retirement income,
the amount depending on how well it accumulated over
the years. You may be allowed to use a Personal Pension
as security for a mortgage, in conjunction with a life
assurance policy.
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Repayment Mortgage = Capital & Interest
Mortgage (see above)Searches Your solicitor will
arrange for a search amongst public historical records
to determine if there are any mines under the property
or restriction on its use. A fee is normally charged
to you. Searches do not necessarily reveal all. Plans,
for example for a club or motorway near you, may not
show up. It is wise to ask your Estate Agent and locals/
potential neighbours.
Stamp Duty This is a tax, which normally your Solicitor
will pay for you, charged when the ownership of your
new home is transferred to you. The amount is a small
% of the value of the property. The cost of this may
sometimes be added to your mortgage. It does not apply
to properties under £60,000.
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Survey = Valuation. The Lender will employ
someone to make a valuation of the property to ensure
that the amount you wish to borrow is appropriate, and
that the property is suitable. It does not determine
the quality of the property. A fee is normally charged
to you.
Structural Survey This is an optional survey, much
more expensive than a standard Survey. You would arrange
this yourself, by employing a Structural Surveyor, who
will make a report about the quality of the property,
revealing any detectable flaws. If the surveyor is negligent
and a fault arises causing serious concerns then you
may be able to make a claim againt the surveyor.
Valuation = Survey.
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