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Your mortgage is without doubt one of the largest financial commitments you will
undertake. Because of the range of options available as well as the potential
pitfalls of choosing the wrong one, we recommend that you seek mortgage advice
which is individually tailored to your needs and requirements rather than go
with the whim of financial inertia. The UK mortgage industry is one of the
most competitive in the world. The range of product options available (8,000
plus) is often bewildering and it is easy to become confused and opt for the
product offering the lowest headline rate of interest or monthly repayment
without looking into other critical factors such as fees and charges to be paid,
penalties for early repayment, conditional insurances, lock-ins and so on and so
forth which might make what on the face of it appears to be a “good deal” an
expensive luxury!
The market used to be that a borrower was grateful to the lender for
providing them with a loan facility to purchase their home. However; today's
market place is such that the balance is tilted more in favour of the borrower.
This is due to competition and innovation within the industry. As independent
adviser can guide you through the mortgage maze and help you obtain superior
value for money. That is where we come in.
Most mortgages are arranged over 25 years. If you need to and depending on
your circumstances, you may be able to choose a term from as short as five years
to as long as 35 years.
Ways to repay your mortgage
There are various ways to repay your mortgage. Here is a brief outline of the
more popular repayment methods, and how they work.
Repayment mortgage
You borrow a lump sum over a fixed period of time to suit your financial
planning objectives (usually 5 years and beyond). This is only way you can be
100% certain the loan will be repaid (provided you keep up with the monthly
repayments.)
With this type of mortgage you make a monthly payment to your lender, partly
to pay the interest on the amount you borrowed, and partly to pay the
outstanding mortgage.
In the early years, most of your payment goes to pay the interest on the loan
and the rest reduces the loan. The reason for this is that your monthly payment
usually consists of a portion of the amount you borrowed, called “the principal”
and interest to the lender for the privilege of giving you the loan. In the
early years of the mortgage, a larger share of your payment is interest to the
lender. The longer into the mortgage term, the greater the proportion of the
outstanding capital is repaid by each of your payments. You therefore repay the
mortgage gradually over the repayment term.
Interest-only mortgage
Your monthly payments to the lender cover only the interest on your loan.
This means that the amount you owe remains about the same throughout the term
of the mortgage, provided you make all payments on the due dates. Your total
loan must however be repaid at the end of the mortgage term. You may therefore
need to arrange a savings or investment vehicle, some of which may offer
generous tax advantages and flexibility which will generate sufficient capital
to repay the loan. You can repay the capital sum from the proceeds of a variety
of investments, for example an individual savings account (ISA), an endowment
policy or the tax free cash from a personal pension or a life assurance plan. Alternatively, you may
choose to repay it from any other assets available to you.
Should you move or arrange a remortgage, your investment can usually be
reallocated to the new mortgage.
Unlike a repayment mortgage, the amount of debt outstanding does not reduce
over time. You will therefore be taking a risk that the investment vehicle
chosen will do well enough to enable you pay back your loan. In most cases there
is no guarantee that the investments chosen will grow sufficiently to repay your
loan. It is also not unusual for investment-linked interest-only mortgages to be
slightly more expensive than repayment mortgages.
Mortgage products
Different mortgages have different interest structures. The most common ones
are described below:
Base rate Tracker
These mortgages are linked to the base rate set by the Bank of England. The
base rate is reviewed once a month and reflects the cost of borrowing money from
the Bank of England. Base rate tracker mortgages give you the certainty that
your payment will rise and fall in line with base rate changes. Your lender will
usually charge a premium above the base rate.
Variable Rate
This is the normal rate the lender will charge you. When it moves up, you pay
more and when it goes down, you pay less. Some lenders only change your
repayments once a year.
Fixed Rate
The interest rate is guaranteed to stay the same for an agreed period of
time, usually between one and ten years.
You are able to budget by knowing how much your monthly costs will be. The
only change will be due to changes in tax relief given on interest payments.
If interest rates drop during the period your outlay will remain the same.
Discounted Rates
You will receive a discount off the normal rate the lender charges, usually
for a set period from the start of the mortgage.
Discount periods range from anything from one to five years. After this
period the rate goes to the lender’s normal rate.
Lower interest payments at the start might allow you to pay for home
improvements and the purchase of new furniture, for example.
Monthly interest payments will increase at the end of the discount period.
Capped Rate
The Interest rate the lender charges will go up and down as normal, but will
not go above an upper limit — this is the “cap rate”.
You will know the maximum you will have to pay and will benefit from any drop
in the interest rates.
Cash Back
After you have started your mortgage, the lender will give you a cash sum
back. This is normally a small percentage of the total loan.
The lump sum will help you in paying moving expenses and for any home
improvements. You can spend the money on anything you wish, even a holiday or a
new car.
Flexible Repayment Mortgage
These are relatively new innovation in the UK mortgage market, although they
are quite common in some other countries – notably Australia (indeed some refer
to these types of mortgage as “Aussie style mortgages”. Flexible Repayment
Mortgage gives you, the borrower increased flexibility when compared to the
traditional type. They give flexibilities such as the ability to vary payments,
so that you can pay more down when you have plenty of cash, and reduce the
length of your mortgage. In times when you are short of cash, you can take
“repayment holidays” or even increase your borrowings via the mortgage account,
using it as an additional loan facility.
What else should you know?
Early Repayment
A mortgage is designed as a long-term commitment. Therefore some mortgages
include penalties for early repayment. Penalties may also apply on the early
cancellation of investments intended to repay the mortgage.
Key Facts Illustrations
Your adviser or lender will give you a Key Facts illustration of the interest
costs for your proposed mortgage. If you propose to arrange a discounted, fixed
or capped mortgage, the illustration will state the potential change to
repayments following the initial period. This will assume that the lender’s
current variable rate will continue to apply.
Moving House
Your illustration will also confirm if the product is portable. If so, if you
move house, the outstanding mortgage may be transferred to your new property.
Costs
When working out how much to borrow you should remember there will be a
number of costs involved.
When submitting your application to the lender you will probably have to pay
a valuation fee. Some types of mortgages also require you to pay an arrangement
fee.
If your mortgage is for more than 75% of the value of the property you may
have to pay a higher lending fee to protect the lender if you default on your
mortgage and the property has to be repossessed and sold for less than the
outstanding loan. The lender may at its discretion use this fee, to obtain an
indemnity insurance to act as extra security for its sole benefit. The higher
lending fee is for offering you a loan above 75% and is not portable and only
the lender can make a claim against the policy. If a claim is paid to the lender
under this insurance, the insurers will normally have the right to recover any
amount paid from you. This right is known as the right of subrogation. Lenders
may allow you to add the cost of this to the loan.
As well as solicitor’s fees, there are a number of other legal costs involved.
Our Independent Financial Advisers or your solicitor will be pleased to go
through them with you.
Your home may be repossessed if you do not keep
up repayments on your mortgage.
Legal disclaimer
These pages provide generic information about
various aspects of financial services advice that we provide as well as possible
areas of clients’ financial planning needs. We hope they are helpful to you but
they do not, on their own, add up to proper investment advice and we cannot take
responsibility for anything you do in reliance on them without further
discussion with us. Please do not make a decision based upon the information
contained within these pages alone. They are not detailed or comprehensive
enough to enable you to make an informed decision which is tailored to your
circumstances and needs. Please contact us now for tailored advice. |
