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What types of interest rate schemes are there?
What costs and fees are there likely to be?
How do I pay my mortgage?
What type of protection should I consider?
What types of interest rate schemes are there?
Variable rate
The monthly payment goes up and down in line with the lender's mortgage rate. This can cause budgeting problems in times of increasing interest rates. Some lenders offer an annual review so that the amount you pay only changes once a year with the difference adjusting your outstanding mortgage.
Fixed rate
The monthly payment is fixed over an agreed period of time. At the end of the fixed rate term the interest rate usually reverts to the lender's variable mortgage rate or you may be offered the choice of another product, at the terms available then.
Capped rate
The interest rate is guaranteed not to go above a certain level throughout the capped rate period, which can be from 1 to 10 years, but you will benefit from any reduction in interest rates.
Collared rate
The interest rate will not fall below a certain level for the collared rate period.
Flexible Mortgages
These schemes allow you to overpay, underpay or even take a payment holiday. Any unpaid interest will be added to the outstanding mortgage. Any overpayment will reduce your outstanding mortgage.
Discounted
The lender offers a true initial discount, for example a reduction of 0.5% off their normal variable rate for a given period. At the end of the discount period, the rate reverts to the lender's variable rate. No interest is deferred so the outstanding mortgage will not increase.
Cash back
Some lenders offer a cash payment on completion of the loan, either based on a percentage of the total loan or a flat fee.
Lenders that offer any type of fixed rate, discount or cash back facilities will want to try and ensure that borrowers are not continually changing lenders in order to take advantage of the latest new offer. They will usually make a redemption charge if you want to redeem your mortgage early. Redemption penalties will be charged if you die within the redemption period so you should consider building this in to the level of life cover you have. You should also make sure that you can afford the variable rate that will be charged at the end of the discounted or fixed rate period.
Tracker
The payable rate is a set amount above or below bank base or libor for a limited period. After the tracker rate period, the rate reverts to the lender's variable rate.
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What costs and fees are there likely to be?
Valuation fee
The type of valuation you choose will depend on factors such as the age and condition of the property and whether there is any history of subsidence in the area. The fee must normally be enclosed with the application and is non-refundable once the valuation has been carried out.
Basic mortgage valuation
This is for the lender's own purposes as they need a professional opinion on whether the property provides security for the loan. Therefore, we suggest you consider one of the more detailed types of survey, although which one you choose is up to you.
Home buyer's report
This provides concise information in a standardise format on the state of repair and condition of the property. The report will include comments on the property's defects and the valuer's opinion as to its marketability.
Full structural survey
This is a structural report based on a detailed examination of the property. Any areas of concern that you might have about the property will be investigated.
Arrangement fee
This may be payable either in advance, where the lender will ask you to enclose a cheque with the mortgage application, or on completion. An arrangement fee can vary significantly and all or part of it may be non-refundable if the mortgage is declined or withdrawn.
Legal costs and fees
The fees charged by a solicitor include the charge for conveyancing (the transfer of ownership of land), the costs of legal registrations and miscellaneous costs (known as disbursements).
Stamp Duty
Stamp Duty is a purchase tax and is payable where the purchase price of the property is more than £120,000. The current charge is 1% of the total value of the purchase price. This increases to 3% if the price is more than £250,000 and to 4% if the price exceeds £500,000. (Stamp Duty is not payable for remortgages).
Mortgage Indemnity Guarantee
(Sometimes known as Mortgage Guarantee Premium)
This may apply if the amount you wish to borrow is more than 75% of the value of the property, some lenders will require additional security on the amount in excess of this threshold in the form of an insurance policy (a Mortgage Indemnity Premium).
For example, if you wish to borrow 90% of the value of an £80,000 property, i.e. £72,000 and the percentage used by the lender is 75%, the insurance premium will be needed on the 15% excess. i.e. 15% of £80,000 which is £12,000. Typically you may be charged 7% on this excess, £12,000 x 7% = £840.
This policy is used to protect the LENDER ONLY and is used to cover themselves in the situation where the property is repossessed and the loan plus unpaid interest exceeds the sale value of the property. You will then owe the insurance company any payment claimed by the lender. The lender will arrange the insurance and the premium will be paid by you, in some cases it can be added to the loan. Redemption Charge
Some lenders make an early redemption charge if you pay off your loan before the end of the normal mortgage term or within a special period. In some cases this can be a significant amount. Always check the terms in the offer letter from your lender.
Buildings and Contents insurance
All lenders require that you fully insure the property for the total cost of rebuilding it. Many offer their own schemes which can also include cover for your house contents. It is also strongly recommended that you take out contents insurance as well, since the value of your house contents is likely to be several thousand pounds. Adviser's fee
At the outset, we will inform you if we will receive a fee for arranging your mortgage. Before you take out a mortgage, we will tell you the amount of the fee in writing. If the fee is less than £250 we will confirm that we will receive up to this amount. If the fee is £250 or more, we will inform you the exact amount.
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How do I pay my mortgage?
The repayment method
How does a repayment mortgage work?
Monthly payments are made up of interest charged on the amount borrowed and a portion of the capital to repay the mortgage. During the early years, most of each month's payment is interest and it is only later on that you start to repay any significant element of capital.
The mortgage is guaranteed to be repaid at the end of the term providing that payments are maintained. You can see the mortgage reducing each year (albeit very slowly in the early years).
It does not contain any form of saving, so there is no possibility of additional return on early repayment.
You will need to take out separate life cover to ensure the mortgage can be repaid in the event of death. The interest only method
How does an interest only mortgage work?
Monthly payments to the lender consist of interest only and the outstanding loan remains the same. You make payments to a separate investment with the aim of producing enough capital to repay the mortgage in full at the end of the term. There are a number of different investments that can be used. You can also use a combination of them. These methods are not guaranteed to repay the mortgage loan.
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What type of protection should I consider?
Life Assurance
To ensure that the mortgage is paid off if you die. This is built into an endowment plan but will need to be arranged separately with a repayment, pension or interest only mortgage.
Critical Illness
To provide a cash lump sum which could be used to pay off your mortgage if you suffer a critical illness such as a heart attack or cancer. This cover can be built into some endowment plans or can be arranged separately with a repayment or pension mortgage.
Waiver of Contribution
This is an important benefit that can be added to many plans. It will enable your plan contributions to continue to be paid if you are unable to work due to sickness or accident.
Permanent Health Insurance (PHI)
To provide you with replacement income if your own stops because you are unable to work due to long term sickness or accident.
Accident, sickness and redundancy insurance
This will provide short term income, usually for up to two years, to just cover your mortgage payments if you are made redundant or are unable to work because of sickness or accident.
The information on this site is for guidance only and is subject to the UK regulatory regime and is therefore restricted to consumers based in the UK.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
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