Mortgage Explained
The mortgage, a simple enough concept – you borrow money to buy a house and pay interest on the loan. Unfortunately however the simplicity ends there. The mortgage industry is a seriously complex one; with numerous lenders each offering an increasing range of products, the choice can be truly bewildering.
But don’t let this worry you; a good professional Independent Mortgage Adviser can guide you through the process, to help find the mortgage that best suits your needs and requirements. Still it is important to know what you are letting yourself in for. At the crux of the issue two facts remain – how you are going to you pay back the capital you borrow and how you will pay the interest on it.
Here you have basically two options; you either make monthly repayments of interest and capital, or you pay interest only each month then repay the loan at the end of the mortgage term from separate savings or investments.
Paying back the capital
You can either pay a little at a time as you go (repayment mortgage) or pay it all off at the end (Endowment, ISA and pension mortgages).
With repayment mortgages each monthly payment pays off a little of the underlying debt, as well as interest on the loan. Then at the end of the term the mortgage is paid in full.
Endowment Mortgages use an endowment policy to provide life insurance and save funds to repay the loan at the end of the term (usually 20-25 years). If the investment performs badly, you could face a shortfall on your loan at the end of the repayment period.
Individual Savings Account (ISA) mortgages work on the same principle as endowments, but use an ISA as the loan repayment method. Again, if your investment performs badly you could face a shortfall at the end of the mortgage term.
Pension mortgages are similar, but work on the basis that pensions (both private and company) provide tax-free cash on retirement. At the end of the mortgage term, the loan is paid out of your tax-free lump sum. They are not often used because with the lump sum spent there will be less money available for your retirement, again investment performance is important.
Paying the interest
You have to pay interest on any debt, mortgages are no different in this respect; they do however differ in the range of interest options offered.
Variable rates change every time interest rates change or, as in most cases, the overall effect of any interest rate change is calculated once a year and payments are altered accordingly.
Tracker rates are a variable rate that tracks the changes in the Bank of England base rate.
Fixed rates are what they say. The interest rate is fixed for an agreed period. These are ideal for budgeting or if you think rates might increase, however you do not benefit if rates fall as you will continue to pay the fixed rate.
Very low rates may tempt you, but they can be used to trap you into paying over the odds in the long term. Identify how long you are tied to the lender for and what the APR is.
Capped rates are fixed not to go above a set level but if rates fall you pay the lower rate. Such deals can be a good buy for budgeting.
Cashback deals are where lenders offer money back if you take out their particular product.
Discounted rates offer a discount off the lender’s variable rate. The discount applies over a set term with the rate fluctuating in line with changes in the variable rate.
The key points
• How much can I afford to borrow?
• This deals with such questions as “What will the cost be each month?” and “What fees will I have to pay?”
• What is the best type of mortgage and rate for me?
• This deals with how to understand the jargon, such as “What do fixed rate, variable rate, discounted or low-start, and flexible mean?” and “Will this mortgage suit my circumstances now and in the future?”
• How should I repay it?
• If applicable – “Why are you trying to sell me an endowment policy, or a pension or an ISA? Why is it best for my circumstances?” and “What commission are you being paid?”
• Can I make lump sum payments to reduce the size of the loan?
• Are there any early repayment charges?
this mortgage come with compulsory insurance? What insurance do I need
• What other charges will I have to pay?
• What happens if I can’t pay?
• What about the small print?
For more information, please contact us