UK Mortages: A Guide Through The Maze
UK Mortages: A Guide Through The Maze
Types of UK Mortgages
You may be wasting your money with the wrong type of mortgage.
Knowledge is power.
There are essentially two
different types of mortgage:
Repayment only,
(capital and interest mortgage)
Interest only,
(ISA, pension or endowment mortgage)
Repayment
only Mortgage
Your monthly repayments consist of repaying the capital amount
borrowed together with accrued interest. On your mortgage statement,
normally received annually, you will see that the amount borrowed
decreases throughout the term.
Advantages
At the end of the term, you are safe in the knowledge that the
total amount of the debt has been repaid.
Overpayments and lump sum payments into your mortgage account
can be made reducing both the interest and capital amounts repayable.
Life assurance cover is not always necessary in taking out
this type of mortgage.
Disadvantages
There may be financial penalties for making lump
sum/overpayments into your mortgage account.
In the early years of a repayment mortgage the majority of the
monthly repayment is interest rather than capital. For borrowers moving
house regularly, this can result in little of the capital being paid
off.
If you have no life assurance cover in place and die before
the loan is repaid, the mortgage will still need to be repaid. This may
result in the property having to be sold to repay the debt owed.
Interest only
Mortgage
With this type of mortgage, only the interest is paid off with
each mortgage payment. The borrower also takes out at the same time, an
alternative repayment
vehicle (method of paying off the mortgage) such as an
ISA, pension plan or endowment policy. More information about
endowments (which in the 1980's and 1990's were extremely popular),
ISAs and Pension plans are below. The most important fact about an
interest only mortgage is that the monthly repayments do not repay any
of the outstanding capital balance. As a consequence it is important
that the payments are maintained into the repayment vehicle otherwise
it will not be possible to pay off the mortgage at the end of the term.
Endowment Mortgage
The most common type of interest only mortgage which also
provides life assurance cover and a fixed payment for investment. The
fixed payments are based on the amount of the loan together with the
mortgage term and are designed so that, at maturity, the amount
invested and earnings are sufficient to pay off the mortgage. Much
maligned in the press because of the poorer investment growth rates
achieved in a low inflationary environment this form of investment is
less popular these days. Note there is no guarantee that, when the
endowment matures and pays out, the balance will be sufficient to
repay the mortgage.
ISA Plan
The Individual Savings Account (ISA) is a tax free method of
saving. Using an ISA as a repayment vehicle is growing in popularity
but due to the ISAs complexity it is only for the financially
sophisticated or borrowers taking advice from a suitably qualified
financial adviser.
Pension Plan
Life assurance cover is provided and monthly payments are made
into a pension fund. When the benefits are eventually taken, the
mortgage is repaid using tax-free cash from the remainder of the fund.
The plan holder can then draw a pension from the balance of the fund.
This product, which tends to be used by the self employed, is only for
those taking advice from a suitably qualified financial adviser.
Discounted mortgages
Most of the discounted rates offer discounts over the first
one, two three, four or five years. The total amount of discount on
offer tends to work out approximately the same over the period of the
discount. The choice is yours between making a choice between a large
discount for a short period of time, a small discount over a long
period of time or something in between. For example one product may
offer a 3% discount over 2 years and another a 2% discount over 3
years. The total discount you receive in either case is 6% so the
choice you are faced with is what period to take the discount over.
Cash back mortgages
These deals vary but, as the name suggests, you get cash as
well as the money you're going to be borrow for your home. You may use
it to pay for home improvements moving costs and furniture etc.
Cash back deals are perhaps best seen as an incentive to go
with a particular lender. It's rarely a genuine gift and you will find
that you have extended ties. There is nothing free in the mortgage
market, the lender will eventually make more than make their money back.
Current account mortgages
It's becoming increasingly popular to combine a mortgage and a
current (banking & cheque) account. Its good news if you like
the option of making overpayments on your mortgage (e.g. if you are
self-employed or receive bonus payments). The other advantage is that
interest is calculated on a daily basis, so when you pay money into
your account, like your monthly wage, the overall loan size is lowered,
so reducing the total amount of interest paid.
Base Rate Tracker
Mortgage
These can get very complicated but in theory they're simply a
mortgage that follows the Bank of England base rate at an agreed rate.
So you might have a Base Rate Tracker Mortgage which sets your
mortgage at 1% above the base rate for, say, the first two years.
Non standard
mortgages
If you have experienced financial difficulty in the past or
are unable to produce full proof of your income then you may find that
the main stream lenders are unable to help you. However, we would
recommend that you contact these lenders first as, depending on the
severity of your situation; you may find that they are willing to help.
If not, however, you will find that there are lenders who specialise in
this area of the market. These lenders tend to charge higher interest
rates or require larger deposits. Once you have re established your
credit you can change to a standard mortgage.
Remortgage
You don't have to move home to move your mortgage. Many
homeowners move their mortgage to a different lender to save money, or
switch to a different mortgage with their current lender.
You may want to remortgage to
