Mortgages

For most people this is probably the biggest investment of time and capital they will ever make.

A good mortgage adviser can remove the stress and worry. A poor one could add to it!

We utilise the services of a mortgage specialist from an associate company for most mortgage advice.

When deciding on a mortgage, a number of choices have to be made. The first relates to how the mortgage capital is to be repaid. There are two principal methods and these can be broadly defined as Repayment and Interest-Only.

Repayment Mortgage (Capital and Interest)

On a repayment basis, each time you make a payment to your mortgage lender, part of that payment is in settlement of the interest being charged whilst the remainder reduces the total outstanding. Your mortgage payments are calculated in such a way that over the selected period of your mortgage, the combination of interest and capital payments guarantee to clear the loan outstanding providing you always pay the amount required by your lender.

Interest Only

On an interest-only mortgage, you pay the interest requested by your lender over a selected term of years, so the mortgage loan does not reduce. You must then make other arrangements to provide the necessary capital to clear off the mortgage when the term ends.

It is always the borrowers' responsibility on an interest-only mortgage to ensure they have adequate arrangements in place to repay the outstanding mortgage at the end of the mortgage term. Failure to maintain such arrangements could result in the loss of your home or extending your mortgage.

Some examples of interest only mortgages are:

Endowment Mortgage

You effect an endowment policy to run beside your mortgage which is geared to provide the amount you initially borrowed at the end of the selected mortgage term. The endowment also provides life assurance (and, optionally, critical illness cover) equal to your mortgage borrowing. The returns from an endowment policy are not guaranteed to clear your mortgage on maturity.

These types of plan have virtually ceased to exist for new business.

Pension Mortgage

Again selected to run beside your mortgage with a view to ultimately providing a capital sum to clear the amount originally borrowed. The main purpose of a pension plan is to provide income in retirement but most forms of pension also permit part of the accumulated fund to be paid as a tax-free lump sum at retirement. A pension mortgage looks to utilise this lump sum to clear your outstanding mortgage loan.

Given that most people do not have anything like sufficient pension provision, this option could leave you short of income in retirement.

Investment Backed Mortgage

The capital invested in virtually any type of investment can be earmarked for use in repaying the amount outstanding on your mortgage at some date in the future. Alternatively you can save a regular monthly amount which, providing it achieves a certain rate of return over the lifetime of your mortgage, will provide the funds to repay the capital originally borrowed. Some examples of investment products used for this purpose include Individual Savings Accounts (ISA), Personal Equity Plans (PEP), Unit Trusts, Investment Trusts and OEICs.

Please bear in mind that investments rise and fall in value and if your selected investment vehicle doesn't perform as anticipated, you could be left with a shortfall in your mortgage repayment.

Mortgage Options

Next, you have to decide how the interest of your Repayment or Interest-only mortgage will be calculated. Many of the options represent an explicit or implicit incentive for you to take the deal, worth in some cases more than 5% of the amount you are borrowing. The main deals available are:

Standard Variable Rate

This is the general interest rate being charged by your lender and applies to your mortgage unless some other deal has been agreed at outset. Some lenders have more than one standard variable rate.

Fixed

The interest rate payable is fixed for a specific period at outset and normally reverts to the lender’s standard variable rate at the end of the fixed rate period.  At the end of the fixed rate period you could be paying more or less than at outset dependent upon prevailing interest rates. 

Discounted

You pay a reduction from the standard variable rate for the period of the discount deal. At the end of the discounted rate period your interest rate reverts to the standard variable rate.

Capped

The interest charged on your account is capped at a certain level for a specific period of time. This means that during this period it cannot go above that rate but usually if rates in general fall below your capped rate then your rate will also fall. At the end of the capped rate period your interest rate reverts to the lenders standard variable rate.  A capped rate is sometimes offered in connection with a collared rate. In the same way that a capped rate cannot rise above a certain level, a collared rate cannot fall below a certain level. That benefits the lender, not you.

Stepped Rate

The interest charge rises or falls in specified steps according to the deal offered.

Cashback

The lender gives you a lump sum back when you complete the legal purchase requirements. Often, this lump sum can be used towards a deposit when you are buying a house. You would then normally pay the lender's normal variable interest rate, although a very large cashback might result in an additional rate of interest.

Tracker Mortgage

This is a variable rate mortgage, with a different basis for calculating the variable rate. It is normally a fixed addition to the Bank of England Base Rate, which varies from time to time. Usually, this results in a lower interest rate than the same lender's normal variable rate. The tracker facility may apply for a specified period only, then reverting to the standard variable interest rate - or it may apply for the life of the mortgage.

Flexible Mortgage

This describes a mortgage with most or all of the following features:

• interest is usually calculated on a 'tracker' basis

• additional repayments of capital as lump sums can be made at any time without penalty, which will result either in lower future payments or in the mortgage being paid off early.

• additional repayments of capital by choosing a monthly payment more than required by the lender can be effected without penalty, and this too will result in the mortgage being paid off early.

The capital repayment element of normal monthly payments, of enhanced monthly payments and of additional lump-sum payments has an immediate effect of reducing the amount of capital outstanding (monthly or daily rests), rather than not being credited until the end of the financial year (annual rests)

• Payment holidays or reductions are available under certain circumstances

• Funds can be approved in excess of actual mortgage requirements, and not immediately released, but then drawn on at will when needed, with no further application, for any purpose. A variation of this (which has the same effect) is that a separate savings account can be set up for funds in hand not needed for house purchase, which will receive an enhanced rate of interest similar to the interest rate applicable to the mortgage.

This is not an exhaustive list of possibilities but demonstrates there are a lot of choices to be made. Some deals are offered in combination, for example a fixed deal with cashback. It is often the case that any deal offering anything different from the lender's standard variable rate will have penalties imposed if you redeem all or part of the mortgage within a specified time. These time scales can be just for the duration of the initial deal, although in some cases the penalty lasts beyond the deal period (known as “overhang”) even though you have reverted to the lender's standard variable rate. Usually, deals are 'portable', so that, on moving, the deal will apply to any new mortgage of the same amount  taken out within the deal time scale, for the duration of the that time scale (or that, if in an “'overhang” period, no penalty will apply to the new mortgage if continued with until the end of the penalty period). However, there are deals available that have no redemption penalties whatsoever, particularly tracker mortgages.

Fees

Certain fees associated with arranging a mortgage can sometimes be added to the loan and where this happens, you will be paying interest on these amounts in addition to your mortgage borrowing.

Debt Consolidation

If you remortgage your property to clear outstanding debts, you could end up paying more in interest in the longer term as the consolidated debts will be spread over the full term of your remortgage.

Insurances

Your lender will insist that the structure (buildings) of your home must be insured and it usually offers to arrange this insurance for you. Normally however, you are free to arrange this cover yourself although in some cases, the lender will impose an additional charge on you for doing so.

Protecting Your Mortgage

Changes in your personal circumstances by relationship breakdown, accident, long-term sickness or redundancy can have a serious effect on your mortgage. You should consider the implications of any of these events happening and where possible, make provisions if they were to happen.

There is little that we can do about a relationship breakdown but this can cause financial hardship to one or both parties. Often the property has to be sold and/or assets split and the consequences of mortgage redemption penalties and early termination of investment products can then have an impact. At best, one of the parties to the mortgage has to take over the entire financing and also purchase their partners share of any accrued equity in the property (subject to approval by the lender). Fluctuating property values can also have a bearing on your longer term finances.

Accident, Sickness or Unemployment

Under the Government's drive for sustainable home ownership, mortgage borrowers are being encouraged to effect Mortgage Payment Protection Insurance.

Income Replacement

It is important to consider the consequences of being unable to work for an extended period through accident, illness or injury.

Life Assurance & Critical illness Cover

It is sometimes a condition of a mortgage loan that you have adequate life assurance in place. Your financial adviser will assess each person’s needs and make appropriate recommendations.