Mortgages

What it is....

  • A mortgage is a loan that you take out to buy a property.
  • The property you buy is held as security against the loan.
  • Banks, Building Societies and specialist mortgage lenders may all offer to give you a mortgage.
  • The Financial Services Authority (FSA) should regulate them so they have to follow strict rules when either giving you advice or selling you a mortgage.
    • They will give you two keyfacts documents.
    • Keyfacts about mortgage services.
      • Whose mortgages they offer.
      • Whether they offer advice or just information.
      • How much they will charge you.

o    Keyfacts about your mortgage.

  • The overall cost of the mortgage.
  • Your monthly payments.
  • The interest rate type.
  • The rate of interest.
  • What fees you need to pay.
  • Any special features of the mortgage.
  • What happens if you don’t want it any more?
  • You should never take a mortgage from an institution that doesn’t specialise in them or are not regulated by the FSA.
  • You can take advice from the lenders directly or from a mortgage broker.
  • When choosing you need to think about a lot of things:
    • How much do you need to borrow?
    • What you can afford to repay?
    • Plan for changes – interest rates can go up, you can have more outgoings or you could lose your job.
    • Which repayment method suits you best?
    • Which interest rate deal suits best?
    • Which mortgage features suit you best?
    •  Are there any special offers in the market that suit your circumstances?

How much do you need to borrow?

  • What you need to borrow and what a lender may be prepared to lend you may be two totally different things!
  • Lenders will make an affordability assessment when deciding on how much they will lend you. Each lender will have their own method but they will all need to know your total income, your existing loan repayments, your bills and living expenses.

How much can you afford to repay?

  • Using the affordability assessment the lender will decide how much you can afford to repay.
  • Do your own budget.
  • Use the published APR to compare mortgages from different lenders.
  • Your lender will insist that you have life insurance to cover the cost of the mortgage. This will be another monthly cost.
  • Find out what fees are attached to each mortgage – Some will be rolled into the mortgage and will have an impact on your repayments. Others will have to be paid for up front.
    • Mortgage broker fee
    • Valuation fee
    • Early repayment charge
    • Repayment fee
    • Stamp duty
    • Estate agents fees
    • Lawyers fees
    • Removal costs
  • If you think that the lender believes you can afford to repay more each month than you believe you can you should say so!
  • Don’t over extend yourself.

Plan for changes.

  • Use a mortgage calculator to see what happens to your repayments if interest rates go up.
  • Remember your mortgage payments will never go lower than what they are now because official interest rates are almost at zero.
  • Your may get a special deal to start with but find out what will happen to your repayments when the deal expires.
  • Build up your emergency fund in your budget for unexpected costs.
  • Find out if you are insured against redundancy.
  • Find out if you have critical illness insurance if you are unable to work through ill health.
  • Find out if your employer will carry on paying you if you are ill.

Which repayment method suits you best?

  • A repayment mortgage where you make monthly payments for an agreed period of time. At the end of the period you would have paid the cost of the property plus the interest attached to the loan.
  • An interest only mortgage where you make monthly payments for an agreed period of time, which covers the interest on the loan only. The original cost of the property has to be paid at the end of the mortgage agreement and has to be financed separately by you.

What interest rate deal suits you best?

  • There are many types of deal. Think carefully about what you need and listen to advice.
  • Standard Variable Rate
    • Your lender sets the interest rate that it will charge you. This can change at any time but it will generally follow changes in the Bank of England’s base rate.
    • You can generally leave this type of deal with no penalties.
    • You can generally make extra payments in order to reduce your interest payments without penalty.
    • You don’t know for sure what you will have to pay next month.
  • Tracker rate
    • Your lender charges you are fixed margin above (or sometimes below) the Bank of England base rate.
    • Each time the Bank of England base rate moves you mortgage rate will move by the same amount, in the same direction.
    • It is generally for a limited time and at the end of the period you move back to the standard variable rate, or you may be offered another deal.
    • There maybe early repayment penalties during the course of the deal.
    • You don’t know for sure what you will have to pay next month.
  • Discounted rate
    • You get a discount on the lenders standard variable rate for a fixed period of time.
    • At the end of this period, the mortgage will revert to he lenders standard variable rate deal, or you may be offered another deal.
    • This gives you a gentle introduction to your monthly payments but ensure that you can afford the higher repayments once the initial period ends.
    • There is likely to be early repayment penalties during the course of the discounted deal and maybe even after as well.
    • You don’t know for sure what you will have to pay next month when the initial discount period has ended.
  • Fixed rate
    • You pay a fixed interest rate for an agreed period of time. At the end of that period you will revert to the lenders standard variable rate or you may be offered another fixed deal.
    • You will have known monthly repayments during the fixed rate period even if the Bank of England base rate goes up or down.
    • If you benefit from a cheap deal make sure that you budget for a sharp increase in your monthly repayments when the deal comes to an end, even if you go onto another fixed deal.
    • There is likely to be early repayment penalties during the course of the discounted deal and maybe even after as well.
    • You don’t know for sure what you will have to pay next month when the initial fixed period has ended.
  • Capped rate
    • Although you effectively have the lenders standard variable rate deal there is a maximum interest rate that you will be charged for an agreed period. This is the cap. At the end of the period you will revert to the lenders standard variable rate deal, or you may be offered another deal.
    • Although you don’t know exactly what your next month’s repayment will be, you know that it will not exceed a certain amount for the duration of the cap deal.
    • If the banks rate falls you will still benefit from the cheaper rate.
    • There is likely to be early repayment penalties during the course of the discounted deal and maybe even after as well.
    • You don’t know for sure what you will have to pay next month when the initial capped period has ended.
  • Collared rate
    • This is similar to a cap in as much your repayments will not go over a certain amount for the duration of the deal, your payments will not fall below a certain amount for the duration of the deal either.
    • In between these two extremes, your rate will go up and down in line with the standard variable rate.
    • At the end of the deal your mortgage will revert to the lenders standard variable rate, or you may be offered another deal.
    • There is not normally a penalty for early repayment.

What mortgage features suit you best?

  • Cashback mortgage
    • This is generally associated with a standard variable rate or tracker mortgage.
    • The lender pays you a sum of money shortly after you take up the loan.
    • The amount may be between 2%-5% of the amount you borrow.
    • You can use the money for anything – you don’t have to show the lender how you spent it.
    • You will have to repay some or all of the money if you leave the deal in the first few years. After that period you can change lenders without having to repay the money.
    • The cashback probably comes at a price. You will probably find a cheaper deal if you do not need the cashback.
  • Flexible mortgage
    • This is generally associated with a standard variable rate or tracker mortgage.
    • You can change your monthly payment to suit you.
    • There is no penalty for overpayment.
    • This is a good plan if you get bonuses and you use them to pay off your mortgage quicker or you are self-employed.
    • There is no penalty for underpayment. Although there is normally a maximum number of months that you can underpay.
    • You may be able to miss some months payments altogether. This is a payment holiday.
    • You can borrow extra money at any time without prior approval provided that the amount you owe does not go above an agreed limit.
    • A less flexible mortgage may well be cheaper.
  • Offset mortgage
    • This is generally associated with a standard variable rate or tracker mortgage.
    • Your current account and savings account are linked to your mortgage account.
    • The credit balances on these two other accounts reduce the amount you owe on your mortgage account each month, therefore you will pay a smaller amount of interest.
    • Has a degree of flexibility associated with it.
  • Current account mortgage
    • This is generally associated with a standard variable rate or tracker mortgage.
    • Similar to an offset mortgage except that you do not have separate accounts – just one big overdraft.
    • Useful if you are a higher rate tax payer or have significant savings.
    • Affords great flexibility – you can borrow extra money at any time without prior approval provided that the amount you owe does not go above an agreed limit.

Are there any special offers in the market that suit your circumstances?

  • Lenders are always trying to entice you with special offers – especially for first time buyers.
  • These can be really good but always price in what your new monthly repayments will be after the honeymoon period is over.

Wize Tips

  • Work out your budget first to find out what you can afford to repay each month.
  • Compare costs and features of various mortgages.
  • Use the APR to give you a comparison.
  • Make sure you include fees and add-ons, including early repayment if you decide to change lenders.
  • Don’t borrow the maximum you can afford – leave some room for interest rate increases.
  • Use a mortgage calculator to help you with this.
  • Decide if you will find the mortgage on your own or need the help of a mortgage broker.
  • Make sure all advisors and potential lenders are FSA regulated.
  • Never be tempted to lie on your application to get a bigger loan – it’s fraud.
  • Remember that your property is held as security against your mortgage. If you miss payments or find yourself in financial difficulties you may be putting your house at risk.