UK mortgage compare and apply online A mortgage is a sum of money borrowed from a bank or
building society in order to purchase a property. The money
is then paid back to the Lender over a fixed period of time
together with accrued interest. There are many different types
of mortgages and there will be one out there that best suits
you.
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TYPES OF MORTGAGE
There are essentially two different types of mortgage:
Repayment only mortgage, (capital and interest mortgage)
Interest only mortgage, (ISA, pension or endowment mortgage)
Repayment only.
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 of a repayment mortgage 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 of a repayment mortgage
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 mortgages.
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
ISA Plan
Pension
Endowment
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.
Nonetheless millions of borrowers have one or more endowment
policy and as a rule of thumb these should not be cashed-in
early and certainly not before seeking advice from a suitably
qualified financial adviser. Customers cashing-in an endowment
policy in the first few years after inception can receive
less than the amount invested. Existing endowments can
be used to support a new mortgage with any ‘additional
lending’ over the value of the projected maturity
balance being covered on a repayment basis or with an
alternative repayment vehicle e.g. an ISA. It is also
worth pointing out that historically the returns on endowment
policies have been pretty good (provided they go full
term).
Endowments provide life assurance so that in the event
of death the mortgage is paid off.
ISA
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.
ADVANTAGES
If the proceeds of the plans exceed the amount required
to repay the mortgage, then this is received as a cash
lump sum by the borrower.
Some plans are tax-efficient.
DISADVANTAGES
f the proceeds of the repayment vehicle do not achieve
the amount expected, then there will be a shortfall. The
borrower remains liable for any shortfall on the mortgage
hence the outstanding balance will need to be paid off
from other resources. Regular checking of the policy fund
itself by the borrower and the lender should minimise
any risk. If the plan is not reaching its expected target,
the borrower can increase payments into the policy or
invest in another product to cover any anticipated shortfall.
Cashing in the plans early may result in financial penalties.
These will be provided for in the initial agreement. In
addition the lender has no way of tracking some of the
more modern repayment vehicles, such as an ISA, which
will result in some instances where a borrower lets an
investment lapse forgetting or not realizing it is to
be used to pay off the mortgage. This will result in situations
where there is no method of paying off the mortgage and
the lender will only become aware at the end of the mortgage
term.
INTEREST RATES ON UK MORTGAGES
When you have chosen the right mortgage for you, whether it
be a repayment or an interest only mortgage, you will need
to consider the 4 main mortgage rate options available.
FIXED
CAPPED
DISCOUNT
VARIABLE
Fixed Rate Mortgage.
The amount you repay the lender each month can be at a fixed
interest rate for a certain period of time, regardless of
the interest rate in the market place. It is common for lenders
to offer rates fixed for a period of 2 to 5 years, but shorter
and longer periods can be found in the market. At the end
of the fixed rate (or ‘benefit’) period the rate
will normally convert to the lenders Standard Variable Rate
(SVR).
It is normal for lenders to charge up-front fees in the form
of booking and/or arrangement fees. In addition lenders frequently
apply an Early Redemption Charge (ERC) for fixed rate mortgages.
This acts as a ‘lock-in’ making an often heavy
charge for borrowers paying off their mortgage early. Watch
out – the ERC can sometimes last longer than the fixed
rate period e.g. a 3 year fixed rate with a 5 year ERC.
Capped Rate Mortgage.
A capped rate mortgage is very similar to a fixed except that
if the variable rate drops below the capped rate, the borrower
will make payments based on the lower variable rate. However
should rates increase the payments will be ‘capped’
and will not rise over the capped rate. So as a rough ‘rule
of thumb’ a capped rate is better to have than a fixed
if all other factors are equal. Again, as with fixed rates,
up-front charges and ‘lock-ins’ are common.
Discounted Rate Mortgage.
The Lender offers a discount on the Standard Variable Rate
(SVR) for a specific period of time. For example, the variable
rate may be 5% with a discount of 1.5%. The initial pay rate
would therefore be 3.5%. If the variable rate rose to say,
6%, then the rate payable would rise to 4.5%. As the discount
is linked to the standard variable rate, the borrowers payments
will increase, if rates rise – so there is no certainty
in budgeting. However should rates decrease the borrower will
benefit from lower payments.
It is still possible to have up-front charges for discounted
products and an Early Redemption Charge is common.
With discount mortgages borrowers need to watch out for ‘payment
shock’. Some short term discount products offer a ‘deep
discount’ e.g. 4% off for 1 year. In such circumstances
the borrower will be facing a significant increase in their
monthly mortgage payment at the end of the discount benefit
period.
Variable Rate Mortgage
Borrowers paying the Standard Variable Rate will have their
payments increase or decrease as the lender adjusts the rate
in accordance with market conditions.
FEATURES AND OTHER BENEFITS OFFERED WITH
MORTGAGES
There are other key features and benefits to be considered
when determining the best mortgage for a prospective borrower.
FLEXIBLE / LIFESTYLE MORTGAGES
CURRENT ACCOUNT MORTGAGE (CAM)
CASHBACK
FREE LEGALS OR CONTRIBUTION TOWARDS CONVEYANCING COSTS
FREE VALUATION OR REFUND OF VALUATION FEE
OTHER BENEFITS
Flexible / Lifestyle Mortgages
A Flexible or ‘lifestyle’ mortgage is designed
to let you to make extra repayments when you have extra money,
and to reduce or even skip payments when necessary. Borrowers
will normally have to build up a reserve through overpayments
before being allowed to underpay or skip payments. The main
benefit of flexible mortgages is that many schemes are offered
on a Daily or Monthly Interest Calculation basis (sometimes
referred to as ‘daily rest’ or ‘monthly
rest’). Until the arrival of flexible mortgages most,
if not all, UK lenders were charging interest on an annual
basis which meant that borrowers making over-payments were
not getting the benefit straight away because it could be
a year before the capital was reduced by the over-payment.
Whereas, on a mortgage where the interest is being calculated
on a daily basis, any over-payment reduces the mortgage balance
immediately hence the borrower will be charged less interest
from the next day. Without going into detail to explain this
feature the up-shot is that over-paying the mortgage on a
monthly or regular basis, even by a relatively small amount,
will reduce your mortgage term by years (hence saving payments).
Many flexible mortgages come without any Early Redemption
Charge so the borrower is not ‘locked-in’ to any
particular lender. In addition the interest rate charged is
often lower than the usual Standard Variable Rates charged
by the other more ‘traditional’ mortgage lenders.
The flexible mortgage concept was imported from Australia
so occasionally you may hear them referred to as ‘Aussie
style mortgages’.
Current Account Mortgage (CAM)
A flexible mortgage linked to a current account. These mortgages
take the benefits of the flexible mortgage and use the funds
held in the current account to offset the interest e.g. on
a particular day a borrower has a mortgage balance of £50,000
and has £2,000 held in the current account. The customer
is charged mortgage interest on £48,000 i.e. the mortgage
balance minus the positive balance held in the current account.
Some of the newer entrants into this sector are also linking
savings accounts, credit cards and personal loans into the
mix.
For a borrower wanting one home for their finances this is
an attractive option.
Cashback
The Lender, as an incentive, will offer a lump sum of cash
once the mortgage has been taken out. The amount will vary
from lender to lender and on the size of the mortgage. The
amounts can range from a flat fee e.g. £200 to a percentage
of the loan e.g. 3% of the loan.
Normally the cashback is offered as a package of benefits
e.g. linked with a discount, but pure cashback products are
not uncommon. Mortgages offering a 5 or even 6% cashback can
be found which would mean a borrower taking a £70,000
mortgage would receive £4,200 on completion (at 6%).
As you would expect lenders apply an Early Redemption Charge
with cashback mortgages. Typically a borrower will be locked-in
for 5 to 7 years where a substantial cashback has been paid.
Free Legals or a Contribution Towards
Conveyancing Costs
More common on products aimed at the remortgage market but
a frequent product ‘enhancement’. To take advantage
of the offer the mortgage applicant will normally need to
use a firm of solicitors or licenced conveyancers nominated
by the lender.
Free Valuation or Refund of Valuation
A free valuation requires no up-front payment from the mortgage
applicant whereas a refund will only be made when and if the
mortgage application completes. Hence an applicant paying
for a valuation and then not proceeding due to, say, a poor
valuation, will not have their valuation fee refunded.
Other Benefits
A whole range of other benefits can be applied to mortgages
including the significant benefits of no Mortgage Indemnity
Charge and no Early Redemption Charge. See below for more
information about these features.
OTHER FEATURES / CONDITIONS AND CHARGES
ASSOCIATED WITH MORTGAGES
Early Redemption Charge (sometimes referred to as a ‘redemption
penalty’)
Given that the mortgage market is very competitive many mortgages
are sold as ‘loss leaders’ i.e. the mortgage has
to be held for a number of years before the lender breaks
into profit. As a consequence lenders frequently ‘lock-in’
borrowers by applying Early Redemption Charges for those paying
off the mortgage early. Charges can be significant e.g. 6
months interest or repayment of the amount of benefit received,
be it cashback or reduced interest. The period an Early Redemption
Charge applies can vary. Sometimes it will match the period
of the discount/fix but often it can go beyond the benefit
period e.g. a 5 year discount with a 7 year ERC. This is referred
to as a ‘redemption overhang’.
On this subject see ‘No Redemption’ and ‘No
Overhang’ below.
No Redemption
Selecting the 'No redemption' option means that the mortgage
schemes on screen will allow you to repay the loan in full
at any time without applying an Early Redemption Charge.
Most mortgage schemes, in return for offering you a lower
initial rate, will require you to stay with that scheme at
least for the period of the Discount, Fix or Cap, and often
longer. If you wish to repay the loan in this time, or you
remortgage with another lender, you will have to pay an Early
Redemption Charge which can cost £thousands (6 months
interest is common) depending on the lender and scheme.
With 'No Redemption' mortgages you will not have to pay
this redemption fee (although there may still be other costs
such as sealing fees and legal fees.) As a consequence of
not being ‘locked-in’, the rate offered on these
schemes will usually not be as competitive as for mortgages
with redemption penalties, making them most suitable for those
who are likely to keep track of current rates and wish to
remortgage quickly if they find a better rate, or those who
may have to repay their loan in the first few years.
No Overhang
Selecting the 'No overhang' option means that the mortgage
schemes on screen will allow you to repay the loan without
penalty once the benefit period has ended i.e. the mortgage
does have an Early Redemption Charge but it does not last
longer than the fixed, capped or discount period. This means
that a mortgage with, for example, a discount to 31st January
2006 will have a redemption charge to either the same date
or a date prior to this.
The Early Redemption Charge can represent a significant sum
although the amount will differ between lenders and between
products.
With 'No overhang' mortgages you will only have to pay this
redemption fee if you redeem the loan or remortgage whilst
you are still subject to the scheme's special rate. Once you
have reverted to paying the lender's Standard Variable Rate
(SVR) you will be able to redeem the loan without penalty
(although there may still be other costs such as sealing fees
and legal fees.) As a consequence of not locking-in the borrower
to the lender's SVR, the rate offered on these schemes will
usually not be as competitive as for rates with redemption
overhangs, making them most suitable for those who wish to
benefit from a lower initial rate without needing a very low
initial rate, and who are likely to want to remortgage to
another Discount, Fix or Cap once they are no longer benefiting
from the initial rate.
Mortgage Indemnity Charge (sometimes
referred to as a High Percentage Lending Fee)
For high Loan to Value (LTV) mortgages i.e. where the loan
is not much less than the value of the property, it is common
practice for the lender to take out a form of ‘insurance’
to protect against some or all of the losses incurred if the
property needs to be taken into possession because of serious
arrears. It is common practice for lenders to pass this charge
on to the borrower. Depending on the amount of loan and the
LTV the Mortgage Indemnity Guarantee charge can be a significant
cost e.g. a £47,500 mortgage on a purchase price / valuation
of £50,000 would result in a £750 charge on a
typical MIG charge of 7.5% on a normal lending limit of 75%
loan to value. Most lenders have a different name for this
charge i.e. it may not appear on the mortgage Offer as Mortgage
Indemnity Charge or High Percentage Lending Fee.
There are some important facts to understand about the mortgage
indemnity charge. It acts as a form of insurance for the lender
not the borrower. This means that the lender can claim part
or all of its ‘losses’ incurred repossessing the
property from the insurance company providing the MIG cover.
Note that even after repossession the former borrower will
remain liable for any sums owing (shortfall between selling
price and mortgage outstanding plus arrears, lenders legal
costs and any other charges applied to the mortgage) and can
be pursued by the insurance company for payment at a subsequent
date.
Valuation Fee
The amount charged to conduct a valuation of the property
on behalf of the lender. It is important to note that the
valuation is carried out on behalf of the lender – not
the mortgage applicants! Frequently lenders include an administration
fee as part of the valuation fee collected to cover the costs
of arranging the valuation. The valuation does not represent
a detailed inspection. For peace of mind it may be appropriate
to obtain a ‘Housebuyers Report’ or a ‘Full
Structural Survey’. These are more detailed than a lender
valuation but they produced on behalf of the applicant. They
are more expensive than the lenders valuation.
Booking Fee and Arrangement Fee
Both are up-front fees charges levied at the outset of the
mortgage.
A booking fee will normally be required with the application
form. A booking fee is paid to reserve funds on a mortgage
product that has limited funds available e.g. a first-come,
first-served fixed rate. Booking fees are often non-refundable,
so if the mortgage applicant cancels the mortgage application
before completion the fee will not be reimbursed.
An arrangement fee is typically charged on completion of
the mortgage. Arrangement fees are common on fixed and capped
rate mortgages. Frequently they can be added to the mortgage
hence the fee does not become an ‘out of pocket’
expense.
Legal Fees
It is necessary to have a solicitor or licensed conveyancer
to act on behalf of the mortgage applicant and the lender
in the house purchase or remortgage transaction. The costs
will be greater for house purchase than for remortgage. It
is the role of the solicitor or licensed conveyancer to note
ownership of the property on the title deeds; note the lenders
interest in the property; register with the Land Registry
and conduct searches to identify if there may be factors which
could affect the property e.g. coal mining search to check
for subsidence; check to see if there are some planned major
road developments going through the back garden etc.
Insurance
Lenders will insist that the property is adequately insured,
with a suitable Buildings Insurance Policy, as it represents
security against the mortgage debt. A buildings policy covers
against storm damage, fire, flooding etc and relates to the
fabric of the house or flat etc. It is normal for lenders
to check that any policy arranged is adequate and a fee will
sometimes be levied to check the policy, if the borrowers
take a policy other than the one sold or recommended by the
lender. In addition, borrowers will need a Contents Policy
that provides cover for the contents, such as carpets, TV’s,
furniture etc. Most lenders and insurance companies offer
a combined Buildings and Contents Policy. In the past some
lenders have made their insurance compulsory with some very
competitive mortgage products although this is less common
now.
Another form of insurance common in the mortgage industry
is a Mortgage Payment Protection Plan. This policy is designed
to offer income protection against unemployment, sickness
and redundancy. This form of insurance has become more important
as the Department of Social Security has steadily withdrawn
the benefits available. This form of insurance is not compulsory.
Another form of insurance is Mortgage Indemnity Guarantee.
This is covered above.
Other Charges
There are a whole series of other fees that some lenders apply
in certain circumstances e.g. arrears, late payment, removing
the lenders name from the Title Deeds at the end of the mortgage.
Under the terms of The Mortgage Code of Practice the lender
will, before a mortgage applicant takes a mortgage, provide
a tariff covering the repayment of the mortgage, including
charges and additional interest costs payable in the vent
of arrears and will advise of any other charges for services
before or when the service is provided.
OTHER TERMINOLOGY
Adverse Credit
If a borrower has a history of poor credit usage then this
is described as Adverse Credit. Poor Credit history can include
County Court Judgements(CCJ), Bankruptcy, Mortgage arrears
or any late payments on credit arrangements.
Arrears
This describes the amount the borrower is behind in his mortgage
repayments schedule. The amount is usually measured in either
pounds or months.
Bankrupt
A Corporation, Firm or individual who, via a court proceeding,
is relieved from paying all debts once assets have been surrendered
to an appointed third party designated by the court.
County Court Judgements (CCJ)
An adverse ruling by a County Court against a person who has
not satisfied their debt payments with their creditors. Once
the ruling has taken place it will be recorded against the
persons credit history and will appear every time a credit
search is done for the next seven years. If a person has a
County Court Judgement against them it will have to be satisfied
before they can get a mortgage. They will also find that the
mortgages they can get will be at a higher interest rate.
Default
Failure of an individual to make payments on a mortgage at
the correct time or to not comply with the mortgage companies
requirements.
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