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Types
of Mortgages
Variable
Rate
Fixed Rate
Discounted Rate
Stepped Rate
Capped Rate Mortgages
Cashback Mortgages
Base Rate Tracker Mortgages
Flexible Rate
Current Account
Jargon
Explained
Types
Of Mortgages
Variable
Rate
The
interest rate changes when the Lender changes its lending rate.
Variable Rate Mortgages are often calculated annually and means
any changes in mortgage interest rate are not reflected in your
repayments until the Lenders recalculation date. Variable rate mortgages
can be the Lender's Standard Variable Rate or some other variable
rate determined by the Lender according to the particular product.
A Variable Rate mortgage allows you to take advantage of any falls
in interest rates but any saving here must be balanced against the
risk of any future rate rises
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Fixed
Rate Mortgages
The
Interest rate is fixed for a specific period which can be from a
few months to the full mortgage term. Repayments are not affected
by fluctuations in the prevailing variable rate, so, if the variable
rate drops below the fixed rate your repayments will remain the
same. This type of mortgage gives you the security of knowing exactly
what your repayments will be for the life of the mortgage. After
the mortgage term the interest rate will normally revert to the
Lender's Standard Variable Rate. There may be financial penalties
if you decide to change your mortgage during the fixed rate period
or even for a while after the scheme has ended.
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Discounted
Rate Mortgages
The
Lender gives a percentage discount from their Standard Variable
Rate for a period of time which can be from a few months to the
full mortgage term. This type of interest rate is normally offered
to first time buyers or people with high levels of equity. Generally,
borrowers with a larger deposit will be offered a greater discount.
Discounts help soften the financial blow of moving house but mean
that after the discount period ends, repayments will rise sharply.
Your repayments will fluctuate with interest rate changes but will
remain at the set level below the prevailing rate for the mortgage
term. There may be financial penalties if you decide to change your
mortgage during the discount period or even for a while after the
scheme has ended.
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Stepped
Rate Mortgages
These come in various forms. They can be discounted
for a number of years with the discount rate reducing during the
scheme period, or even short-term fixed rates followed by a discounted
period. Some schemes even offer a combination with a cashback to
help with moving costs. Many schemes are only available on an exclusive
basis.
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Capped
Rate Mortgages
The maximum rate of interest you pay is fixed for
a certain period of time. If the interest rate rises above the set
capped rate your repayments will remain at the capped level. If
they drop below the capped rate your repayments will also fall in
line with the lower interest rate. This type of interest rate gives
a level of security should the base rate rise but also takes advantage
of lower interest rates should they fall. After the mortgage term
the interest rate will will normally revert to the Lender's Standard
variable Rate. There may be financial penalties should you decide
to change your mortgage during the capped rate period or even for
a while after the scheme has ended.
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Cashback
Mortgages
With a Cashback mortgage, the Lender can offer a single
cash payment once the purchase or remortgage is completed. This
can amount to several thousands of pounds which can be us to help
towards moving costs, home improvements or new furniture. Cashbacks
can also be Staged over a number of years or even combined with
discounted or fixed rate mortgages. The Lender will normally require
you to pay back the Cashback if you decide to move your mortgage
within an agreed period of time.
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Base
Rate Tracker Mortgages
The newest type of mortgage. The interest rate is variable
but set at a premium (above) the bank of England Base Rate for a
period or even the term of the mortgage. The interest rate fluctuates
with the bank Base Rate fluctuations and usually change immediately
a bank Base Rate change is announced. The biggest advantage of this
type of mortgage is that usually there is little or no redemption
penalty. This also means that interest can be saved on the mortgage
without penalty, by overpayments, and these savings can be quite
significant.
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Flexible
Mortgages
This type of mortgage is relatively new. The interest
rate can be discounted, fixed, capped or variable and has the big
advantage that it is calculated daily or monthly instead of annually.
This means that the capital repayment of the loan will affect the
interest charged on the outstanding balance immediately. By making
regular overpayments, interest saved on the mortgage over the term
can be quite significant. Further, most lenders will allow funds
to be drawn from the account up to the original mortgage balance
or even allow repayment holidays.
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Current
Account Mortgages
A combination of a Flexible mortgage and a current account.
The Lender sets a maximum borrowing limit on the account which included
the balance of the mortgage. Provided the borrower remains on course
to repay the mortgage before they retire they can increase their
borrowings by withdrawing money from the current account. A cheque
book is issued to facilitate this and money can be withdrawn for
any purpose as long as the maximum limit is not exceeded.
Lenders
normally require borrowers to pay their salary into the account
each month and calculate interest on a daily basis. Any money paid
into the account is set against the mortgage and any which is left
over at the end of the month reduces the outstanding balance on
the account. Providing the outstanding balance is reduced regularly,
this would have the same effect as making an overpayment on an ordinary
Flexible Mortgage therefore potentially saving thousands of pounds
over the life of the mortgage
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Jargon
Explained
APR
= Annual Percentage Rate. You will see this quoted on many different
financial products. It is a reasonable attempt to show an "equivalant"
rate of interest "per year", as an alternative to the
total charges that apply. It should allow you to compare competing
products, but it is not completely reliable since some lenders calculate
it differently. It should tale into account all charges: up-front
and on-going.
Capital
& Interest Mortgage (same as a Repayment Mortgage)
Your monthly payments are made up of two components. One component
will partly reduce the amount you have borrowed; the other part
will pay off the total interest accrued in the previous month. Therefore
the amount you owe reduces increment by increment.
Conveyancing
The legalities of transferring a property from thold owner to the
new one. You can do this yourself (there are plenty of books on
the subject), but normally you would use a solicitor.
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Endowment
Policy This is a life assurance policy (i.e. paid into monthly
and steadily increasing in value, enhanced by bonuses of various
designs). A lender will accept this as the means of paying off an
Interest Only mortgage, in one go at the end of the life
of the mortgage (they will be designed to mature at the same time).
If the economy does well (i.e. stocks & shares) then an endowment
policy might end up being worth more then the amount of the mortgage.
After you've paid it off you can pocket the difference. However
if the economy does badly such a policy might not accumulate to
the level of the mortgage, and you will have to match the shortfall
some other way. There is no means of being certain how the economy
will fare, when the period of a policy extends to 25 years or so.
Always take advice, at regular intervals.
A very important aspect of Endowment policies is they include Level
Term Assurance.
Freehold
This is when the property and the land it rest on are sold together.
It is "free" of any other ownership interests.
Interest
Only You make monthly payments to the lender, thereby continually
paying off the interest accruing on the mortgage. The amount repayable
at any time throughout the period of the mortgage should remain
the same (perhaps with minor fluctuations).
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ISA
= Individual Savings Account. You can choose different types of
ISA. They are a good way of saving as they are tax free. The money
you put in is used to buy shares or some other long term investment.
A lender may allow you to use this as security for your mortgage.
Leasehold
Where the land on which the property stands is owned separately
(by someone else). This typically applies to flats, but also to
other property. The home owner is therefore obliged to pay rent,
known as ground rent, usually a tiny fee every year. The lease will
state the number of years. A mortgage lender will insist it is a
long period, perhaps 60 years.
Level
Term Assurance (A feaure of Endowment policies) If the
policy holder dies, then the next of kin does not inherit the onus
of the mortgage repayments - on the contrary the policy guarantees
to settle the mortgage outright, there and then. Instead the next
of kin stands to inherit a fully paid-off house.
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LTV
= Loan to Value. This is the ratio (expressed as a %) of the amount
borrowed to the value of the property. Therefore, for a £75,000
mortgage on a £100,000 property the LTV is 75%.
MGI
= MIG = Mortgage Guarantee Insurance/Mortgage Indemnity Insurance.
The borrower is usually required to pay for this special insurance
policy (though the lender will actually make the arrangements).
This policy protects the Lender in case things go wrong and they
can't get their money back. For example if a homeowner fails to
pay them back: while the Lender might reposses the property they
might then discover it is unsellable! Usually the cost of the policy
is added onto the mortgage so you don't have to shell out for it
with cash.
Mortgage
A common type of loan (typically more than £25,000) enabling
you to buy a property. The property can be confiscated by the Lender
should you fail to keep up with regular repayments (for some Lenders
this is truly a last resort, for others it is not. You may wish
to ask your Advisor about this).
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Negative
Equity In an economic slump property values can decrease. This
creates "negative equity" i.e. where the value of your
home drops below the amount you borrowed to buy it. If, one year
after borrowing £80,000, your house is valued at £75,000,
then it has a negative equity of £10,000.
PEP
= Personal Equity Plan. These are no longer available, replaced
by ISAs.
Personal
Pension This is a savings plan, into which you make monthly
payments, usually until you retire. It will increase in value, hopefully
enhanced by the success of the Economy (stocks & shares). You
cannot draw money out until a specified age (usually 55). Then you
may be able to withdraw a portion of it as a lump sum. After this
you may take a regular retirement income, the amount depending on
how well it accumulated over the years. You may be allowed to use
a Personal Pension as security for a mortgage, in conjunction with
a life assurance policy.
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Repayment
Mortgage = Capital & Interest Mortgage (see above)
Searches
Your solicitor will arrange for a search amongst public historical
records to determine if there are any mines under the property or
restriction on its use. A fee is normally charged to you. Searches
do not necessarily reveal all. Plans, for example for a club or
motorway near you, may not show up. It is wise to ask your Estate
Agent and locals/ potential neighbours.
Stamp
Duty This is a tax, which normally your Solicitor will pay for
you, charged when the ownership of your new home is transferred
to you. The amount is a small % of the value of the property. The
cost of this may sometimes be added to your mortgage. It does not
apply to properties under £60,000.
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Survey
= Valuation. The Lender will employ someone to make a valuation
of the property to ensure that the amount you wish to borrow is
appropriate, and that the property is suitable. It does not determine
the quality of the property. A fee is normally charged to you.
Structural
Survey This is an optional survey, much more expensive than
a standard Survey. You would arrange this yourself, by employing
a Structural Surveyor, who will make a report about the quality
of the property, revealing any detectable flaws. If the surveyor
is negligent and a fault arises causing serious concerns then you
may be able to make a claim againt the surveyor.
Valuation
= Survey.
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Useful
reading
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Useful Links
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'Buying
a House'
'Buying & Selling'
and many other books
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