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Your guide to mortgages - table of contents
Types of mortgage repayment |
What fees could I pay? |
What choice of deals can I have? |
What type of borrower am I? |
Mortgage buyers notes
How should I repay my mortgage debt?
Capital and Interest (repayment) Mortgage
The mortgage is repaid over an agreed period, typically 25 years, although lenders will consider as little as 5 years and up to 40 years in some cases. Your single monthly payment covers interest on the mortgage and part of the capital. During the early years, a large proportion of each monthly payment is interest, in later years more of the capital is paid off. This type of mortgage is simple and guarantees to repay the mortgage at the end of the term providing all payments have been met. It provides the benefit of a reducing mortgage and therefore the build up of equity and is best suited to people who wish to take no risk at all with the repayment of the mortgage.
Interest only
The mortgage is not repaid back to the lender until the end of the mortgage term when the full amount borrowed is due, again typically 25 years. Instead you only pay the interest on the mortgage each month and the debt will not reduce. Whilst the monthly payment for the mortgage will be cheaper, you need to make financial provision to pay the debt back at the end of the term by paying into an investment vehicle each month such as an ISA or an endowment plan and keep up the payments for the full term. It is your responsibility to maintain the payments into the investment plan and you should seek the advice of a suitably qualified investment adviser. This type of mortgage is best suited to those who are happy with an investment risk and do not want the guarantee that their mortgage will be repaid at the end of the term.
What fees could I pay?
Stamp Duty
- This is a tax payable on the purchase of a property by the purchaser. The following rates are those applicable on the purchase of a residential property, not designated as being in a disadvantaged area. You should always ask your solicitor to make enquiries and to confirm the level of stamp duty payable.
Between £125,000 and £250,000 - 1%
Between £250,000 and £500,000 - 3%
Over £500,000 - 4%
Stamp duty is not normally charged on a re-mortgage, this is moving your mortgage from one lender to another or one deal to another with the same lender. There are, however exceptional cases when additional stamp duty will be charged when borrowing considerable sums of money, adding someone to the mortgage. You should check with your solicitor first.
Lenders Arrangement / Booking Fee
a fee you pay to your lender in return for providing you with a mortgage. This can be paid on either application or completion, these fees usually apply when you take out a fixed rate or cash-back mortgage. Again, this size of this fee varies from mortgage to mortgage. Some lenders do not charge any arrangement fees on certain products. Some fees may not be refundable if you change your mind.
Valuation Fee
A fee paid by a borrower to cover the cost of the lender checking that the property is suitable security for the mortgage. Some lenders do not charge valuation fees with certain products and others may refund the cost of the valuation to you on completion. The amount of this fee is dependent upon the market value of the property and varies from lender to lender. As a home buyer you will be offered three levels of survey from a basic report as described above through to a full structural survey providing a much more thorough report and therefore more expensive. We recommend you buy the report you can best afford and do not see this as a way to save money.
HLC Higher lending charge.
This is insurance that covers the lender in case your property is repossessed and the lender cannot get back their money. Although this insurance protects the lender, you have to foot the bill. Some lenders will add the HLC on completion of the mortgage, whilst others will deduct the relevant amount at completion. This usually applies to high percentage mortgages of over 75% although many lenders do not charge the amount until 90% borrowing is exceeded. Some lenders will credit the cost as part of an incentive within their products.
Legal Fees
You will need to engage the services of a solicitor to carry out a search, checking that the person selling the property has the right to sell, whether there are any outstanding legal claims on the property, and so on. Solicitors and conveyancers have different charges for the services they provide and depending on in which part of the country they are based. In addition, the Local Authorities in different parts of the country charge different rates for administering these searches. You should allow at least £400 if you are re-mortgaging and £650 if you are buying in England, and considerably more in Scotland. Some lenders offer a free re-mortgage legal service or offer small cash-backs to cover the costs providing you use their choice.
Professional fee (broker fee)
If you choose to pay an hourly rate or a set fee for the work your broker does, it will be classed as a broker fee and can be paid upfront, on completion or a combination of the two. In return the broker will refund any commissions generated form the placing of your mortgage or any insurance or investment associated with it.
Certain work may attract broker fees, for example some lenders do not pay commissions and the brokers business still needs to generate cash to continue providing advice, or some type of work or applications may prove to be more complicated than others and again attract a fee expressed as a set amount or an hourly rate. Any such work should always be discussed and agreed prior to the work being carried out.
What choice of deals can I have ?
Discounted Rate Mortgages
The lender gives a percentage discount from their Standard Variable Rate for a length of time, which can be from a few months to the full mortgage term. Generally, borrowers with a larger deposit could be offered a greater discount. Discounts can help soften the financial blow of moving house or simply a good way to take advantage of cheaper monthly payments, but they also 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 deal term. There may be early repayment charges if you decide to change your mortgage during the discount period or even for a while after the scheme has ended.
Stepped Rate Mortgages (low start)
Stepped Rate mortgages are normally 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 cash-back to help with moving costs. These are designed for people who want the maximum benefit immediately, say the first 6-12 months and understand they are likely to be tied in with early repayment charges after the mortgage rates revert to a standard variable rate. The initial rate is always a headline grabber but they do not always offer good value for money over the term of the deal.
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 deal term the interest rate will normally revert to the lender's standard variable rate. There may be early repayment charges if you decide to change your mortgage during the capped rate period or even for a while after the scheme has ended. Most lenders apply a collar which means they can set a limit on the lowest rate you pay therefore restricting the benefits if rates continue to fall. Not many lenders offer this type of mortgage and therefore may not be as competitive as other type of deals.
Cash back Mortgages
With a Cash back mortgage, the lender offers a single cash payment once the purchase or re-mortgage is completed, typically 5-10% of the mortgage mortgage. This can amount to several thousands of pounds, which can be used to help towards moving costs, to pay for home improvements or buy new furniture. Cash backs 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 cash back if you decide to move your mortgage within an agreed period of time. For example it is common for a 10% cash back to have early repayment charges for 10 years.
Base Rate Tracker Mortgages
The interest rate is variable but set at a low premium (above) the Bank of England Base Rate for a period or even the term of the mortgage. The interest rate fluctuates with bank base rate fluctuations and usually changes immediately following a bank base rate change. The biggest advantage of this type of mortgage is that, usually there is little or no early repayment charge (ERC). This also means that interest can be saved on the mortgage without penalty, by overpayments, and these savings can be quite significant. These generally represent excellent long term value for money as the lender can offer guarantees as to the margin of profit they make.
Flexible Mortgages
The interest rate can be discounted, fixed, capped or variable, but has the big advantage that it is calculated daily or monthly instead of annually. This means that any capital repayment of the mortgage will affect the interest charged on the outstanding balance immediately. By making regular overpayments, the interest saved on the mortgage over the term can be quite significant. Also, most lenders will allow funds to be drawn from the account up to the original mortgage balance or even allow payment holidays. If you are looking for overpayments only you may find most some lenders offer up to 10% overpayments per year. These are not flexible mortgages and should not be confused with them.
Current Account Mortgages
A current account mortgage is a combination of a flexible mortgage and a current account (and other savings accounts if required). The lender sets a maximum borrowing limit on the account, which includes the balance of the mortgage known as the reserve. As long as 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 provided the maximum limit is not exceeded. Lenders normally require borrowers to pay their salary into the current 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. Discipline is required as the temptation is to borrow and always retain a high level of debt throughout your working life.
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 term of the deal and is ideally suited for those borrowing close to their budget or who believe rates will rise in the future. After the deal 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.
(standard) Variable Rate Mortgages
The interest rate changes when the lender changes their lending rate. Variable rate mortgages are often recalculated annually. This means that any changes to mortgage interest rates are not reflected in your monthly repayments until the lender's 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 future interest rate rises. Lenders can choose to pass on all or part of an increase / decrease in bank base rate and overtime you may find you are paying more than you should be.
What type of borrower am I ?
First Time Buyers
Special schemes are often available for First Time Buyers. Lenders usually have special fixed or discounted rates to enable new borrowers to budget easier and reduce their financial burdens in the early years. Typically, lenders will also allow you to borrow a higher percentage of the purchase price of the property, know as mortgage to value, reducing the need for a large deposit. Some schemes are also available where no deposit is required at all or cash backs to help with the costs associated with buying your own home.
Up to 125% Mortgages
There are some lenders who have special schemes available which will allow you to borrow the full value of the property or even more. Typically, lenders would require you to have a good credit history and be able to prove a steady income. In order to insure their risk, the lender would normally require you to pay a Higher lending charge (HLC) which can often be added to the mortgage. This type of deal is not always competitive and should not be seen as an opportunity to hold cash back Any fees added to the mortgage attract interest charges and you need to careful about negative equity if house prices fall.
Adverse Credit
If you have a bad credit history because you have suffered mortgage or mortgage arrears in the past or have had any for none payment of debts, you may still be able to get a mortgage. Most lenders offer specific mortgage products which cater for varying degrees of adverse credit. Some lenders even specialise in this area, but be aware that interest rates will normally be higher than those for standard mortgage products. Rates will reflect your personal circumstances, taking into account the severity of the problems and how long ago they occurred. A good broker will obtain the best terms for you and just because one lender tells you NO you should not be put off.
Self Certification
If it is difficult or extremely inconvenient for you to provide proof of earnings, because you are self-employed or your income comes from a variety of sources, you can choose to self-certify your income. This involves signing a declaration which states the sources and amounts of your income. The lender does not require proof of this income and will not ask for any references. Lenders can charge you higher rates than average and offer you a more limited range of mortgages if you choose to self-certify your income, so it's not a good idea to self-certify just to avoid some paperwork. Lenders always reserve the right to verify income and this should not be seen as a method of inflating your earnings to obtain a mortgage you otherwise may not get.
Buy-To-Let
This is a mortgage designed for people who wish to purchase a property as an investment and rent it out to others. The Lender would normally require you to put down a deposit of at least 15%. Some lenders will allow you to build a portfolio of investment properties. The ability to repay this type of mortgage is often based on the projected rental income of typically 125% from the property as opposed to the personal income of the borrowers. Be aware that because this is classed as an investment, you could be liable to pay income tax on the rental income from the property and also pay Capital Gains tax on the sale of the property. This is a form of investment and there is no guarantee you will make money. Property prices can decrease as well as increase and unknown running repairs could leave you out of pocket.
Right-To-Buy
A tenant in a council owned property may be able to purchase the property at a discount, depending on the length of their tenancy. Many high street and also specialist lenders have designed mortgages to meet the needs of these borrowers. There are likely to be steep penalties to the local authority if you sell within the first three years (to pay back in full or pre agreed amount of your discount). Many lenders will not allow you to re-mortgage to them during this three year period.
Shared Ownership
This is a scheme operated by a housing association where a person owns part of the property and pays a mortgage on this, while the housing association owns the rest of the property and the person pays rent on this. You are normally expected to buy 50% of the home initially. Shared ownership can be a good way to get into the property market, as the total monthly payments are often less than they would be for an equivalent mortgage on the whole property. You should check with your broker or lender to see if the housing association is recognised. Please remember, if property prices increase only a percentage is yours and if house prices continue to grow rapidly the remaining purchase may be out of your financial reach.
Other useful terms to be aware of when applying for a mortgage
What is a credit search ?
This is a check that your lender will carry out to determine whether you have any County Court Judgements or have a record of not paying mortgages, credit cards and bills and how you conduct your finances in general. Lenders share this information through agencies such as Experian or Equifax and may share your information either now or later if required by law to do so. Too many credit searches in a short period of time may weaken your chances of credit so be careful when speaking to lenders and brokers before agreeing a search may be carried out.