All About Mortgages
By Daily Telegraph and Evening Standard finance expert, Steve Ellis
Mortgages come in a wide variety of shapes and sizes to fit everyone's needs. But the choices can prove confusing. It is best to give it some thought before going shopping for the deal to suit you. Many people now choose to use a mortgage broker to help them make their decision.
You have to know how much you want to borrow and how big a deposit you can put down because this may affect your eligibility for the many special deals on offer.
You need to decide how long a period you want your mortgage to last. This could be as little as 5 years or as much as 40, and you can usually extend the term of the mortgage at any time during its ‘life'. However you should note that you will not normally be able to have a mortgage once you retire or for a period that does not finish until after you stop working unless you have some other form of income - from savings or investments, for instance. On average people move or remortgage at least once every seven years.
Mortgage providers base their deals on the percentage of their expert's view of the home's value that you need to borrow. So, for instance, even if you are paying £105,000 for a home, if they reckon it is worth £100,000 and you need to borrow £95,000 (because you only have £10,000 as a deposit) it means you will need to borrow 95 per cent.
You also need to check how much you can borrow. It is important not to borrow more than you can afford to repay - and you should take into account the fact that interest rates could rise.
Many people got into trouble at the end of the 1980s when interest rates were high and they found the monthly payments were more than they could afford. Usually the lenders work on a multiple of your salary, plus a smaller multiple of your partner's earnings. Or it could be a multiple of joint earnings. Typically it will be three times the main income plus the second person's annual salary or 2.75 times joint incomes.
Some lenders will advance higher multiples but you need to be absolutely certain that you will be able to afford the monthly payments comfortably. Some lenders now use an affordability calculation to help decide just what your budget will bear.
Traditionally lenders have only been willing to advance a maximum of 95 per cent of their valuation of a home. However some lenders will go to 100 per cent and a few even have special arrangements to lend up to 125 per cent of the home's value. While this may seem attractive if you have no capital, it means you could be in serious trouble if you were unable to keep up the monthly payments because you would owe more than the home is worth and could be chased for the shortfall.
You also need to be aware of mortgage indemnity insurance (see tie-ins and penalties below).
SPECIAL DEALS
Many of the special deals on mortgages are only available to those who have larger deposits and need to borrow no more than 90 per cent. So the bigger the deposit you have, the better the deal you may be offered. There are also exclusive offers for people who sign up for an on-line mortgage
A decision to grant you a mortgage will also be based on your credit worthiness. Those with bad credit ratings or who are self-employed and do not have properly audited accounts, may be forced to pay a higher rate of interest and will usually be ineligible for the special deals. They need to consider sub-prime or self certification mortgages
.
The choice is between standard variable, fixed, discounted, capped, cash-back or tracker. You also have to watch out for penalties and tie-ins and it is worth checking how interest is calculated. Then you need to choose what sort of repayment method will suit you best and here your choices are between repayment, interest only (which includes such options as endowment, pension or ISA mortgages) or flexible
HOW INTEREST IS CALCULATED
Traditionally mortgage lenders have calculated interest on a yearly basis, at the beginning of the year so, if you have a repayment mortgage, you are effectively paying interest for part of the year on money that you have repaid. It also meant that if you tried to make a lump sum payment, they would often hold on to it until the end of their financial year. As a result, where you are on an annual interest basis and want to make a capital repayment, it is best to do so just before the end of the lender's financial year unless they have a special arrangement - as many now do - to allow for specifically nominated capital repayments to be deducted immediately.
However more recently lenders have started calculating interest on a monthly or even daily basis. This will help to reduce the amount of interest you pay and is a better system if it is available, but generally only if you have a repayment mortgage.
Therefore you may be better off accepting annual interest and a better deal than an inferior deal but linked to daily interest.
STANDARD VARIABLE
Very few people choose a mortgage on this basis preferring to take advantage of the many special deals on offer. However most mortgages will revert to a variable rate at some point in the future. It simply means that the interest charged will be adjusted in line with interest rates generally and the monthly announcement of base rate by the Bank of England.
FIXED
With a fixed rate mortgage, the interest rate is set at a particular level for a period of time. They are ideal for people who are on a tight budget and who want to know exactly how much their mortgage payments will be. You should check whether there are penalties for paying off or switching the mortgage either during the period of the fix or afterwards.
Fixed rate deals can last as little as a few months or for as much as 25 years.
Sometimes they will quote a period of time - say, six months - in other cases there is a set date on which the deal ends.
DISCOUNTED
In this case the interest charged will be at a set amount less than the lender's variable rate mortgage for a given period. This can work out as a good deal at a time when interest rates look likely to fall over a relatively short time-span.
Again check for penalties for paying off or switching the mortgage either during the period of the discount or afterwards.
CAPPED
This may be linked to other deals or combined with a variable rate mortgage. It means that no matter how high interest rates go generally, your mortgage interest rate will not be more than this level for the period quoted. This is ideal at times when there is a chance of rising interest rates.
TRACKER
In this case the level of interest will be pegged at a set amount either above the Bank of England's base rate or below the rate charged by the lender on its variable rate mortgage. However do check if there are any penalties for paying off or switching your mortgage either during the period of the cap or afterwards.
The deal will usually last for the life of the mortgage but could be limited to a set period.
This is ideal for people who are not interested in switching and swapping mortgages or regularly looking around for a good deal.
PENALTIES AND TIE-INS
Some mortgage lenders will insist that you buy certain insurances - such as buildings and/or contents or mortgage payment protection - from them in order to qualify for their special deals. You can usually get these insurances cheaper elsewhere so switch as soon as possible.
If you are borrowing a larger percentage of your home's value - usually more than 90 per cent - you may be asked to pay for mortgage indemnity insurance (MIG) which protects the lender in case you default.
There may also be penalties for switching your mortgage or repaying it during the period of any special deal and a few lenders may impose these penalties for a period after the special deal ends.
REPAYMENT
This is a system for buying your home where your monthly payment includes an amount to cover interest as well as something to repay the original capital you borrowed. It guarantees the mortgage will be repaid by the end of its ‘life'.
If you opt for this style you must realise that your early payments will largely be used to cover the interest and it is not until you are about a third of the way through the mortgage term that you really see the capital debt coming down.
INTEREST ONLY
With this style of mortgage your monthly payments cover only the interest on the money you originally borrowed. However you have to make arrangements to insure the original capital borrowed can be repaid at the end of the mortgage term. Traditionally the method has been through a ‘with profits' endowment. These are now under a cloud, though they have proved successful for people who have used them in the past.
CASH BACK
These deals are usually linked to standard variable rate mortgages. They offer a percentage of the money you borrow back to you in cash. Ideal for those setting up home for the first time with little money to spare.
FLEXIBLE
These are a fairly recent innovation and the exact terms and conditions vary considerably between lenders. At their best they allow you to make larger payments from time to time with no penalties, underpay or take payment holidays, re-borrow any overpayment you have made and have interest calculated daily.
Some versions link your mortgage to a current account. This may mean that your mortgage is literally shown as a giant overdraft but with others the mortgage is kept in a separate account but linked to your current account.
The benefit of having the two linked in any way is that all the money you have in your current account between payday and when you withdraw it or use it to pay bills, is effectively offsetting your mortgage debt and reducing the interest you are being charged. It makes good use of your regular income and can help you to repay your mortgage much quicker than originally planned.
Generally speaking you can have either a repayment or interest only arrangement with a flexible mortgage. But to be on the safe side the lender will tell you if you fall behind in the schedule of repayment where you have a repayment mortgage. That is to ensure you are warned if there is a chance of not repaying the debt within the allotted time.
SUB PRIME
These are mortgages aimed at people whose credit record is less than perfect or who do not come up to the financial standards imposed by the traditional lenders.
This will include people who run their own business, but do not have properly audited accounts. Generally you will be expected to pay a higher rate of interest and, though ‘deals' may be available, will often be expected to sign up to a variable rate mortgage. However check first whether you do qualify for an ordinary mortgage.
Check out these sites:
www.kmc.co.uk
www.paragon-mortgages.co.uk
and most mortgage brokers
MORTGAGE BROKERS
Although it is possible to shop around for yourself, the wide variety of mortgages and deals makes it easier to use a mortgage broker - and they may have exclusive special deals. There may be a broker's fee and sometimes there will be an arrangement fee charged by the lender even if you apply to them direct, but it may be able to offset this against commission earned on your mortgage deal or associated insurance products.
Check out these sites:
www.charcolonline.co.uk
www.moneysupermarket.co.uk
www.netmortgage.co.uk
ON LINE MORTGAGES
Most people are dubious about sorting out something as complicated as a mortgage online without seeing someone face-to-face. However if you are willing to handle everything via the internet and post you could find additional value deals.
Check these sites:
www.if.com
www.woolwich.co.uk
www.coventrybuildingsociety.co.uk
www.firstactive.co.uk
www.virginmoney.com
Feb 2001
Mortgages come in a wide variety of shapes and sizes to fit everyone's needs. But the choices can prove confusing. It is best to give it some thought before going shopping for the deal to suit you. Many people now choose to use a mortgage broker to help them make their decision.
You have to know how much you want to borrow and how big a deposit you can put down because this may affect your eligibility for the many special deals on offer.
You need to decide how long a period you want your mortgage to last. This could be as little as 5 years or as much as 40, and you can usually extend the term of the mortgage at any time during its ‘life'. However you should note that you will not normally be able to have a mortgage once you retire or for a period that does not finish until after you stop working unless you have some other form of income - from savings or investments, for instance. On average people move or remortgage at least once every seven years.
Mortgage providers base their deals on the percentage of their expert's view of the home's value that you need to borrow. So, for instance, even if you are paying £105,000 for a home, if they reckon it is worth £100,000 and you need to borrow £95,000 (because you only have £10,000 as a deposit) it means you will need to borrow 95 per cent.
You also need to check how much you can borrow. It is important not to borrow more than you can afford to repay - and you should take into account the fact that interest rates could rise.
Many people got into trouble at the end of the 1980s when interest rates were high and they found the monthly payments were more than they could afford. Usually the lenders work on a multiple of your salary, plus a smaller multiple of your partner's earnings. Or it could be a multiple of joint earnings. Typically it will be three times the main income plus the second person's annual salary or 2.75 times joint incomes.
Some lenders will advance higher multiples but you need to be absolutely certain that you will be able to afford the monthly payments comfortably. Some lenders now use an affordability calculation to help decide just what your budget will bear.
Traditionally lenders have only been willing to advance a maximum of 95 per cent of their valuation of a home. However some lenders will go to 100 per cent and a few even have special arrangements to lend up to 125 per cent of the home's value. While this may seem attractive if you have no capital, it means you could be in serious trouble if you were unable to keep up the monthly payments because you would owe more than the home is worth and could be chased for the shortfall.
You also need to be aware of mortgage indemnity insurance (see tie-ins and penalties below).
SPECIAL DEALS
Many of the special deals on mortgages are only available to those who have larger deposits and need to borrow no more than 90 per cent. So the bigger the deposit you have, the better the deal you may be offered. There are also exclusive offers for people who sign up for an on-line mortgage
A decision to grant you a mortgage will also be based on your credit worthiness. Those with bad credit ratings or who are self-employed and do not have properly audited accounts, may be forced to pay a higher rate of interest and will usually be ineligible for the special deals. They need to consider sub-prime or self certification mortgages
.
The choice is between standard variable, fixed, discounted, capped, cash-back or tracker. You also have to watch out for penalties and tie-ins and it is worth checking how interest is calculated. Then you need to choose what sort of repayment method will suit you best and here your choices are between repayment, interest only (which includes such options as endowment, pension or ISA mortgages) or flexible
HOW INTEREST IS CALCULATED
Traditionally mortgage lenders have calculated interest on a yearly basis, at the beginning of the year so, if you have a repayment mortgage, you are effectively paying interest for part of the year on money that you have repaid. It also meant that if you tried to make a lump sum payment, they would often hold on to it until the end of their financial year. As a result, where you are on an annual interest basis and want to make a capital repayment, it is best to do so just before the end of the lender's financial year unless they have a special arrangement - as many now do - to allow for specifically nominated capital repayments to be deducted immediately.
However more recently lenders have started calculating interest on a monthly or even daily basis. This will help to reduce the amount of interest you pay and is a better system if it is available, but generally only if you have a repayment mortgage.
Therefore you may be better off accepting annual interest and a better deal than an inferior deal but linked to daily interest.
STANDARD VARIABLE
Very few people choose a mortgage on this basis preferring to take advantage of the many special deals on offer. However most mortgages will revert to a variable rate at some point in the future. It simply means that the interest charged will be adjusted in line with interest rates generally and the monthly announcement of base rate by the Bank of England.
FIXED
With a fixed rate mortgage, the interest rate is set at a particular level for a period of time. They are ideal for people who are on a tight budget and who want to know exactly how much their mortgage payments will be. You should check whether there are penalties for paying off or switching the mortgage either during the period of the fix or afterwards.
Fixed rate deals can last as little as a few months or for as much as 25 years.
Sometimes they will quote a period of time - say, six months - in other cases there is a set date on which the deal ends.
DISCOUNTED
In this case the interest charged will be at a set amount less than the lender's variable rate mortgage for a given period. This can work out as a good deal at a time when interest rates look likely to fall over a relatively short time-span.
Again check for penalties for paying off or switching the mortgage either during the period of the discount or afterwards.
CAPPED
This may be linked to other deals or combined with a variable rate mortgage. It means that no matter how high interest rates go generally, your mortgage interest rate will not be more than this level for the period quoted. This is ideal at times when there is a chance of rising interest rates.
TRACKER
In this case the level of interest will be pegged at a set amount either above the Bank of England's base rate or below the rate charged by the lender on its variable rate mortgage. However do check if there are any penalties for paying off or switching your mortgage either during the period of the cap or afterwards.
The deal will usually last for the life of the mortgage but could be limited to a set period.
This is ideal for people who are not interested in switching and swapping mortgages or regularly looking around for a good deal.
PENALTIES AND TIE-INS
Some mortgage lenders will insist that you buy certain insurances - such as buildings and/or contents or mortgage payment protection - from them in order to qualify for their special deals. You can usually get these insurances cheaper elsewhere so switch as soon as possible.
If you are borrowing a larger percentage of your home's value - usually more than 90 per cent - you may be asked to pay for mortgage indemnity insurance (MIG) which protects the lender in case you default.
There may also be penalties for switching your mortgage or repaying it during the period of any special deal and a few lenders may impose these penalties for a period after the special deal ends.
REPAYMENT
This is a system for buying your home where your monthly payment includes an amount to cover interest as well as something to repay the original capital you borrowed. It guarantees the mortgage will be repaid by the end of its ‘life'.
If you opt for this style you must realise that your early payments will largely be used to cover the interest and it is not until you are about a third of the way through the mortgage term that you really see the capital debt coming down.
INTEREST ONLY
With this style of mortgage your monthly payments cover only the interest on the money you originally borrowed. However you have to make arrangements to insure the original capital borrowed can be repaid at the end of the mortgage term. Traditionally the method has been through a ‘with profits' endowment. These are now under a cloud, though they have proved successful for people who have used them in the past.
CASH BACK
These deals are usually linked to standard variable rate mortgages. They offer a percentage of the money you borrow back to you in cash. Ideal for those setting up home for the first time with little money to spare.
FLEXIBLE
These are a fairly recent innovation and the exact terms and conditions vary considerably between lenders. At their best they allow you to make larger payments from time to time with no penalties, underpay or take payment holidays, re-borrow any overpayment you have made and have interest calculated daily.
Some versions link your mortgage to a current account. This may mean that your mortgage is literally shown as a giant overdraft but with others the mortgage is kept in a separate account but linked to your current account.
The benefit of having the two linked in any way is that all the money you have in your current account between payday and when you withdraw it or use it to pay bills, is effectively offsetting your mortgage debt and reducing the interest you are being charged. It makes good use of your regular income and can help you to repay your mortgage much quicker than originally planned.
Generally speaking you can have either a repayment or interest only arrangement with a flexible mortgage. But to be on the safe side the lender will tell you if you fall behind in the schedule of repayment where you have a repayment mortgage. That is to ensure you are warned if there is a chance of not repaying the debt within the allotted time.
SUB PRIME
These are mortgages aimed at people whose credit record is less than perfect or who do not come up to the financial standards imposed by the traditional lenders.
This will include people who run their own business, but do not have properly audited accounts. Generally you will be expected to pay a higher rate of interest and, though ‘deals' may be available, will often be expected to sign up to a variable rate mortgage. However check first whether you do qualify for an ordinary mortgage.
Check out these sites:
www.kmc.co.uk
www.paragon-mortgages.co.uk
and most mortgage brokers
MORTGAGE BROKERS
Although it is possible to shop around for yourself, the wide variety of mortgages and deals makes it easier to use a mortgage broker - and they may have exclusive special deals. There may be a broker's fee and sometimes there will be an arrangement fee charged by the lender even if you apply to them direct, but it may be able to offset this against commission earned on your mortgage deal or associated insurance products.
Check out these sites:
www.charcolonline.co.uk
www.moneysupermarket.co.uk
www.netmortgage.co.uk
ON LINE MORTGAGES
Most people are dubious about sorting out something as complicated as a mortgage online without seeing someone face-to-face. However if you are willing to handle everything via the internet and post you could find additional value deals.
Check these sites:
www.if.com
www.woolwich.co.uk
www.coventrybuildingsociety.co.uk
www.firstactive.co.uk
www.virginmoney.com
Feb 2001
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