What is a mortgage?
A mortgage is a loan taken out to buy property or land. Most run for 25 years but the term can be shorter or longer.
The loan is ‘secured’ against the value of your home until it’s paid off. If you can’t keep up your repayments the lender can repossess (take back) your home and sell it so they get their money back.
The money you borrow is called the capital and the lender then charges you interest on it till it is repaid. The type of mortgage you are able to apply for will depend on whether you want to repay interest only or interest and capital.
With repayment mortgages you pay the interest and part of the capital off every month. At the end of the term you should manage to have paid it all off and own your home.
With interest-only mortgages, you pay only the interest on the loan and nothing off the capital (the amount you borrowed).
These mortgages are becoming much harder to come by as lenders and regulators are worried about homeowners being left with a huge debt and no way of repaying it.
You are responsible for ensuring that an adequate repayment vehicle is in place so that you have sufficient funds available to repay the loan at the end of the mortgage term.
Failure to maintain an adequate repayment strategy could result in difficulty in repaying the mortgage capital when due. You should review the progress of your savings on a regular basis to ensure enough capital is available when repayment becomes due. The mortgage lender will also check during the term of the mortgage that your repayment strategy remains in place and still has the potential to repay the capital borrowed.
Current Account Mortgage
A current account mortgage reduces the overall amount ‘owed’ when your savings or current account balance are taken into account. The mortgage and current/savings account are normally combined into a single account, effectively acting like one big overdraft.
The lender normally stipulates a minimum amount that needs to be left in the account each month to repay your mortgage over the agreed period. If there is a surplus, then you will pay less interest and pay off your mortgage early. Similarly, if you leave less than the required amount in the account, you will end up paying more for your mortgage.
A current account mortgage also normally has the typical features of a current account such as a cheque book, access via cash machines, direct debits etc.
An offset mortgage sees your earnings paid in, permits overpayment, underpayment, lump sum deposits, payment holidays and all the other features of a flexible mortgage, as well as giving you a cheque book, debit card and the facility to set up direct debits. However, instead of combining all the accounts (current account, mortgage and savings) into one and having a single balance, the different components are kept separate, but work towards reducing the mortgage debt.
The three different accounts are not usually charged at the same rate of interest, the lender charges a set rate of interest on the current account and the savings account OR will ‘sweep’ the marketplace and apply the best rate of interest that can be found for each particular component. The balance in the two accounts is then added together and the total is then offset against the mortgage.
Importantly, because you’re not receiving interest on your current account or savings there is no tax payable.
Often, monthly payments will remain at an equal amount and ‘overpayments’ are used to reduce the overall mortgage debt. This is how you can pay off your mortgage early and save money with an offset mortgage. Some lenders will amend the monthly mortgage payment instead so that you benefit from lower payments but, of course, you won’t be able to pay off your mortgage early.
Type of interest rate
Fixed Interest Rate/ Stepped Fixed
The mortgage has a ‘fixed’ mortgage interest rate, so you pay a set amount each month for the duration of the fixed period. This allows you the security of knowing your exact monthly commitments in the early years of the mortgage, unaffected by changes in the underlying interest rates. If interest rates fall below the fixed rate you will, however, continue to pay the higher, fixed amount.
Variable Interest Rate
The mortgage has a variable interest rate which can rise and fall in line with market conditions. This does involve a degree of uncertainty as your monthly repayments can vary and increase but will allow you to benefit from a fall in interest rates.
Discounted Variable Interest Rate
The mortgage has a discounted variable interest rate. This does involve a degree of uncertainty as your monthly repayments can vary and increase but it allows you to have a discount on your mortgage payments for a specific period and to minimise your monthly payments, it also allows you to benefit from a fall in interest rates.
The mortgage has a tracker interest rate. This means that the interest rate is linked to the [Bank of England Base Rate/LIBOR] and is equivalent to that rate plus a certain percentage. This does mean that your monthly premium may vary and can increase and therefore involves a degree of uncertainty, but this does allow you to benefit from a fall in interest rates.
The mortgage has a capped interest rate which means that the lender has put a “cap” on the maximum interest rate that can be charged. It provides the security of knowing that your monthly repayments will not rise above a certain amount, whilst allowing you to benefit from any drop in the rate below the cap.
Most lenders regard affordability as the most important factor in determining whether an applicant is eligible for a mortgage, and consequently how much can be borrowed.
You will need to prove your income, and show the lender evidence of any outgoings, including debts, household bills and other living costs such as clothing, childcare and travel costs.
There are a number of risk considerations that need to be taken into account. It is important that you are aware of these in relation to your particular circumstances.
- The payments shown in the Key Facts Illustration provided could be considerably different, and higher, if interest rates change.
- In the event that your income falls, you will still have to make your mortgage payments.
- You will still have to pay your mortgage if you lose your job or illness prevents you from working. Think about whether you could do this.
- Your mortgage may have early repayment charges which may result in a penalty if you do not want the mortgage any more.
- Your home may be repossessed if you do not keep up repayments on your mortgage.
- The affordability assessment we have undertaken at this time is based on current interest rates, which may rise in the future, and on your current circumstances, which might change in future;
- The Key Facts Illustration should be read and understood fully.
- If all relevant information has not been disclosed correctly this may result in the mortgage contract becoming invalid.
Help to Buy
Help to Buy is equity loan assistance to home buyers meeting certain requirements, provided by the Homes and Communities Agency. Up to a maximum of 20% of the purchase price is available to the buyer through an equity loan funded by the Government through the scheme. The scheme will run from 1 April 2013 until 31 March 2016 (or earlier if all of the funding is taken up.)
An equity loan from the scheme of £480,000 (80% of the Purchase Price) based on a maximum purchase price of £600,000 is available and is interest free for the first 5 years. After that, a fee of 1.75% of the outstanding amount of the loan, rising annually by the increase (if any) in the Retail Price Index plus 1% is payable.
The Help to Buy scheme will not allow you to transfer/port your loan to another property. The equity loan must be repaid after 25 years or earlier if you sell your home. You must repay the same percentage of the proceeds of the sale, as the initial equity loan (i.e. as you will receive an equity loan for example, for 20% of the purchase price of your home, you must repay 20% of the proceeds of the sale.) The entitlement by the Help to Buy Agency to a share of the future sale proceeds, is secured through a second charge on your home.
Details relating to early repayment of the equity loan and the implications of the property value falling, are provided on the Help to Buy website