Compare Best Fixed, Variable Mortgages, Tracker, Capped Mortgages, Offset, Discounted Mortgages

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TYPES OF MORTGAGE

Repayment

You pay off the capital borrowed on your mortgage by the end of the mortgage term, e.g. 25 years. Monthly repayments consist of capital and interest. The outstanding capital balance decreases throughout the term.

Why a repayment mortgage?

• At the end of the term the mortgage is paid off so long as you keep up the monthly repayments.
• There is no ‘risk’ element involved as with an interest only mortgage..

Interest only

With each mortgage payment the borrower pays interest to the lender. The borrower takes out an alternative ‘repayment vehicle’ such as an ISA, pension plan or endowment policy. The monthly repayments do not repay any of the outstanding capital balance. Payments have to be maintained into the repayment vehicle; otherwise it will not be possible to pay off the mortgage at the end of the term.

Why an interest only mortgage?

• The proceeds of the repayment vehicle ( ISA, endowment or pension, for example ) may exceed the amount required to repay the mortgage andthis is received as a cash lump sum by the borrower.
• Monthly mortgage payments may need to be low in the early days to aid cash flow and affordability for the borrower.

MORTGAGE DEALS

Whether a repayment or an interest only mortgage, you will need to consider several mortgage rate options.

Fixed Rate Mortgage

The amount you repay the lender each month can be at a fixed interest rate for a specified period of time, regardless of changes to 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).

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 borrower’s payments will increase, if rates rise - so there is no certainty in budgeting. However, should rates decrease, the borrower will benefit from lower payments.

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.

Tracker Rate Mortgage

This is a variable rate that is linked to the movement of a prevailing rate such as The Bank of England Base Rate or London Interbank Offered Rate (LIBOR). The pay rate will be a set percentage amount above the relevant base rate for a specified period of time. For example if the tracker mortgage is set at 1% above The Bank of England Base Rate for 5 years and the base rate is currently 4.75%, the pay rate will work out at 5.75%.
As their name suggests the rates of tracker mortgages change to follow ‘track’ changes in the base rate to which they are linked. So if the base rate increases by 1%, the pay rate will increase accordingly. Also if the base rate is reduced, borrowers will benefit from a lower pay rate.

OTHER MORTGAGE FEATURES

Flexible Mortgages

Flexible mortgages allow the borrower to make extra repayments, either monthly or lump sums. 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. This 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. Overpaying the mortgage on a monthly or regular basis will reduce your mortgage term.

Current account mortgages

This is a flexible mortgage linked to a current or savings account held with the lender. These mortgages take the benefits of the flexible mortgage and use the funds held in the current and/or savings account to offset the interest e.g. on a particular day a borrower has a mortgage balance of £100,000 and has £2,000 held in their current and/or savings account. The customer is charged mortgage interest on £98,000 i.e. the mortgage balance minus the positive balance held in the current and/or savings account.

Cashback Deals

These are offered as an inducement where a switch of mortgages from one lender to another ( a remortgage ) is accompanied by a cash lump sum to the borrower as a reward for switching. They used to be based on a percentage of the amount borrowed in more generous times but usually consist of a flat amount these days of only a few hundred, rather than thousand, pounds.

Free Legals

Usually offered with remortgages. To take advantage of the offer the mortgage applicant will normally need to use a firm of solicitors or licensed 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 of valuation 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.

Fees and charges

Early Repayment Charge (sometimes referred to as a ‘redemption penalty’)

This is a charge for early redemption, compensating the lender for the loss of business, usually expressed as a percentage of the amount borrowed if the capital balance is paid off during the early redemption period. Some more attractive deals have a redemption overhang once the benefit period has ended where an ERP will still apply, e.g. a two year fixed rate period may have a 5 year ERP therefore a three year overhang after the initial benefit period has finished!

Higher Lending Charge (previously referred to as a Mortgage Indemnity Charge)

The lender does not want to lose money so takes out insurance to cover loans with a high loan to value, usually on loans above 75% loan to value. This charge or indemnity has to be paid by you the borrower !

Valuation Fee

The amount charged by the lender to protect its interests by having the property valued by a professional person to assess the adequacy of security.

Booking Fee and Arrangement Fee

A booking fee is charged up front to book the ‘deal’ required, e.g. a two year fixed rate.
An arrangement fee is the lenders administrative fee for arranging the deal on the buyer’s behalf and can usually be added to the loan..

Legal Fees

A solicitor or licensed conveyancer acts on behalf of the borrower and the lender in the house purchase. Typical charges are for processing the house purchase transaction, investigation of title, searches and dealing with the financial trasactions.

Insurances

These include:

Buildings and contents insurance.
Mortgage payment protection in the event of illness or redundancy

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.

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