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UK Mortages: A Guide Through The Maze
Types of UK Mortgages You may be wasting your money with the wrong type of mortgage. Knowledge is power. There are essentially two different types of mortgage: Repayment only, (capital and interest mortgage) Interest only, (ISA, pension or endowment mortgage) Repayment only Your monthly repayments consist of repaying the capital amount borrowed together with accrued interest. On your mortgage statement, normally received annually, you will see that the amount borrowed decreases throughout the term. Advantages At the end of the term, you are safe in the knowledge that the total amount of the debt has been repaid. Overpayments and lump sum payments into your mortgage account can be made reducing both the interest and capital amounts repayable. Life assurance cover is not always necessary in taking out this type of mortgage. Disadvantages There may be financial penalties for making lump sum/overpayments into your mortgage account. In the early years of a repayment mortgage the majority of the monthly repayment is interest rather than capital. For borrowers moving house regularly, this can result in little of the capital being paid off. If you have no life assurance cover in place and die before the loan is repaid, the mortgage will still need to be repaid. This may result in the property having to be sold to repay the debt owed. Interest only With this type of mortgage, only the interest is paid off with each mortgage payment. The borrower also takes out at the same time, an alternative 'repayment vehicle' (method of paying off the mortgage) such as an ISA, pension plan or endowment policy. More information about endowments (which in the 1980's and 1990's were extremely popular), ISAs and Pension plans are below. The most important fact about an interest only mortgage is that the monthly repayments do not repay any of the outstanding capital balance. As a consequence it is important that the payments are maintained into the repayment vehicle otherwise it will not be possible to pay off the mortgage at the end of the term. Endowment ISA Plan Pension Endowment The most common type of interest only mortgage which also provides life assurance cover and a fixed payment for investment. The fixed payments are based on the amount of the loan together with the mortgage term and are designed so that, at maturity, the amount invested and earnings are sufficient to pay off the mortgage. Much maligned in the press because of the poorer investment growth rates achieved in a low inflationary environment this form of investment is less popular these days. Note there is no guarantee that, when the endowment matures and 'pays out', the balance will be sufficient to repay the mortgage. ISA Plan The Individual Savings Account (ISA) is a tax free method of saving. Using an ISA as a repayment vehicle is growing in popularity but due to the ISAs complexity it is only for the financially sophisticated or borrowers taking advice from a suitably qualified financial adviser. Pension Plan Life assurance cover is provided and monthly payments are made into a pension fund. When the benefits are eventually taken, the mortgage is repaid using tax-free cash from the remainder of the fund. The plan holder can then draw a pension from the balance of the fund. This product, which tends to be used by the self employed, is only for those taking advice from a suitably qualified financial adviser. Discounted mortgages Most of the discounted rates offer discounts over the first one, two three, four or five years. The total amount of discount on offer tends to work out approximately the same over the period of the discount. The choice is yours between making a choice between a large discount for a short period of time, a small discount over a long period of time or something in between. For example one product may offer a 3% discount over 2 years and another a 2% discount over 3 years. The total discount you receive in either case is 6% so the choice you are faced with is what period to take the discount over. Cash back mortgages These deals vary but, as the name suggests, you get cash ?as well as the money you're going to be borrow for your home. You may use it to pay for home improvements moving costs and furniture etc. Cash back deals are perhaps best seen as an incentive to go with a particular lender. It's rarely a genuine gift and you will find that you have extended ties. There is nothing free in the mortgage market the lender will eventually make more than make their money back. Current account mortgages It's becoming increasingly popular to combine a mortgage and a current (banking & cheque) account. Its good news if you like the option of making overpayments on your mortgage (e.g. if you are self-employed or receive bonus payments). The other advantage is that interest is calculated on a daily basis, so when you pay money into your account, like your monthly wage, the overall loan size is lowered, so reducing the total amount of interest paid. Base Rate Tracker Mortgage These can get very complicated but in theory they're simply a mortgage that follows the Bank of England base rate at an agreed rate. So you might have a Base Rate Tracker Mortgage which sets your mortgage at 1% above the base rate for, say, the first two years. Non standard mortgages If you have experienced financial difficulty in the past or are unable to produce full proof of your income then you may find that the main stream lenders are unable to help you. However, we would recommend that you contact these lenders first as, depending on the severity of your situation; you may find that they are willing to help. If not, however, you will find that there are lenders who specialise in this area of the market. These lenders tend to charge higher interest rates or require larger deposits. Once you have re established your credit you can change to a standard mortgage. Remortgage You don't have to move home to move your mortgage. Many homeowners move their mortgage to a different lender to save money, or switch to a different mortgage with their current lender. You may want to remortgage to Improve your home. Save money If you're paying your lender's standard variable rate (SVR), your existing lender - or another lender - may offer better rates if you move to a different mortgage. Raise money if you want to improve your home, or pay off other borrowings, you may be able to increase your mortgage rather than taking out a separate loan. Nicholas Marr Marr International is not registered under the UK financial services act to give advice regarding mortgages. Our partners specialising the different regions world wide for mortgage advice.
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