Mortgage Information
What is a Mortgage?
How Much Can I Borrow?
Types of Mortgage Repayment
Features of Mortgage Products &
Interest Rate Options
Mortgage Product Fees
What is a Mortgage?
A mortgage is similar to any loan - you borrow a sum of money and then pay it
back with interest over a period of time. The key difference is that the lender
uses your home as security for the loan.
How Much Can I Borrow?
Mortgage lenders will consider a number of factors to determine:
a) If they are willing to lend.
b) How much they should lend.
Income
The mortgage lender must be satisfied that the borrower can afford the
mortgage payments. Most mortgage lenders consider the loan based on a multiple
of the borrower's gross income.
Liabilities
The mortgage lender will also consider the borrower's current financial
liabilities (other loans, credit cards etc.) as they reduce the amount of
disposable income that could be used for mortgage payments.
Credit History
The mortgage lender will also check to determine if the borrower has any bad
debts or an adverse credit history - bankruptcy, county court judgements (CCJs),
mortgage arrears, loan defaults or late payments. Most mainstream lenders will
only provide mortgage loans to those with a 'good' credit history, while some
lenders specialise in cases involving a 'bad' credit history.
Employment Status
The mortgage lender will consider whether the borrower is employed or self
employed, and if they appear to be in stable employment and consequently have a
reliable source of income.
Amount of Deposit
The mortgage lender will consider the borrower's deposit (if any) and the
'loan to value' (LTV). The LTV is the loan amount expressed as a percentage of
the value of the property. A low LTV means less risk for the lender.
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Types of
Mortgage Repayment
Capital and Interest (Repayment Mortgage)
The monthly mortgage payments consist of capital and interest. By the end of
the term, the loan will be completely paid off.
Interest Only (Interest Only Mortgage)
The monthly mortgage payments consist of interest only. At the end of the
term, the capital remains outstanding and needs to be paid off in one go. The
borrower should have some method (a repayment vehicle) in place to achieve this.
The repayment vehicle would normally be an endowment, an ISA or a pension.
Part and Part
The mortgage is arranged as part repayment and part interest only.
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Features of Mortgage Products & Interest Rate Options
The following describes the various common features of mortgage products.
Note that a mortgage product may well have a combination of features. For
example, a mortgage product may have a fixed rate, provide cashback and be
flexible.
Standard Variable Rate
The mortgage interest rate is set at the lender's standard variable rate
(similar to a default rate). The rate will vary from time to time in line with
interest rates in general, which are normally driven by the Bank of England base
rate. It is highly likely that anyone paying the SVR rate will save a
significant amount of money by switching to a mortgage product that offers some
form of discount.
Variable Rate Mortgages
The mortgage interest rate is set at a rate of interest determined by the
lender - normally less than the standard variable rate. The rate will vary from
time to time in line with interest rates in general (as above).
Fixed Rate Mortgages
The mortgage is set at a fixed rate of interest for a fixed term. At the end
of the fixed term the interest rate reverts back to the lender's standard
variable rate.
Capped Rate Mortgages
This mortgage has a variable interest rate but is guaranteed not to rise
above a certain level (the 'cap') for a fixed period of time, before reverting
back to the standard variable rate. Note that some mortgage lenders also set a
level below which the interest rate cannot fall (the 'collar').
Discount Rate Mortgages
The mortgage interest rate is set at a percentage amount below the lender's
standard variable rate for a fixed period of time and then reverts back to the
standard variable rate.
Tracker Mortgages
The mortgage interest rate tracks a published rate, normally the Bank of
England base rate. The actual rate may be equal to, or a percentage amount above
or below the published rate. As the published rate changes, the borrower's
mortgage interest rate changes accordingly in order to maintain the same
percentage amount difference.
Cashback Mortgages
As an incentive, the mortgage lender offers a lump sum to the borrower once
the mortgage is in place. This may be a flat amount or a percentage of the
mortgage loan. Early repayment charges are applied so that the lender can 'claw
back' the lump sum if the mortgage is paid off early.
Stepped Rate Mortgages
The mortgage interest rate is normally set at a fixed rate for each year of
the fixed term. The lowest rate is set in the first year and a higher rate is
set for subsequent years i.e. the rate increases in steps. At the end of the
term, the rate reverts to the lender's standard variable rate.
Offset Mortgages
This is a mortgage linked to a current and/or savings account with the same
lender, also referred to as a Current Account Mortgage. The balance of the
current and savings accounts is used to reduce the amount of interest paid on
the mortgage account. For example, if the mortgage balance was 80,000, the
current account balance 1,000 and the savings account balance 9,000, then the
mortgage interest would be calculated on a sum of 70,000 (80,000 - 1,000 - 9,000
= 70,000).
Flexible Mortgages
The mortgage lender allows more flexibility in the way that the mortgage
operates. The lender may allow overpayments, underpayments and payment holidays.
However, underpayments and payment holidays are usually restricted by the amount
of overpayments made previously. The lender may also allow additional borrowing
up to an agreed limit.
Shared Ownership Mortgages
Shared ownership mortgages combine property rental with ownership, enabling
the borrower to buy a percentage of the property and rent the remainder. The
borrower has the option to buy further shares in the property at a later date.
As the borrower increases his/her share of the property, the mortgage element
increases and the rented element decreases.
Self Certification Mortgages (Self Cert)
This mortgage product is intended for borrowers who may be unable to prove
their true level of income, and are therefore allowed to self-certify their
income. The self-employed are more likely to require this type of product, but
it could also be appropriate for some employed applicants.
Buy to Let Mortgage
This mortgage product is designed for those who intend to buy a property and
rent it out to tenants. Mortgage lenders normally compare the expected rental
income with the mortgage payment when considering whether to lend. However, some
lenders still use income multiples or a combination of both.
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Mortgage Product
Fees
The mortgage lender may charge some, or all of the following fees depending
on the mortgage product. Some lenders offer a fee-free product where they do not
charge any of these fees.
Booking Fee
A mortgage lender may allocate a specific amount of funds for lending on a
particular mortgage product. The mortgage applicant reserves their share of the
funds by paying a booking fee.
Arrangement Fee
This fee covers the cost of arranging a mortgage.
Valuation Fee
This fee covers the cost of having the property valued.
Legal Fees
These fees cover the cost of a solicitor or licensed conveyancer acting on
behalf of the mortgage lender and applicant.
Early Repayment Charge
This charge may be payable if a mortgage loan is paid back within a specified
period, normally while a special deal or discount is in effect. Sometimes the
early repayment charge extends past the initial rate (discount) period, tying
the borrower into paying the lender's standard variable rate.
Higher Lending Charge
If the mortgage exceeds a loan to value (LTV) threshold set by the lender, a
higher lending charge may be applied because of the increased risk. The lender
would take out insurance (a mortgage indemnity guarantee) to cover any losses
incurred should the property be repossessed.
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