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Frequently Asked Mortgage QuestionsStandard Variable Mortgage The Standard Variable Mortgage is the simplest mortgage. You don't lock in a interest rate so the amount that you pay each month is directly affected by movements in interest rates. The Bank of England determines the rate of interest and then Lending institutes are free to decide for themselves the amount that they will alter their own interest rates by, in relation to these movements in base rate. A standard variable mortgage is based on the lender's basic mortgage rate, commonly known as the Standard Variable Mortgage Rate.It is usually the rate that customers revert to after a fixed, capped or discount period ends. With a standard variable rate you can pay off your mortgage early without the fear of an early repayment charge. Tracker Mortgages A mortgage that tracks the Bank of England base rate at an agreed rate. A Tracker Mortgage sets your rate of interest at a fixed percentage above or below the Base Rate. If or when the Base Rate changes so do does your rate of interest but always at a fixed percentage. This resulting interest rate is usually lower than a mortgage lender's standard variable rate. A main advantage of a tracker mortgage is that the percentage that you agree to track the base rate is a smaller margin then the lender's standard variable rate, so you will end up paying less overall. In addition, if the base rate falls, the interest payments on your mortgage loan will fall accordingly, no matter how low the base rate goes.This will typically be cheaper than a capped, flexible, or fixed-rate mortgage - but while the cost of a tracker mortgage will fall if interest rates fall, it does not protect the mortgage-holder against rises in interest rates. A Fixed Rate Mortgage A type of mortgage where interest repayments to the lender are fixed until maturity or for a specified term. A Fixed Rate Mortgage locks in an interest rate for the intial years of your mortgage. Meaning that for this period of your mortgage you have a fixed amount to pay each month that is unaffected by changes to the Bank of England Base Rate or the lender’s Standard Variable Mortgage Rate. The rise and fall of interest rates won't affect your mortgage repayments because the interest rate has been locked in. This means that if the interest rates rise above what you have locked in you have actually saved money but also means that if interest rates drop then you will end up paying more. A fixed rate mortgage is ideal for budgeting purposes because you know exactly what you have to repay each month without that amount flactuating. An Early Repayment Charge may apply if the mortgage is repaid during the fixed period. The Fixed Rate period is determined at the start of the loan and may be for 1- 5 years and then the mortgage returns to a standard variable rate for the rest of the repayments. A Capped Rate Mortgage A mortgage which guarantees the interest rate charged will not rise above a certain level, but it may fall in line with variable rates. A Capped Rate mortgage is supposed to offer the best of both variable and fixed rate deals. You agree on a limit to the amount that the lender can increase the interest payable on your mortgage. So there is a Cap on how far the interest rate can rise. The advantage here is that a Capped Rate Mortgage also allows the monthly repaymenst to fall if the interest rates drop. So you benefit from falling interest rates but are protected from rate rises. You know the max you'll be paying. This period of capped interest is for a specified period only; typically between one and five years. At the end of the specified period your mortgage will usually revert to a variable rate.However, it is possible to find a capped rate mortgage that can last for the entire life of the loan. Some capped rate mortgages also have a 'collar' or lower limit below which the interest on your loan cannot fall. There is not alot of these deals available on the market and they're not thought to be that competitive because the interest rate you'll be paying is going to be higher than your average fixed or discounted rate mortgage. There are often early repayment charges applicable if the loan is repaid within the capped period. Discount Rate Mortgage This is a variable mortgage that is discounted from a Lender's SVR by a set percentage within a set period. A discount rate mortgage offers a percentage discount from the lender's normal variable rate for a set period of time. As interest rates flucautate your monthly re-payments will vary though the discount will remain fixed, however, the amount of discount and the period will vary from deal to deal. These mortgages particularily suit first time buyers, who have a lower income and initally need some spare cash to spend on furnishing their new house. Discount mortgages offer initial low payments at the expense of higher rates later on. After the agreed set period the interest rate will switch into the morgage lender's usual variable rate. A Cashback Mortgage A loan secured on a property which offers a cash rebate when the purchase is completed. Cash Back Mortgages are often aimed at first time buyers. On Completition of the mortgage the lender will pay a percentage of the amount borrowed "back" to you as a lump sum. Usually the cash-back is offered as a package of benefits (e.g. linked with a discount) but pure cash-back mortgages are not uncommon. Mortgage lenders may offer a sum of money towards covering part or all of the cost of moving house and setting up home, cost of legal fees or survey charges. This could be, for example, £200 to £1000 as a flat amount, or a percentage of the mortgage loan. Cash Back Mortgages are typically repayed at the standard vaiable mortgage rate of the mortgage lender. However, the bonus sometimes has interest charged on it at a higher rate than the rest of the loan, and can include penalties if the loan is paid-off early. Additionally, a cashback mortgage may offer worse overall value than other mortgage options. Self Certification Mortgages The lender will ask for details of the borrower's income, but they will not require to see proof of total earnings. Available for who borrowers who cannot verify their income as it may come from a number of sources, or they may not have been trading for long enough to have the required number of years accounts, or they may have a low basic salary but achieve bonus or commission payments or a regular second income. The person taking out a self cert mortgage will certify themselves how much they earn, without requiring proof of total earnings. With changing work practises over the last few decades Self Certification Mortgages are designed for people whose income is difficult to assess using standard methods. Self certification mortgage often charge higher rates of interest than standard mortgage deals. Most mortgage lenders will only allow you to prove your income in this way if you want to borrow less than 75% of the property's value. Borrowers are expected to put down much bigger deposits for self-cert loans, sometimes between 20 and 40 per cent of the mortgage because the borrower is covering some of the lender’s risk. Interest rates are also sometimes higher for these loans. The lender will ask for details of the borrower's income, but they will not require to see proof of total earnings. Buy to Let Mortgages Buy-to-let mortgages are for investment properties. Buy-to-let mortgages are provided for property purchases or remortgages for investment in the private rental sector. Buy-to let Mortgages are quite a specialisied mortgage that looks at several factors with the property such as the expected rental income, with this income potentially having to exceed your mortgage repayments by a certain percentage. Your lender may also want to establish if the property you are purchasing is a good long term investment. Buy to Let Mortgages ranged from special offer deals to fixed and variable rate loans. They may have slightly higher interest rates. Generally buy-to-let mortgages are available for between five and 45 years and for up to 80% of the property value. 100% Mortgages A 100% loan covers the full value of a property, without the need to put down a deposit. 100% mortgages are very popular particularily amoung first time buyers who wish to get a foot on the property ladder but to not have a deposity. A 100% mortgage offers you a borrowing of 100% of the value of the property so no deposit is required. Rates may be fixed, variable, discounted or capped. Opting for a 100% mortgage means that you could risk facing a negative equity situation if house prices fall. You may also be charged an above-average interest rate and a mortgage indemnity premium. There are two ways to pay off the amount you have borrowed: The Capital" Repayment Mortgage also called a Capital and Interest Loan A repayment mortgage guarantees your loan is paid off in full at the end of the agreed term. With a repayment mortgage you make monthly payments that cover both the interest on the loan and the repayment of the loan itself. Your monthly payments gradually pay off the amount you owe as well as paying the interest charged on the loan. Provided you make all the agreed payments, the loan will be fully paid off by the end of the mortgage term. Interest-Only Mortgage With an interest-only mortgage you only pay-off the interest on the loan and none of the outstanding debt until the end of the term. Your monthly payments cover only the interest on the loan. They do not pay off any of the capital. Interest-only mortgages usually have lower monthly payments than a repayment mortgage but are inherently more risky. It is your responsibility to make sure you have enough money to repay the mortgage at the end of the term, otherwise you could lose your home. You will need to arrange to pay separately into a savings or investment scheme to build up a lump sum to pay off the mortgage at the end of the term. It is possible to combine both an Repayment mortgage with an Interest only mortgage. These are particularily useful for people who have an investment product and wish to use a proportion of the loan as an interest only mortgage and a proportion as a repayment mortgage. For example, if you want to take out a £350,000 mortgage and already have an endowment that could pay out £100,000 in a number of years time, you could consider an interest-only element to cover the first £100,000 and a repayment element for the remainder. Flexible Mortgages There are many varying degrees of flexibility. In order to be truly flexible, a mortgage must allow borrowers to do the following: Overpaying The vast majority of flexible mortgage borrowers make overpayments on their mortgages. If you can pay off your mortgage earlier you can save yourself tens of thousands of pounds in interest payments. Underpaying Some mortgage plans allow you to pay less than the agreed amount - once you have made overpayments. Payment Holidays Some flexible mortgage deals allow you to take a complete break from making mortgage payments for up to a year. You have to have built up sufficient overpayments to cover the period you take off. Borrowing Back Borrowing back overpayments if you need extra cash. With the Advantage that because the amount you over pay is taken off your mortgage you are effectively earning the mortgage rate on your savings. Calculating Interest Daily Fully flexible mortgages have interest calculated daily, and any payments and overpayments are credited to your mortgage account as soon as they are paid, so you are immediately paying interest on a smaller amount of debt. |
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