MortgagesZ

By: Michael Challiner

If you’re thinking of improving your home, investing in buy-to-let or holiday property or maybe consolidating your debts, you’re probably thinking of re-mortgaging. If your current mortgage is now some years old, you’re probably out of date on what’s available. Forget the old “one size fits all” mortgages. Mortgages today are varied and there’s probably one just waiting for you.

In view of the fact that there are around 4,000 different loans available, obviously we can’t cover them all, but here are a couple of popular options:-

Flexible mortgages have no fixed term. It’s up to you to choose what you spend your loan on, however the loan is secured by your property so it is essential that you keep up to date with your monthly repayments, otherwise you risk losing your home. These mortgages can be based on either a repayment mortgage, which is more traditional, or an interest only mortgage. You can even have a mixture of both types.

These mortgages are ideal for someone who plans a break from their career for family commitments, such as child birth, or travel, re-training or whatever. You can reduce or suspend payments for a period. You can also increase payments and get ahead in order to either take these breaks or avoid interest costs. Funding your credit needs via this type of mortgage will be at a lower interest rate than general credit card use.

It is increasingly common to find that these flexible mortgages include a range of banking services, such a cheque books, direct debit facilities and credit cards. Generally speaking, though, the more flexible mortgages are inclined to be the ones carrying higher interest rates.

If you’re the type of person who likes to keep financial matters “compartmentalised” then the all in one nature of this type of mortgage may take some getting used to.

For the more traditional borrower, a repayment mortgage could be a possibility. The advantage of this is that, as long as payments are kept up to date, the debt will be paid off in the term of the mortgage. It is simple to understand and easy to manage. The monthly repayments are split between the cost of interest and the repayment of the capital borrowed. During the earlier years of the mortgage life a large part of the monthly payment will, for the most part, be paid in interest. As the years progress, however, more and more will go towards capital repayment.

There is not the flexibility in this method and unless overpayments are made, you’re in for the full stretch, so to speak. In the early years, very little capital is being repaid and overall you may pay more interest than in our earlier comparison.

For advice and ideas, an on-line mortgage broker is the answer They’ll be able to offer you details of the various mortgaging methods and interest rates and once they have your details they’ll come up with as many comparisons as you need.

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By: Michael Challiner

Do you, in common with millions of other home owners, have a short-term mortgage? If so, it’s very easy to set up the monthly repayment and then get involved with so many other aspects of your life that time slips away and before you know it, the two or three year period of your loan is coming to an end. Whilst many lenders write to their customers towards the end of the loan period, it isn’t compulsory.

When you sign on the dotted line for your mortgage deal, you are issued with a key facts mortgage document which will include all the loan details together with the all important date that your fixed price deal will come to an end. If you forget this date and also fail to receive a reminder, the first thing you’ll become aware of it a notice of a change in monthly re-payments, which means that you’ll be going on to the lender’s usually expensive SVR, or standard variable rate.

As an example, on a loan of £150,000, you could easily be paying out a substantially higher amount - more than £200 a month extra. This is assuming that the SVR is 2.25% more than the “special rate”, which would not be unusual.

Obviously most borrowers would opt to change to an alternative short term mortgage, but it takes between four to six weeks to arrange this change-over.

If you are extremely diligent at remembering to take action you may run into problems too as if you ask what your options are when there’s more than a month or so to run, your lender will very often say they’re unable to make a decision until nearer the date. Then you’ve been stalled and still can’t make a decision.

There has been some improvement in the way insurers are handling the situation. An increasing number of them are contacting borrowers around three months before the end of their current deal and setting out options.

It’s not always the right thing to automatically change to another lender to get the best price. Consider your options carefully. If you stay with your current lender, there will be a saving on legal charges and you shouldn’t need another valuation. Nor will exit fees be charges, which could mean a fairly big saving. It just could be that a slightly more expensive deal with your current lender may work out best in the long run.

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By: Mike Mansell

There are two types of mortgages. The first and most popular, is the Repayment Mortgage where you pay off the capital (the amount of money loaned) and the interest every month as part of your mortgage payment. The other type is the Interest Only Mortgage where you only pay off the interest on your mortgage every month.

What this means, is that if you take out an Interest only Mortgage, once the term of the loan is over, you will have paid off all the interest, but you must find the capital i.e. the price of the house.

For example, if you bought a house for £100,000 over the course of the next e.g. 25 years, you would have managed to pay off the interest (probably about £150,000), but you will not have paid off any of the £100,000 so the lender will be expecting a payment of £100,000 at the end of the mortgage deal. A lot of money for the vast majority of us.

In order to be able to re-pay the capital on the loan, there are 3 commonly used methods which are usually employed so that the borrower has the funds available to be able to pay off the loan. They are as follows

Endowment
An endowment is an investment scheme which was very common in the 1980s and early 1990s. The idea was to have an endowment and an interest-only mortgage. You would pay a monthly premium to the company (often an insurer) who sells you the endowment, and the policy was supposed to grow over the years. This way, when the policy matures, you would be left with enough money to pay off your mortgage and most people also expected to have a significant lump sum of cash too.

However, what happened is that the performance of the endowment is linked to how well the Stock Market performs so when the Stock Market crashed in the late 1980’s, the endowments weren’t worth as much as people thought they would be.

In essence, if the borrower took out an endowment mortgage for £100,000, if has had happened in the past, the endowment at the end of the term of the mortgage would have been worth at least £100,000 if not more. Some policies were worth a lot more. Any excess(profits) on the £100,000 would have gone to the borrower. However, what happened is that a lot of endowments after the crash were worth a lot less. This meant that the borrower would have to find the shortfall from somewhere else.

As you can see with the above illustration, this type of mortgage is very risky, offering a potential of a big gain, however, there is always the possibility of problems.

Despite the bad publicity and the inherent problems, it may be that this type of mortgage is suitable for some people and a number of lenders still offer Endowment Mortgages.

ISA (formerly known as Peps)
With this type of mortgage, you’re still paying off the interest only, however, you also pay into an ISA. There are a number of different ISA’s available, however, the main advantage is that the money you pay in, earns interest free of tax.

A disadvantage though, is that you are only allowed to put a certain amount of money into an ISA every year, so by using an ISA for your mortgage, you are missing out on using the ISA for savings.

Pension
This way of paying off an interest-only mortgage, is by far the least common. Most forms of pension fund let you take 25% of their value as a tax-free lump sum at retirement. The idea behind pension mortgages is that you are paying off the loan not only using a fund which grows free of tax (like an ISA), but you are also effectively getting tax relief on your mortgage contributions as well. The problem is a distinct lack of flexibility, and the fact that you can’t pay off the mortgage before retirement.

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By: Benedict Rohan

Basic principle of a mortgage is very simple: you borrow money to buy a house and pay back the loan with interest. However, nowadays there are so many products available that it can be mind-boggling. Here’s a guide to methods of repayment and interest rates.

Methods of repayment

Repayment mortgage: with repayment mortgages, also known as capital and interest loans, you repay a little of the capital with every repayment, along with interest, gradually paying more and more until the loan is paid off at the end of the term.

Interest-only mortgage: you don’t pay any of the capital in your monthly repayments with this type of mortgage. Instead, all your repayments are towards the interest only. You’ll need to set up a separate savings or investment fund, e.g. and endowment policy, for repaying the capital as a lump sum at the end of the mortgage term. If the fund doesn’t accumulate enough capital to repay the mortgage at the end of the term, you will need to pay the shortfall.

Interest rates

Standard variable rate: the rate of interest that you pay fluctuates depending on the lender’s current rate, which is normally linked to the base rate set by the Bank of England. So if interest rates are high, your mortgage repayments will increase. Conversely, if they are low, your repayments will be lower. Normally there aren’t any charges for repaying lump sums without penalty.

Tracker: tracker rates are another type of variable rate loan where the lender ‘tracks’ the rate at a set amount above or below the Bank of England base rate and it increases or decreases in line with base rate changes.

Fixed rates: the interest is set at one rate for a specified period of time, normally before changing to the lender’s standard variable rate. This can be good for helping you to budget in the first few years of your mortgage, or if you think interest rates are likely to fall during the fixed rate period, but you could end up paying over the odds if the base rate is low during this period. Some fixed rate products charge penalties for leaving so check exactly what the terms and conditions are before you sign up.

Capped rates: these are variable but specify a maximum level (‘cap’ or ‘ceiling’) that you’ll pay, so you will pay less if the base rate is lower than this. Normally the capped rate applies only for a fixed period, after which you’ll move to the lender’s standard variable rate. In this way you can benefit from reduced repayments if interest rates are low, with the security that they can’t go above a certain level. It can be useful for helping you to budget in the first few years of your mortgage.

Collared rates: the opposite of capped rates – they are variable but won’t go below a certain level (‘collar’ or ‘floor’). Collared rates are normally used along with a capped rate or tracker. If rates are lower than the collar, you could lose out.

Discount rates: some lenders give discounts from their standard variable rate for a fixed period as a special offer. You should check that you’ll be able to afford to repay the increased rate at the end of the fixed discount period.

Standard variable rate with cashbac: you’ll receive a sum of money when you take out the loan, which can be good if you don’t have any cash to spare for furniture, décor or home improvements. If interest rates don’t rise too high, it may be a good deal, but if they do you could be paying back a great deal more.

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