Guide To Mortgages

THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

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What is a mortgage?

A mortgage is really just a loan although it is designed to be paid back with interest over a long period of time, usually 25 years. A mortgage is a secured loan, which means that in return for lending you money, the lender (a bank or building society) uses the property as security for the mortgage. Therefore if you can't repay your debt the lender has the right to reclaim your house and sell it to recoup the money you borrowed.

Repayment methods

There are basically two ways of repaying your mortgage: interest only or repayment.

Interest Only Mortgage

Here, your monthly payment doesn't reduce your actual debt - it just covers the cost of borrowing the money, ie the interest. Therefore after 25 years of paying the interest only on a £100,000 loan for example, you will still owe £100,000. You would need to set up an investment which would build up enough money to pay off what you borrowed at the end of your mortgage term. With this type of mortgage there is a risk that the value of the investment may not be enough to pay the debt. The most common forms of investment used are endowments, certain types of ISAs and pensions.

Repayment Mortgage

With a repayment mortgage each month you pay part of the interest and part of the loan so that by the end of the mortgage term you will have cleared the interest and the loan and owe nothing. Some lenders will consider offering a part repayment, part interest only mortgage which is a combination of both methods.

Types of Mortgage

Standard Variable Rate (SVR) [View demonstration]

Each lender offers a Standard Variable Rate which tends to follow - but is not the same as - the Bank of England base rate. As the Bank of England base rate shifts up and down, so lenders move their SVRs, however there is sometimes a delay and there is no guarantee that the lender will pass on the full effect of the increase or decrease. When the interest rate goes up the amount you have to pay each month goes up, and it falls when interest rates come down.

Tracker Mortgage [View demonstration]

Unlike the Standard Variable Rate, a tracker mortgage follows the Bank of England base rate absolutely. So if the base rate rises by 1% your mortgage rate rises and if it falls by 1% your mortgage rate drops by that amount as well. Some tracker mortgages have a floor - a minimum level below which the rate will not drop. Some trackers only run for a couple of years, but often you can get one lasting the full term of your mortgage.

Discounted Mortgage [View demonstration]

A discounted interest rate gives you a reduction of, for example, 1% off the lender's Standard Variable Rate for a specified period of time. You can get a discount off a tracker rate rather than the SVR. It is important to know how big the discount is, the interest rate the discount is off, and the length of time the discount will last.

Fixed Rate Mortgage [View demonstration]

Whatever happens to interest rates, your monthly mortgage repayments are fixed for as long as the deal lasts - usually not the whole term of the mortgage. Your payments will not go up during a fixed mortgage no matter how high interest rates go, however if interest rates fall you will not see your payments drop.

Capped Mortgage [View demonstration]

This is a part variable and part fixed mortgage. The rate you pay moves in line with the base rate but there is an upper ceiling or cap - a maximum rate above which your payments will not go. You benefit from interest rate falls and have some protection against interest rate rises, but the cap tends to be set quite high.

Current Account Mortgage

This type of mortgage combines your mortgage and current account to give you one balance. Some lenders in this sector also link savings accounts, credit cards and personal loans together into combined accounts. With this type of mortgage, you are only charged interest on the total amount you owe the lender, after taking off any savings or current account balances against the amount of your mortgage.

Offset Mortgage

An offset mortgage keeps your mortgage, savings and current accounts in separate pots, although your savings are used to offset or reduce the amount you owe on your mortgage. You can be effectively overpaying your mortgage every month and so could clear the mortgage more quickly.

Other things to consider

Daily interest

If the lender charges daily interest this means that the amount you owe is recalculated every time you pay money off. With annual interest you don't get the benefit of having made 12 monthly payments until the end of the year. It can make a huge difference to what you pay over the life of the mortgage.

Early repayment Charges

There will normally be a redemption penalty for shifting a mortgage or repaying part or all of the mortgage during the initial special deal period. Sometimes there are extended redemption penalties where some lenders continue to charge a penalty even after the initial period.

Moving house/Portability

Most mortgages are portable, so if you move house during the term of your mortgage you won't necessarily need a new mortgage deal. If you need additional borrowing then you can often make sure that the end dates of your existing mortgage and your new mortgage coincide.

Overpaying

You can pay more than the required monthly repayment amount on your mortgage and the extra money you pay is knocked off your outstanding debt. However, many mortgages restrict the amount of money you can overpay.

Payment Holidays

You can usually arrange to miss one or two mortgage repayments. However, there may be an extra penalty or additional charge for this and the remaining monthly repayments are recalculated to incorporate the repayments you missed.

Let us find the best mortgage deal for you from our panel

Here at YOUR MOVE we understand the mortgage market. We know the different types of products, typical costs and which lenders have a good reputation for customer care.

We can see beyond the headline interest rates and understand some of the pitfalls such as early repayment charges and product fees

YOUR MOVE can provide you with award winning* advice which is given to you by people with extensive experience in this field.

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For mortgage advice our initial consultation is free, however we do charge a fee for administering your mortgage application. The precise amount will depend upon your circumstances however we estimate that it will be £399.

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