Repayment options
There are two ways of repaying what you borrow; your choice will depend on your views and financial circumstances.
Repayment mortgage
With this option, each monthly payment you make pays off the interest and some of the loan. Most of your monthly payment initially pays off the interest, and what’s left goes towards reducing what you’ve borrowed. As time goes on, the balance changes, and as the interest charges reduce, more and more of your monthly repayment is used to reduce the loan. A repayment mortgage will always guarantee that your loan will be repaid at the end of the term, provided you maintain your monthly payments.
Interest-only mortgage
As the name suggests, with this kind of mortgage, every penny of your monthly repayment goes towards paying off the interest. If you go for this option, you still need to repay the capital at the end of the term of the mortgage. To do this you could establish a savings or investment scheme, but there is a risk that, if that scheme does not cover the value of your mortgage by the end of the term, it may not be possible for it to be repaid in full and you may have to sell your property to clear the debt. Unless you are confident that you will have the means to repay the capital at the end of the mortgage term, an interest-only mortgage is unlikely to be the right choice of repayment option for you.
Interest rate options
Lenders offer all kinds of different deals when it comes to the interest you pay on your mortgage. Sometimes you may have a choice, sometimes you may not.
It’s an area where you’ll probably find expert advice helpful.
Standard variable rate
A mortgage where the interest you pay goes up and down, usually (but not always) in line with the Bank of England’s base rate. Standard variable rate with cash back, same as above, with one difference: the lender will give you a sum of money (normally a percentage of the amount borrowed) as an incentive, the cash back for taking out the mortgage. This can be especially attractive if you need money to make any improvements to your property.
Discounted rate
Once again, the interest rate will vary, but you will pay a rate less than the lender’s standard variable rate. As you might expect, such beneficial treatment can’t last forever, and after a limited period, you will pay the lender’s standard variable rate.
Fixed rate
A mortgage where your repayments are guaranteed to stay the same for a limited period (usually no less than one year and no more than five years, although 10 and even 25-year fixed rates are sometimes available). At the end of the period, you will pay the lender’s standard variable rate.
Capped rate
This is another special limited-term arrangement where, although your payments can go up and down, they are guaranteed not to rise above a certain level. So you will benefit from interest rate falls during the capped rate period. When the arrangement finishes, you will then pay the lender’s standard variable rate.
Rate tracker
Here again, your monthly repayment will vary, but only by a certain amount. Your interest rate tracks an index such as the Bank of England’s base rate for a predefined period. If, for example, it were guaranteed that you would never pay more than 1% over the base rate, this is how it would work. If the base rate were 5%, your interest rate would be 6%; if the base rate increased to 5.25%, you would pay 6.25%. Conversely, if the base rate were to fall to 4.75%, you would pay 5.75% and so on.
Current account mortgage
This is where you put most or all of your financial commitments into one pot. So your savings and your income are paid into the one mortgage account, and all your debts are combined in the same account. It’s not so much a mortgage, more of a large overdraft that’s secured on your house. Say, for example, that your debts total £50,000 at any one time, and the savings and income balance in your account is £5,000, then the interest will be charged on £45,000, not on the £50,000. So the more savings and income you have in your account, the less interest you will pay overall. And because the interest is calculated daily, you will immediately benefit from any overpayments you make. These mortgages also provide you with a debit card and a cheque book.
The offset mortgage
This is slightly different to the current account mortgage because your mortgage account is separate from a savings and income account that you open with the same company. Like the current account mortgage, your income and savings are offset against your mortgage, which reduces what you owe. The interest is calculated daily on that reduced balance. The simplest versions of these new mortgages are known as Flexible Mortgages because they allow you to overpay, underpay, and even stop, albeit for a limited period, your monthly mortgage payments altogether. You can also increase your loan without permission to a pre-agreed limit, or by borrowing against any overpayments you may have made. Some of these mortgages can even be linked to your other personal financial commitments and arrangements. One of the main attractions of these mortgages is the prospect of paying less interest. In return, you are required to put some or all of your monetary eggs, current account, savings account, credit cards, other loans, etc, into one pot.
If things should ever go wrong
Should you ever be faced with financial hardship and payment difficulties, and even if you have appropriate insurance (see below) the first step is to talk to your lender, and sooner rather than later. You may also wish to get in touch with the
Citizens Advice Bureau, which can advise on debt-related matters. And unless the circumstances make it an absolute necessity, it is not advisable to cancel or surrender any life assurance policies or mortgage-related investments that are intended to help repay your mortgage at the end of the term.
Mortgage-related insurances
Life Insurance: all lenders will insist on you having life insurance in place. Ideally, you should insure your life for the whole of the mortgage debt, so that if you die before the end of the term, the entire loan is paid off.
Critical illness insurance: This is often linked to the value of the loan and provides financial help if you survive a critical illness (e.g., cancer, a stroke or some other pre-determined serious illness). The insurance company pays out a cash sum, which you can use to repay the mortgage or spend in some other beneficial way.
Mortgage payment protection insurance
If an illness, an accident or redundancy prevents you from working, these policies make your mortgage repayment for you, usually for a limited period. Some policies will also cover your mortgage-related expenses, such as house insurance premiums.
Buildings and Contents insurance
These policies exist to cover you against the costs of damage to the physical structure of your home and/or its contents. This could be caused by an accident of some kind or an event that’s outside of your control, e.g. a fire, flood, a natural disaster and theft.
Portable mortgage
When you move house, you are normally required to repay the existing mortgage and take out a new one. This can be financially disadvantageous. There are, however, mortgages that allow you to transfer the terms of your existing mortgage to your new home. This is beneficial where for example, you take out a 5-year fixed rate mortgage and believe that you may move before the 5-year term expires. If you think that’s a possibility, then its best to check that the mortgage you are taking out is portable.
Credit reference agencies
As part of the lender’s underwriting checks, they normally carry out a search with your consent using a credit reference agency to check your personal financial history. A record of the search will be recorded in your file.
Higher lending charge
This is a one-off fee that a lender charges when your advance is higher than the lender’s usual maximum loan-to-value ratio. Some lenders may use this fee to take out an insurance policy to cover any losses they might incur if the property is repossessed and sold for less than the outstanding mortgage. But even if the lender is insured, you will still be liable for any shortfall.
Mortgage-related fees
Here are some of the fees that you may be asked to pay when applying for a mortgage. Although we don’t charge you a fee, almost everyone else involved in the process will. The charges below are what you might expect the lender to apply. There are other charges, lawyers, the Land Registry, stamp duty, etc, but these are usually collected after completion.
Application fee: a fee you pay to the lender when you apply for the loan. This fee is sometimes refunded on completion of the mortgage.
Booking fee: a nominal fee usually charged when the lender is offering a special deal, such as a mortgage where the funds are limited, or where the interest rate is discounted, fixed or capped. In such circumstances, funds are usually only available on a first-come, first-served basis. Booking fees are not usually refundable, are paid up front and cannot be added to the mortgage.
Arrangement fee: similar to a Booking fee, except this kind of fee can normally be added to the mortgage.
Administration fee: a charge that a lender may make for administering your mortgage. Fees vary according to the lender.
Valuation fee: a fee the lender charges you for valuing the property you want to buy or remortgage. Sometimes refundable, but seldom if ever added to the mortgage.
