guide to mortgages
Use
the quick links below to find more
information different mortgage terms:
Types Of Mortgage
Variable Rate
The basic mortgage rate, which most lenders
offer, is a standard ‘variable’ rate (SVR).
This generally moves up or down according to
the Bank of England Base Rate changes.
However, banks and building societies do not
always pass on these changes to their
customers, or delay doing so, which can make
it worthwhile shopping around. Special rate
deals revert to the variable rate at the end
of the ‘discounted’ period. Some mortgage
lenders guarantee their variable rate will
remain within a certain margin of the Bank
of England base rate at all times. Alongside
the standard variable rate, lenders offer a
variety of other rates and a range of
special deals, which specific terms and
conditions. These take the form of fixed,
discounted, capped, LIBOR, base-rate tracker
and flexible mortgages and deals that offer
incentives like cashback.
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Fixed Rate
This type of mortgage sets the interest rate
you will pay for a given period of time –
thereby guaranteeing that the amount you pay
back each month will not change for that
period. When the fixed time period expires,
you will revert to the lender’s standard
variable rate. The obvious advantages of
fixed-rate mortgages are that if you are
having to budget carefully over the first
few years of your mortgage
 then
you know how much you will be paying each
month and you won’t be caught out by any
surprise increase in the interest rate.
Likewise, if interest rates rise above the
fixed rate you are paying then you have the
satisfaction of knowing you are saving
money. The reverse is also true. If interest
rates drop below the fixed rate you will
lose out, but you will still be sure of how
much has to come out of your bank account
each month. top
Fixed-rate mortgages
usually last between one and five years, the
best rates occurring in the one to
three-year time frame. Some lenders offer
fixed-rate mortgages lasting 10 years or
more, in some cases, the full length of the
mortgage term. How long a fixed rate you opt
for will depend on your view of how interest
rates are going to move over the next few
years, as well as the comfort you may get
from knowing that whatever changes do occur,
your payments each month will not change for
that period.
Fixed rates have proven very popular with
people looking to protect themselves against
interest rate movements, particularly as
variable rates have been as high as 18 per
cent in the past. However, recent years have
seen interest rates continuing to fall and
many borrowers have been turning to base
rate tracker mortgage instead, to ensure
they benefit from those rate decreases as
they occur.top
Capped Rate
A variation on the fixed-rate mortgage,
capped-rate mortgages guarantee that your
monthly payment will never go above a set
figure (or ‘cap’) within the time period.
Below that set figure, the rate will move up
and down in the line with the lender’s
variable rate. This means you can be certain
of the maximum amount you will pay and may
benefit from lower rates as interest rates
fluctuate. top
Discounted Rate
 This
type of mortgage gives a discount on the
lender’s standard variable rate for a
specified period. This means that whether
the interest rate goes up or down, you will
always be paying a reduced rate for as long
as the discount lasts. If interest rates are
falling these deals can be very good news.
Likewise, when rates rise you will always be
paying less than borrowers on the SVR.
With the Bank of England Base Rate falling
and expected to drop even further during
2002, discounted deals are proving popular
with borrowers looking for a special rate
and prepared to take the risk that rates may
rise in the future. This risk arises because
unlike fixed and capped rates, discount
rates lack the comfort of a defined payment
ceiling.
Discount rates are worth considering if you
think the rate will average out below the
fixed and capped-rate products in the
market. Be warned, through, discounted deals
can have stringent redemption periods
attached. top
Base-Rate Tracker
These faithfully track, by a set percentage,
the Bank of England Base Rate. Every time
that base rate changes so will the payments
on your mortgage. This is fine when rates
are going down as they ensure you
immediately benefit from any savings,
whether or not your lender has decided to
pass on the change by lowering its standard
variable interest rate. However, if interest
rates go up, then so will your payments and
you could be paying above the odds if your
lender decides not to pass on some or all of
the rate increase to its other customers.
A further advantage of tracker mortgages is
that many lenders are now adding flexible
features to them, such as the facility to
over and underpay each month.
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Flexible
Flexible mortgages can offer borrowers
greater control of their
 finances
by calculating interest daily and allowing
the option of overpayments. Paying just a
few pounds extra each month you can pay back
the capital of your loan faster,
considerably reducing the mortgage term and
saving you thousands in interest payments.
Once you have been paying the mortgage for a
while, most flexible loans allow you can
make underpayments and take payment holidays
but only to the limit of any overpayments
already made. top
Some lenders also offer
a cheque book or reserve account facility
allowing you to draw down on your
overpayment or, if you have equity in the
property, to borrow more (to a set
percentage of the property’s value and
depending on your income). While most
flexible mortgages follow the lender’s SVR a
growing number of flexible lenders are now
offering fixed capped and discounted deals –
although often only for a limited period of
four to 12 months. top
Current Account/Offset
Current account and offset mortgages are the
big new thing in the mortgage world. They
allow you to save money by ‘offsetting’ the
interest you pay by taking account of your
credit balances in other accounts, such as
your savings or current account.
Historically most lenders charge you a
higher rate of interest on money that you
borrow from them than the level of interest
you will receive from having money in
accounts with the same lender.
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Unfair? A lot of people
think so and this is where the new breed of
Current Account/Offset mortgages have arisen
from. With these lenders if you have for
example £5,000 in a current account and a
mortgage of £150,000 - then instead of being
charged interest on £150,000 you are charged
interest on £145,000. This means that the
money in your current account has earned the
same amount of interest as the level of
interest that you pay on your mortgage.
Another added benefit is that there is no
tax due unlike a normal current or savings
account where interest is taxed at 20/40%
based on your tax rate.
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CashBack
 Under
cash back schemes, on completion of your
mortgage your lender gives you a cashback
cheque which you are free to spend on
whatever you want. The payment is a tax-free
lump sum, normally either a set figure or a
percentage of the total mortgage loan.
Cashback offers can be ideal if all your
saving have gone into providing a deposit
for your new home, leaving you short of
money to furnish it or pay for the move.
On the negative side,
cashback deals inevitably tie you in to the
lender’s standard variable rate for a number
of years, with an early redemption penalty
that can be three to six months interest or
the repayment in full of the cashback
amount. top
Repayment Methods Explained
Repayment Mortgage
Repayment is the traditional means to pay
back a mortgage – you make payments every
month, part of which goes towards repaying
the money you have borrowed – the capital –
and part of which pays the interest on the
loan (also known as capital and interest
mortgages.) Instalments remain the same each
month, changing only as the Bank of England
interest rate rises or falls and lenders
interest rates follow suit. The advantage of
a repayment mortgage is that provided you
have kept up with the monthly payments you
are guaranteed to have paid off the loan by
the end of the mortgage term.
In the early years of a repayment mortgage,
more of the instalment goes on paying the
interest than the capital. Over time, as
more of the capital is paid off so the
amount of interest reduces until the total
loan has been paid back.
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Interest-only
Mortgages
With an interest-only mortgage you do not
pay back any of the capital until the end if
the mortgage term. You pay the lender
interest on the loan each month. Repayment
of the capital is usually covered by long
term payment into an investment scheme,
designed to have accumulated sufficient
returns by the end of the term to pay off
the loan – and even to have grown to give
you a surplus lump-sum payment too. There
are various types of investment schemes used
to cover an interest-only loan. There are
various types of investment schemes used to
cover an interest-only loan. The most common
has been as endowment policy but mortgages
linked to
pensions and ISAs are also available. It is
also becoming more popular to downsize at
the end of the mortgage term. This involves
selling the family home and moving to a
lower value 'smaller' property once the
family has flown the nest. Flexible
mortgages are sometimes arranged on a pure
interest only basis as they allow you to
make additional repayments at the times to
suit you. Some people have even used regular
bonus payments to make balloon payments off
the mortgage balance.
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Endowment Mortgages
With an endowment mortgage you pay interest
on the loan to the lender and premiums into
as investment plan. These plans are usually
run by insurance companies and include life
cover. They are designed to pay off the
capital at the end of the mortgage term or
if you die within that term.
However, much depends on the performance of
the fund into which your monthly payments
are invested. Many people who took out
endowments during the 1980s when stock
markets and percentage returns on
investments were high, have found that the
low returns of the 1990s and since have left
them with a current shortfall and the
possibility that the endowment will not meet
the payment of the loan at the end of the
mortgage term, let alone provide them with a
welcome lump sum over and above that amount.
As it is linked to an insurance policy which
does not mature until the end of the
mortgage term, an endowment requires a
commitment for the full term of the mortgage
if you want the benefit. The insurance
policies can have a surrender value after
they have been paid for a number of years
but that value can often be less than you
have paid in. How much an endowment will
cost will depend on your age, health and the
length of the mortgage.
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ISA Mortgages
With an ISA (individual savings account)
mortgage you pay the interest on the loan
each month and invest in an ISA, the cashing
in of which pays off the mortgage at the
term-end. ISAs have the advantage of a
number of tax benefits but there is a limit
on how much can be invested into an ISA each
year. ISAs can be invested in the stock
market, life insurance policies and cash. As
with endowment policies the ISA's ability to
repay your mortgage, will be reliant on
stock market performance if invested in a
stocks and shares ISA.
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Pension Mortgages
These are available to the self-employed and
those contributing to a personal pension
plan; but not as part of company pension
schemes.
With pension mortgages the capital sum
remains outstanding for the length of the
loan, on which you pay interest. Payment of
the loan is met at the end of the term from
the pension plan into which you pay on a
monthly basis.
The advantage of a pension mortgage is that
you claim tax relief on any contributions
made to the pension plan. The disadvantages
are that you are paying for your own home
loan until you retire, thereby setting your
retirement age in advance. You are also
using part of your pension to pay for your
mortgage, which means your pension fund will
have to perform very well or your
contributions have been high. And only 25
per cent can be taken as a tax free lump sum
(under current legislation) – the rest must
be used to purchase an annuity.
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