A mortgage is a loan of capital from a Lender. Like most loans, the lender expects to receive interest on the amount lent and eventually the original capital has to be repaid. The reason it is called a mortgage is that your property is assigned - by means of a mortgage deed - as security for the loan. If for any reason you default on the payments, then the lender is legally entitled to force the sale of your your property to recover the amount owing.
What type of mortgages are there?
There are many confusing descriptions of mortgages - endowment, ISA and Pension - but the underlying explanation is quite simple. The lender will provide you with a capital loan with two alternative methods of payment:-
Capital and Interest (repayment)
As well as interest payments being made, the capital loan is gradually paid off year by year, throughout the term of the mortgage (usually 25 years) so at the end of the term the loan is repaid.
Interest Only (Endowment / Pension / ISA)
Only interest payments are made throughout the term of the loan, with the capital loan remaining payable at the end of the term. To pay this amount an investment plan is taken out at the same time as the mortgage (e.g. an endowment plan or another suitable savings plan) and you pay into the investment plan at the same time as making interest payments on the mortgage. At the end of the term the value of your investment should repay the loan and leave a surplus, which belongs to you.
How important is it to consult an Independent Advisor?
Any Independent Financial Advisor will have access to the whole of the marketplace - building societies, banks, insurance companies etc. This selection is of considerable advantage to you, letting you choose the particular mortgage product which best suits your needs. If you merely visit your local bank or building society, you would be unlikely to have a choice of more than two or three different mortgages. Your Independent Financial Advisor can access hundreds of mortgage products and can compare the products for you. The choice you make is critical - it can greatly affect your monthly payments, both during the early years and later on.
How do interest rates differ?
Interest rates can change in various ways:-
Fixed Rate
The rate is guaranteed not to change for a specified period, after which it can revert to the lender's normal variable rate or you may have the option to transfer to a new fixed rate.
Capped Rate
A form of variable rate where the rate stated is guaranteed not to rise within a set period. It may fall during the capped period and can be expected to revert to the lender's normal rate of interest at the end of the capped period.
Variable Base Rate
The traditional type of interest rate in the UK, which fluctuates from time to time depending on the Government's economic policy.
Discount Rate
This is a discount on the lender's normal variable base rate, lasting for a guaranteed period of time. It will vary in that period if the base rate varies and will revert to the base rate at the end of the period.
Are there any perks for First Time Buyers?
Yes - with First Time Buyers accounting for fifty percent of all new mortgages there is intense competition between the lenders. Some lenders allow fees (such as arrangement fees and indemnity guarantee premiums) to be added to the loan rather than paid up front. Some lenders will also allow legal expenses to be added. For further information please contact andersonbain.
Are there any other special situations?
There are certain mortgage facilities tailored to cater for specified classes and groups. In particular :-
Professionals
Special products are available for Doctors, Dentists, Accountants and even Lawyers!
Self Employed
There is generally a requirement for three years accounts. Normally they have to be audited by a Chartered Accountant.
Self Certification
Many mortgages with low loan to value ratios allow you to self certify your income (i.e. independent verification is not required).
CCJ's / Arrears
If you have been affected by Court Decrees or arrears problems, some lenders will take a more sympathetic viewpoint.
Your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it.