Repaying the loan
• Whilst many different mortgage options are available, there are two main methods for repaying a mortgage: interest only or repayment (capital and interest).
• With an interest only mortgage, you pay monthly interest payments only to the lender and require an alternative method of repaying the capital by the end of the term.
Popular vehicles that are used for repayment include ISAs and other investments, pension lump sums, sale of property, downsizing and until recent years, endowment policies.
• With a repayment mortgage, monthly payments cover both the interest and part of the capital. This mortgage option offers the certainty that the loan will be paid off at the end of the term.
•Flexible features differ, but generically will suit if your financial circumstances vary or you want to use bonuses or commissions, often at irregular intervals, to repay your mortgage.
• There should be no redemption penalties for lump payments and interest is typically recalculated daily.
• This could be the lender’s own calculated Standard Variable Rate (SVR), which fluctuates as lending rates change.
• Or a Bank of England Base Rate tracker rate that is normally set at a fixed margin above the Bank’s base rate. Both types normally share an initial discount.
• Lenders will typically calculate their SVR in relation to movements in the Bank of England Base rate, for example keeping between 1 or 2 percent above, but not always. The SVR might go up and down as soon as the base rate changes or less frequently, e.g. once a year, reflecting interest rate changes during that period.
• Here the interest rate is fixed for a set initial period, typically between two and ten years.
• Unlike variable rates, fixed rates allow you to budget your monthly home expenses as you know that your monthly repayment will remain unchanged for a set period.
• You are also protected, during this set period, from any increases in interest rates, although equally you will not benefit from falling rates.
• Lenders often charge a booking fee on fixed rate loans.
• Redemption penalties are generally incurred if the loan is paid off within the fixed period, but there will normally be an allowance fr overpayments.
• Many lenders offer loans with a very low initial fixed rate, on which extended redemption penalties apply for one or more years beyond the fixed period, normally when the loan has reverted to a much higher variable interest rate. We do not endorse these arrangements and advise against them.
• The loan has a maximum interest rate, or cap, for a specific time period.
• This protects you from an unexpected rise in interest rates.
Discounted interest rates
• The lender offers a discount, below their variable rate for a set period of time.
• This means your payment can still be variable, but at a lower interest rate for a given period.
Offset mortgage & current account mortgages
• Savings are used to offset mortgage debt and therefore you only pay interest on the difference between your outstanding mortgage balance and your savings.
• In principle you therefore earn tax-free interest at your mortgage interest rate.
• With a current account mortgage your current account balance is also offset against the mortgage debt. Your mortgage debt can also effectively be treated as a large overdraft facility.
Charges involved in purchasing
Residential rates in England and Wales: • Nil below a property value of £125,000
• 2% of the amount between £125,000 and £250,000
• 5% of the amount between £250,001 and £925,000
• 10% of the amount between £925,001 and £1.5million
• 12% the amount over £1.5million
An additional 3% is charged when purchasing second residential property.
Survey fee unless you are quite happy that your chosen property is sound, you would be well advised to instruct a homebuyers report or full structural survey.
• Their fees
• Local searches
• Necessary reports for the lender
• Land Registry fees
Mortgage Lenders costs
A lender may charge none, one or some of these fees:
• Valuation fee
• Administration fee
• Booking / Completion/Arrangement fee (can often be added to loan)
• Higher Lending Charge*
• Early repayment charges
*A higher lending charge (HLC) is a type of insurance taken out to indemnify against losses that lender could incur if the property had to be repossessed and sold in the event of the borrower defaulting on the loan. It protects the lender in the instance that the sale of the property is not enough to repay the amount that they are owed. Now not as common as they used to be, lenders that charge them will have a loan to value threshold, above which an HLC fee will be required; generally between 70% and 90%.