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UK Mortages: A Guide Through The Maze
Types of UK Mortgages
You may be wasting your money with the wrong type of mortgage.
Knowledge is power.
There are essentially two different types of mortgage:
Repayment only, (capital and interest mortgage)
Interest only, (ISA, pension or endowment mortgage)
Repayment only
Your monthly repayments consist of repaying the capital amount
borrowed together with accrued interest. On your mortgage
statement, normally received annually, you will see that the
amount borrowed decreases throughout the term.
Advantages
At the end of the term, you are safe in the knowledge that the
total amount of the debt has been repaid.
Overpayments and lump sum payments into your mortgage account
can be made reducing both the interest and capital amounts
repayable.
Life assurance cover is not always necessary in taking out
this type of mortgage.
Disadvantages
There may be financial penalties for making lump
sum/overpayments into your mortgage account.
In the early years of a repayment mortgage the majority of the
monthly repayment is interest rather than capital. For borrowers
moving house regularly, this can result in little of the capital
being paid off.
If you have no life assurance cover in place and die before
the loan is repaid, the mortgage will still need to be repaid.
This may result in the property having to be sold to repay the
debt owed.
Interest only
With this type of mortgage, only the interest is paid off with
each mortgage payment. The borrower also takes out at the same
time, an alternative 'repayment vehicle' (method of paying off
the mortgage) such as an ISA, pension plan or endowment policy.
More information about endowments (which in the 1980's and 1990's
were extremely popular), ISAs and Pension plans are below. The
most important fact about an interest only mortgage is that the
monthly repayments do not repay any of the outstanding capital
balance. As a consequence it is important that the payments are
maintained into the repayment vehicle otherwise it will not be
possible to pay off the mortgage at the end of the term.
Endowment
ISA Plan
Pension
Endowment
The most common type of interest only mortgage which also
provides life assurance cover and a fixed payment for investment.
The fixed payments are based on the amount of the loan together
with the mortgage term and are designed so that, at maturity, the
amount invested and earnings are sufficient to pay off the
mortgage. Much maligned in the press because of the poorer
investment growth rates achieved in a low inflationary
environment this form of investment is less popular these days.
Note there is no guarantee that, when the endowment matures and
'pays out', the balance will be sufficient to repay the
mortgage.
ISA Plan
The Individual Savings Account (ISA) is a tax free method of
saving. Using an ISA as a repayment vehicle is growing in
popularity but due to the ISAs complexity it is only for the
financially sophisticated or borrowers taking advice from a
suitably qualified financial adviser.
Pension Plan
Life assurance cover is provided and monthly payments are made
into a pension fund. When the benefits are eventually taken, the
mortgage is repaid using tax-free cash from the remainder of the
fund. The plan holder can then draw a pension from the balance of
the fund. This product, which tends to be used by the self
employed, is only for those taking advice from a suitably
qualified financial adviser.
Discounted mortgages
Most of the discounted rates offer discounts over the first
one, two three, four or five years. The total amount of discount
on offer tends to work out approximately the same over the period
of the discount. The choice is yours between making a choice
between a large discount for a short period of time, a small
discount over a long period of time or something in between. For
example one product may offer a 3% discount over 2 years and
another a 2% discount over 3 years. The total discount you
receive in either case is 6% so the choice you are faced with is
what period to take the discount over.
Cash back mortgages
These deals vary but, as the name suggests, you get cash -as
well as the money you're going to be borrow for your home. You
may use it to pay for home improvements moving costs and
furniture etc.
Cash back deals are perhaps best seen as an incentive to go
with a particular lender. It's rarely a genuine gift and you will
find that you have extended ties. There is nothing free in the
mortgage market the lender will eventually make more than make
their money back.
Current account mortgages
It's becoming increasingly popular to combine a mortgage and a
current (banking & check) account. Its good news if you like
the option of making overpayments on your mortgage (e.g. if you
are self-employed or receive bonus payments). The other advantage
is that interest is calculated on a daily basis, so when you pay
money into your account, like your monthly wage, the overall loan
size is lowered, so reducing the total amount of interest
paid.
Base Rate Tracker Mortgage
These can get very complicated but in theory they're simply a
mortgage that follows the Bank of England base rate at an agreed
rate.
So you might have a Base Rate Tracker Mortgage which sets your
mortgage at 1% above the base rate for, say, the first two
years.
Non standard mortgages
If you have experienced financial difficulty in the past or
are unable to produce full proof of your income then you may find
that the main stream lenders are unable to help you. However, we
would recommend that you contact these lenders first as,
depending on the severity of your situation; you may find that
they are willing to help. If not, however, you will find that
there are lenders who specialise in this area of the market.
These lenders tend to charge higher interest rates or require
larger deposits. Once you have re established your credit you can
change to a standard mortgage.
Remortgage
You don't have to move home to move your mortgage. Many
homeowners move their mortgage to a different lender to save
money, or switch to a different mortgage with their current
lender.
You may want to remortgage to
Improve your home.
Save money If you're paying your lender's standard variable
rate (SVR), your existing lender - or another lender - may offer
better rates if you move to a different mortgage.
Raise money if you want to improve your home, or pay off other
borrowings, you may be able to increase your mortgage rather than
taking out a separate loan.
Nicholas Marr
Marr International Ltd
Visit our overseas website for Mortgages abroad,mortgage advice
and overseas property
http://www.homesgofast.com
Marr International is not registered under the UK financial
services act to give advice regarding mortgages. Our partners
specialising the different regions world wide for mortgage
advice.
 MORE RESOURCES updated Sat. July / 31 / 2010
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