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The following information is a brief description, if you require more information, please contact us.
Mortgage Payment Period
Mortgage repayment periods are usually twenty five years, but can be arranged for a period of five years to forty years, subject to your status i.e. age and employment security.
Mortgage Payment Methods
There are two main types of mortgage payments:
Capital and Interest Repayment Mortgage (also known as - Repayment Mortgage)
The interest charged to this type of mortgage account is calculated over the mortgage term. Lenders usually charge the interest up front; therefore, the majority of the interest is paid in the early years of the mortgage. The monthly mortgage payment includes part of the loan and interest payable on the loan; therefore, in the early years of the mortgage the loan reduces slowly, but increases during the mortgage term.
This payment method guarantees the borrower that the loan will be repaid at the end of the mortgage term where payments are made on the due date, the correct payments are made and no arrears accrue on the mortgage account.
Where the borrower moves home in the early years they would have paid mainly the interest on the loan they have borrowed. If the mortgage account is closed the borrower would have paid a greater part of the interest than the money borrowed.
Interest Only
The payment to the lender consists only of the interest due on the amount borrowed. They do not pay off any of the capital. The money borrowed will normally be repaid when either the property is sold or you receive the proceeds from a financial windfall, an inheritance, personal savings or an investment.
If you decide to proceed with this method it is vital that your chosen savings and/or investment plan is maintained until sufficient in value to repay the mortgage debt before or at the end of your mortgage term. You should also ensure regular reviews are undertaken to confirm the savings and/or investment plan is on target to achieve the outstanding mortgage.
It is possible to use a combination of a capital repayment and interest only mortgage (see part & part).
How Interest Rates are charged?
Daily
This system adjusts the debt daily to take account of all daily transactions thus allowing interest to be charged daily on the outstanding balance. A reason for this system is that it reduces the amount of interest receivable by the lender on the loan as the capital owed reduces more quickly than under a monthly or annual interest system. It can have the effect of reducing the mortgage term or the monthly mortgage payment, which can potentially save the borrower interest payments.
Monthly
This system adjusts the debt monthly, thus charging the borrower monthly on the outstanding debt on a nominated day in the month. A reason for this system is that it reduces the amount of interest receivable by the lender on the loan as the capital owed reduces more quickly than under the annual interest system. It can have the effect of reducing the mortgage term or the monthly mortgage payment, which can potentially save the borrower interest payments.
Annually
This system operates on an annual review, which gives the borrower a known cost once a year. The account is charged with interest at the rate applicable at the beginning of the financial year. The interest rate is adjusted annually, usually at the time the annual mortgage statement is sent out. Despite it's obvious benefits for financial planning, the annual review scheme can create financial pressure on the household budget if interest rates move upwards several times in the same accounting year. By the end of the year, the amount owed will have increased by the rolled up interest, necessitating a more than proportionate increase in monthly payments. Many lenders offer this facility.
Annual Percentage Rate (APR)
The APR represents the total interest cost and charges on the loan. The charges may include arrangement fees, valuation fees and others The APR is designed to allow the borrower to compare product costs with other lenders products.
Mortgage Product Types
Standard Variable Interest Rate (SVIR)
This is an interest rate set by the lender and can be changed at their discretion. Most lenders charge a similar SVIR to remain competitive. As interest rates rise and fall so will your mortgage repayments.
Discounted
The lender will offer a discount for a specific period of time from their (SVIR). As rates rise and fall so will your mortgage repayments. At the end of the discounted period your monthly payments and the interest rate will usually revert to the lender’s normal SVIR and your monthly payment will reflect this change. Early repayment penalties can apply to this type of loan particularly during the discounted period. Sometimes the penalty period can extend beyond the discounted period.
Fixed
The lender will offer a fixed monthly payment for a specific period of time. At the end of this fixed interest rate period your monthly payments and the interest rate will usually revert to the lender’s normal (SVIR) and your monthly payment will reflect this change. Early repayment penalties can apply to this type of loan particularly during the fixed rate period. Sometimes the penalty period can extend beyond the fixed rate period.
Stepped
With this option the borrowers repayments remain the same throughout each year, however, at the end of each year the repayments are "stepped up" by a percentage which the borrower can choose.
A stepped mortgage can be incorporated within other mortgage products, for example a discounted or fixed. The stepped system allows the lender to step their mortgage product, for example; the mortgage percentage is set low in year one and increases during the agreed period
Capped
The lender will offer a capped interest rate for a specified period of time. This means that should the lenders (SVIR) increase above the capped rate your monthly payments will not increase above the capped interest rate. If the SVIR falls below the capped interest rate your payment will reduce inline with this fall. At the end of the capped interest rate period the interest rate will usually revert to the lender’s SVIR and your monthly payment will reflect this change. Early repayment penalties can apply to this type of loan particularly during the capped rate period. Sometimes the penalty period can extend beyond the capped period.
Capped & Collared
The lender will offer an agreed Capped & Collared interest rate for a specified period of time. This means the interest rate will not go above the capped or below the collared interest rate. The “cap” reflects the highest rate charged and the “collar” reflects the lowest rate charged. This means that should the lender’s (SVIR) move below the collar or higher than the capped rate your payments will not reflect the lower or higher interest rate being charged. At the end of the capped & collared interest rate period the interest rate will usually revert to the lender’s SVIR and your monthly payment will reflect this change. Early repayment penalties can apply to this type of loan particularly during the capped & collared rate period. Sometimes the penalty period can extend beyond the capped period.
Flexible
There are many different variants on a flexible mortgage they can give you increased flexibility when compared to the traditional mortgage type. Flexible mortgages usually incorporate the following features:
- You can vary payments by overpaying paying. This will reduce the mortgage debt, lower the monthly interest payment and may reduce the mortgage term.
- You can take payment holidays, lower your monthly payments or increase the borrowings via the mortgage account. With many flexible mortgages it might be possible to use this facility without having made earlier payments, provided the total borrowings does not exceed certain limits – typically 75% or 80% of the value of the property. This may be useful if you have a fluctuating income and have difficulty budgeting for your monthly mortgage.
- Interest is usually calculated on a daily basis on the out-standing mortgage balance. When overpayments are made it immediately reduces the amount of interest charged on the following day.
A flexible mortgage might include any or of the following features:
- To enable the purchase of another property
- A facility to borrow money, with-in agreed limits, for capital sum expenditure such as home improvements
- A current account with an agreed overdraft facility, cheque book, credit card, debit card
This flexibility can be very appealing to those with fluctuating incomes such as the self employed or those who expect to receive a capital sum such as bonuses or an inheritance; these can be applied against your out-standing mortgage account if desired.
Such mortgages should only be considered suitable for those who are likely to take advantage of the ability to over-pay as well as under-pay. Otherwise, there is the danger to take full advantage at an early stage of the ability to take a ‘payment holiday’ and will become over-extended without really having any prospect of catching up in the future.
Current Account
A current account mortgage is where the mortgage combines a banks current account allowing you to write cheques against your mortgage. Also, allowing you to usually make overpayments, under payments and take payment holidays. A current account runs within the parameters of SVIR and lenders can change the rate at their discretion. Most lenders charge a similar SVIR to remain competitive. As rates rise and fall so will your mortgage repayments. There is a need for you to plan carefully and exercise self-control with this type of mortgage.
Introduction to - Base Rate Tracker, off-set, Current & Savings Accounts
An Off-Set, Current and saving Account(s) mortgage, gives the flexibility within one mortgage package. The interest is usually charged ‘daily’. This type of mortgage offers you the control of your day to day financial needs that are catered for within a lender’s single account. Lenders do not usually apply penalties to an early repayment of the mortgage.
Lenders do offer specified tracker periods, example a two or five year tracker. These might have a penalty within the tracker period, which can extend beyond the tracker period.
The off-set mortgage is not too dissimilar to a flexible mortgage, the key difference is the savings and mortgage accounts are kept separately. The advantage is; you can see what there is in each credit and/or debit account on any day.
Base Rate Tracker, off-set, Current & Savings Accounts
This type of mortgage is charged at a percentage above the lenders chosen bank base rate; for example, The Bank of England’s base rate. This rate changes from time to time. The lender applies a percentage above their chosen base rate; this percentage varies between lenders, but usually remains fixed for the duration of the mortgage term. When the lenders chosen bank base rate moves ,usually inline with The Bank of England’s base rate; the mortgage interest payment will move accordingly, hence the word ‘tracking’. This account incorporates a current account and saving account(s).
Off-Setting
The mortgage account is linked to a saving account(s) and/or a current account. This linking reduces the daily interest rate charged on your mortgage by way of off-setting the credit balance in the current and saving account(s) against the outstanding mortgage account. A key difference with this type of mortgage is the savings and mortgage accounts are kept separately giving you the advantage seeing what there is in each credit and/or debit account on any day. This additional transparency (in theory) is to give you a greater degree of control over your finances, whilst at the same time benefiting from a lower overall debit interest rate.
Off-Setting Account(s) explained
The off-setting feature allows you to establish separate savings accounts along with the balance held in a current account. The total amount held in these accounts will be totalled and offset against your mortgage. For example, if your savings account(s) and current account total £5,000 on any one day and your mortgage is £60,000, interest will be charged on the net balance of £55,000. Please note; you will not see interest added to your savings as this is being used to reduce the interest paid on your mortgage.
Whilst writing; the off-setting facility is tax free.
The below is an example of how an Offset Mortgage could be used to its full potential.
The example and calculations are based on borrowing £100,000 over 25 years at a rate of 6% per annum.
(Click here a bigger diagram)
• The monthly Interest and Capital Payment (Repayment amount) on this mortgage = £644 p/m
• £500 of this payment is the Interest part, therefore the Capital part is £144 (£644 minus £500)
• Each month a £500 mortgage payment goes to the lending bank, this covers the interest of the loan only.
• £144 can then be paid into a savings account to make up the capital part of the monthly payment; we have called this account ‘Capital Account’ (see blue box in diagram). The money that mounts up in this account will then be offset against the mortgage account.
• Other savings accounts can also be set up (see green boxes in diagram), any money that is put into these accounts is also offset against the mortgage account.
• In the example there is a total of £15,000 in the current account, capital account and savings accounts. This amount is offset against the mortgage account, which means interest is only charged on £85,000 of the £100,000 borrowing. (£100,000 mortgage minus £15,000 in current, capital and savings accounts)
• Interest charged on £85,000 is £425, this is £75 less than if you were paying interest on the full £100,000 borrowing.
CAT Standard
These were introduced by the Government as an option for customers who wish to have some clearly stated guarantees in respect of; charges, access and terms that will apply. CAT stands for Charges, Access & Terms. To qualify for “CAT” status the mortgage must satisfy certain benchmarks laid down by the government. Different CAT marks apply for (discounted) variable rate and fixed or capped rate mortgages. The Government stresses that a CAT mark doesn't mean a mortgage deal is officially endorsed and for many people non-CAT-marked deals will be a better option.
Part & Part
A part & part is a combination of an interest only and a capital repayment and interest mortgage.
Libor Mortgages
Libor is the – London Inter-bank Offered Rate – essentially the rate at which banks lend to each other. It’s an indicator of the short term price of money.
Some lenders offer mortgages with a rate of interest linked to a Libor rate. The rate is reviewed at periodic intervals set out in the mortgage contract, usually every three months. When the Libor rate is increased, the payment will be increased and vice-versa; there is time delay for this adjustment to be reflected in this type of mortgage.
It is unusual for residential properties to be linked to a Libor rate. It is most common with loans secured on commercial property.
Guarantor / Surety to a Sibling’s Mortgage
A Guarantor – is someone (an individual a company or occasionally a partnership) who agrees to be responsible for the repayment of a loan if the borrower(s) cannot or will not repay it themselves. The borrower(s) do this by making a guarantee, which is defined under the statute of Frauds Act 1677 as a written undertaking to “answer for the debt, default or miscarriage of others”
Surety – Is someone who in addition puts up some form of security for the mortgage. As well as making the undertaking to answer for the mortgage if the borrower fails to do so, (Guarantor) they also provide some additional collateral.
Where the borrower wants the lender to accept a guarantee or other security from another person for the borrower’s mortgage, the lender may ask the borrower to consent to the disclosure of their confidential financial information to the person giving the guarantee or other security or their legal advisers. The lender will;
1. Encourage the proposed guarantor to take independent legal advice to make sure that they understand their commitment and the potential consequences of their decision. All the documents the proposed guarantor will be asked to sign will contain this recommendation as a clear and prominent notice.
2. Advise them that by giving the guarantee or other security they may become liable instead of or as well as the borrower.
3. Advise the proposed guarantor what the limit of their liability will be. An unlimited guarantee will not be taken.
The lender has the right to enforce the guarantee should the borrower default in payment. By contrast, the guarantor has few rights.
A guarantor may request the lender to be released from the obligations of the guarantee, but the lender will only agree if the borrower can prove to the lender that their income or a joint application can support the mortgage under the lenders normal lending criteria. Fees are usually charged for this release. If the loan is supported by a guarantee, any proposed changes in the terms and conditions of the guaranteed mortgage must be sanctioned by the guarantor(s), although the guarantor is not usually included on the mortgage deeds.
The lender will usually require the guarantor(s) to take independent legal advice.
Reserve Facility
This means; should you wish to receive money in the future there will be a reserve account available to you with a percentage upper limit, which is agreed with you and the lender. The amount you want to receive will be available at the same rate that applies to your mortgage. This is a short term solution to clear any borrowing and you may wish to consider clearing your credit card balances or any other borrowings with this facility. Please note; although this may be a short term solution over the long term this could be very costly. You will be charged nothing for the use of this facility should you opt not to use it, with exception to the interest applied, however, all loans are secured on your property and your home is at risk should you not maintain the appropriate payments.
Higher Percentage Lending HLC Fee/Charge
A mortgage that represents a higher percentage to which the lender is not prepared to take a risk (usually in excess of 75% of the lenders valuation to the property), the lender will want you to pay a high percentage lending fee. Some or this entire fee may be used by the lender, at its discretion, to obtain mortgage indemnity insurance to act as extra security for its sole benefit. If this is the case, the lender will give you a written explanation stating that:
1.
Such insurance is not designed to cover the home owner and will not protect you if your property is subsequently taken into possession by the lender and sold for less than the amount you owe.
2. You will remain liable to pay all sums owing, including arrears, outstanding interest, legal fees and the accumulated interest on any outstanding debt the lender has linked to you via your mortgage account after the property has been sold. The mortgage and its accumulated debt must be repaid in full.
3.
If a claim is paid to your lender under such insurance, the insurers generally have the right to recover this claimed amount from you.
The implications of adding fees and costs to the loan and/or debt consolidation
Should you decide to add any fees, costs or debt consolidation to your loan, please be aware that interest will be charged to these, usually by the same interest rate charged to your mortgage loan. Over a period of time these charges may work out to be expensive.
Portability of a Mortgage
The portability of a mortgage from one property to another is dependent on the lenders terms and conditions of the mortgage contract. This can be checked in the lenders ‘Key Facts about this mortgage’ or on their mortgage ‘offer letter’, it’s in your interest to read these carefully. Where a mortgage contract is ported to another property charges can be incurred.
The following is a generic overview of OMHB.
OMHB is a government-funded scheme to help you borrow money to buy a home where you can not afford to buy a home on the open market without assistance. It provides access to additional money, which runs along side a conventional mortgage.
The scheme is available to Key Workers; Social Tenants; Priority Groups on a housing register and Priority first time borrowers. To establish whether you are able to participate in the scheme you will have to first write to a HomeBuy Agent operating the OMHB scheme, they will then assess your eligibility for the scheme. The scheme involves you borrowing money from a government nominated lender who supply the OMHB mortgage scheme and a HomeBuy Agent. The HomeBuy Agent will manage the money the Government puts in to the scheme. A HomeBuy Agent is a housing association in England that has been appointed by the government to operate the OMHB scheme.
The mortgage is funded in three parts:
- 12.5% by the Government
- 12.5% by the nominated lender
- 75% in the borrowers name, lent by the nominated lender
The 12.5% Government share is an interest free loan, in the normal sense of the word. The Government receive their money back by taking a 12.5% of the growth value in the property. They never charge interest on this loan. There are no monthly payments to be made. If you sell the property and the property has fallen in price the Government will accept the fall in price and a lower percentage share. Example; if the property fell by 12.5% then the Government will receive nothing. This loan is secured against the property, but it is behind the first charge of the nominated bank.
The 12.5% share held by the nominated lender is also an interest free loan, in the normal sense of the word, usually, for a nominated period of time. The nominated lender receives their money by taking a 12.5% of the growth value in the property. Also, and usually after an agreed period of time a percentage is applied to the loan, usually 3%. This percentage could increase to the lenders standard variable rate after ten years. You will usually pay the interest and repay the money you borrowed when the mortgage is redeemed or the property is sold. If the property has decreased in value you will usually have to repay the money you borrowed, however, some lenders will share in any fall in the property value.
The 75% share in the borrowers name and lent by the nominated lender is usually a standard mortgage product from the nominated lender. It is usually taken out on a capital repayment mortgage (where you pay the interest and the capital per month on the money you have borrowed).
Costs involved in an OMHB mortgage:
Legal costs
Search fees and land registry
Lenders fee
Mortgage broker’s fee
Survey – Homebuyers or equivalent
Stamp duty (if applicable)
On going costs:
Monthly mortgage payments
Buildings insurance
Contents Insurance (If chosen)
Mortgage payment protection (If chosen)
Individual insurance protection (If chosen)
Council tax
Utility bills - Gas, Electric, Water
What are the Advantages and Disadvantages?
Advantages
You have a foot hold on the housing ladder
It’s usually cheaper than renting
You will eventually own your own home
You have the freedom to find your own property (providing it meets with the scheme’s terms and conditions) unlike the Shared Ownership scheme.
Disadvantages
You might be placed on a waiting list
It’s not available to everyone
Early repayment charges usually apply
Government will own a share in the property increased value
Lenders will own a share in the property increased value
Only on a repayment method
Unfavourable rates at the end of the initial period
You must pay for a valuation of the property when you sell it
You must pay for a valuation of the property when you redeem the equity loan i.e. the lender’s and the government’s share of the loan
You must have at least £3,500 in savings to cover the costs of buying a home
You cannot secure loans on the property for any reasons other than repair/improvement whilst the equity loans from the government and the HomeBuy Agent are outstanding
Is it for you? It is in your own interest to gain a greater understanding of this scheme, please refer to: http://www.housingcorp.gov.uk/server/show/conWebDoc.1154 click on ‘Open Market HomeBuy’. To the right hand side of the screen under ‘Related Information’ click on ‘Open Market HomeBuy’ this will take you to their pdf Booklet ‘Have you heard about Open Market HomeBuy?
Also included in this pdf booklet is a list of HomeBuy Agents (HBA) should you wish to contact the agent for your area, please see page 20.
Note: if the links do not work then copy and paste the address into your internet browser bar.
We trust the above information was helpful if you have any questions in relation to this document, please contact us.
Your home may be repossessed if you do not keep up repayments on a mortgage or any debt secured on it. |
