Universal Finance: Mortgage

The Basics

Mortgages are one of the largest single transaction in most people’s lives. Buying a property can be a stressful and time consuming experience, although nowadays the financing of a mortgage is a case of finding and selecting the most suitable deal, rather than simply accepting a lender’s offer.

Hundreds of banks, building societies, and smaller niche lenders compete for your business, all offering a variety of interest rate deals, associated fees and other enhancements to attract borrowers.

There remains two main methods of repaying a mortgage loan, and it is possible to set up the mortgage on a ‘part repayment and part interest only’ basis. A description of these methods is provided below.

Repayment (capital and interest) mortgages:

Under a repayment mortgage your monthly repayments consist of both interest and capital hence, over time, the amount of money you actually owe will decrease. In the early years your repayments will be mainly interest and therefore the capital outstanding will reduce slowly in the early years.

Whilst this method ensures that the mortgage is repaid at the end of the term providing all payments are made on time and in full, it is generally more expensive at the start.

Interest only mortgages:

As their name suggests, with an interest only mortgage you only repay the interest on the mortgage. At the end of the term the capital is still outstanding. Therefore you will usually need to take out some kind of investment policy to save up enough money to repay the mortgage at the end of the term.

Traditionally the preferred product for repaying the capital of an interest only mortgage was a mortgage endowment policy (which included a set amount of life cover) – although more recently customers are using Individual Savings Accounts (ISAs) and pensions to build up a sufficient sum and taking advantage of the tax breaks offered by these products.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

The Financial Conduct Authority does not regulate some forms of mortgages and ISAs.

**PLEASE COMPLETE THE APPROPRIATE FEE WARNING AND DELETE THE REMAINDER AS APPLICABLE**

There may be a fee for Mortgage advice. The precise amount will depend upon your circumstances but we estimate that it will be £X.

A typical fee for Mortgage advice is X% of the Mortgage amount

As we are independent you have the choice whether to pay a fee for the mortgage advice we provide. Typical £X/X% of the Mortgage amount

Broker fees may be payable for mortgage advice. These would typically be X% of the loan we arrange for you. However, we will discuss your payment options with you and confirm the actual amount payable before we begin to provide our services.

Mortgage Deals

There are also several terms used to describe the interest you pay on a mortgage, and the key terms are as follows:

Standard Variable Rate (SVR)

The SVR is the lenders standard rate, usually 2-4% above the Bank of England base rate. With a variable rate mortgage you are able to switch lenders at any time without being penalised. If you start a mortgage with a different type of interest repayment for an agreed term, once the term finishes you will go back to the Lenders SVR.

Fixed Rate

A fixed rate mortgage allows you to repay interest at a fixed rate, irrespective of any base rate fluctuations. In other words your monthly repayments will remain the same every month for a time period agreed between you and your lender (usually up to 25 years). Fixed rate mortgages often have high repayment charges so you need to be sure this is suitable for you for the foreseeable future. Furthermore, the lender may also charge a ‘booking/arrangement fee’ to apply for this type of mortgage.

Tracker

A tracker mortgage will track any movement in the Bank of England Base rate, so you will benefit from any falls in interest rates, but will also have to pay more each month should the rates increase.

Discount

The discount mortgage rate is another variation of the standard variable rate. It provides a discount from the lenders SVR for a fixed period of time. The interest rate still fluctuates, meaning your monthly repayments may differ slightly from month to month, but the discount remains constant.

You should ask your adviser to explain these in more detail, or ask for an illustration.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

The Financial Conduct Authority does not regulate some forms of Mortgages

**PLEASE COMPLETE ONE OF THE FOLLOWING FEE WARNINGS AND DELETE THE REMAINDER AS APPLICABLE**

There may be a fee for Mortgage advice. The precise amount will depend upon your circumstances but we estimate that it will be £X.

A typical fee for Mortgage advice is X% of the Mortgage amount.

As we are independent you have the choice whether to pay a fee for the mortgage advice we provide. Typical £X/X% of the Mortgage amount.

Broker fees may be payable for mortgage advice. These would typically be X% of the loan we arrange for you. However, we will discuss your payment options with you and confirm the actual amount payable before we begin to provide our services.