There are so many different types of mortgages and products that it can be confusing for Buyers to know who to turn to. While we do not arrange mortgages ourselves, we are able to offer impartial general advice about the different types of mortgages and products available.
Historically, the first port of call in arranging a mortgage would be to approach your usual Building Society with whom you have had savings over the years. However, in the present economy, there is a greater chose of mortgage providers and mortgage products.
Most Lenders will allow you to borrow up to three times your salary, usually over a period of 25 years. Some Lenders are willing to increase these multiples but this will depend on your particular circumstances. It will also depend on the value of the property you are purchasing. Although most Lenders will expect you to put down a deposit, it is possible to borrow the full purchase price. It is even possible to arrange a mortgage if you do not have a good credit history - although these types of mortgages are usually more expensive.
The purpose of this is not to tell you how much your lender will allow to borrow but to explain the different types of mortgages available.
Interest rates and charges
When choosing what product to take, you should consider the interest rate payable. The traditional loan provides a standard interest rate to apply, which goes up and down in line with the Bank of England base rate. Not all Lenders charge the same variable rate so it is a good idea to compare rates between the Lenders.
There are other charges that may need to be paid such as an arrangement fee, a survey or valuation fee and you should check to see whether or not there will be a penalty to pay if you redeem your mortgage before the end of the mortgage term.
You should also check to find out how the interest is calculated – i.e. whether this is on a daily, monthly or annual basis as the amount you repay at the end of the mortgage term can differ considerably depending on how the interest rate is charged. In addition to the traditional loan, you can obtain fixed rates, capped rates, deferred interest rates, discounted rates and cashback mortgages. Most mortgage Lenders will be happy to provide you with an illustration and comparison to help you make your choice.
Methods of repayment
In additional to considering which Lender to approach and which interest rate you should take, you will also need to consider your method of repayment. Essentially, there are three basic methods to repay your mortgage as described below.
Repayment Mortgages
This means that you repay the whole of the initial loan (known as the ‘capital’) and any interest gradually over the life of the loan. The amount outstanding decreases over the repayment period so that at the end of the mortgage term, you will have repaid the whole of your mortgage. This method is known as a "capital and interest mortgage".
A Lender does not usually require any life policy to be taken out to support this type of mortgage although a simple life insurance policy, or mortgage protection policy, is advisable, especially if you have any dependents. You may also decide to arrange some form of accident sickness or employment cover in respect of the monthly payments.
Endowment or unit linked mortgages
This means that you do not repay any of the initial loan (the capital) but simply pay interest on the capital for the whole of the life of the loan. This will mean that you will have to take out some form of repayment vehicle (either an endowment policy or unit linked policy) with a separate insurance company. The theory is that your endowment or unit linked policy, once matured, will provide you with a cash lump sum to repay the capital at the end of the term and may even produce an additional lump sum for you.
In view of the nature of the policy, the lump sum is not guaranteed and if your policy was to prove insufficient to repay the amount of the loan when it matures, you would have to make up any shortfall out of your own funds. It is therefore most important that you choose a reputable life insurance company when choosing your policy.
Pension mortgage
This is also a mortgage when you only pay the interest on your loan but not the capital. You would elect to pay the benefit of any anticipated lump sum from a pension policy to pay off the capital at the end of the mortgage term. This is similar to an endowment mortgage and your ability to repay the capital at the end of the term will also depend on how much your pension policy produces when it becomes available to you to use, that is, when you retire. The benefit in using a pension mortgage is that the premiums currently attract tax relief.
For further information
This is a brief outline of the basic position regarding the types of mortgages available. We are not financial advisers and are not able to comment on whether a particular mortgage or policy is the best available on the market at any particular time but we can put you in touch with a reputable financial advisor if you wish. Please contact our Residential Property Department if you require any further information.
