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Mortgage Options Explained
► Is there only one type of mortgage?
No. There are several types of mortgage available to both Owner and Investor Partners, and you can choose the one that’s best for you.
► What are my options?
The mortgages available fall into 2 main categories:-
1 : Capital repayment where the capital is paid off over the length of the loan, usually 25 years. This is expensive as the first 5 years is mostly interest and very little capital.
Please note: At present we only offer repayment mortgages up to 25 years.
2 : Interest only where you provide another method of repaying the capital at the end of the term.
However, it is not as simple as the a simple choice between the two as there are multiple types of capital repayment The following section look at the options in more detail.
► So, what’s best for me?
Only you can decide that but our mortgage advisors who are fully FSA registered will help with all the facts.
Speak to your Joint Equity advisor for the latest details and interest rates
► What’s in this section?
► Fixed rate mortgages
If you have stretched yourself in trying to buy a property or if you are someone who likes the security of knowing your repayments won't change, then a fixed-rated deal is probably for you. However, this additional security costs - rates on fixed rate deals are higher than for variable special offers and many lenders have high fees for their best deals. Two-year fixed rates are the most popular with British homeowners, but increasing numbers of borrowers are turning to longer term fixed rates of five or ten years. If you choose to do this, make sure that your loan is portable and so can be carried with you if you decide to move house, but remember any extra borrowing will generally have to be with the same lender.
► Arrangement fees
All mortgages will charge to arrangement fees which are usually a fixed sum or a % of the loan taken out. They can be added to the loan amount but remember you will then be paying interest on the fee as well as the amount you borrow to buy your home.
The current (April 2008) arrangement fees vary from £499 to £1,500 and up to 2% for variable fees. So a £150,000 loan from the Abbey will cost you £3,000 since they charge a 2% fee. If you keep the mortgage for 2 years before switching then it is the equivalent of 1% on the loan rate.
Beware, since September 2007 higher arrangement fees have been used increasingly to allow lower “headline” interest rates, so you do need to ensure that you consider all the fees before you make the decision.
► The pitfalls
Lenders offer special offers on the hope that after they end, you will forget to move your mortgage and pay the punishing rates on their SVRs.
Also, some deals lock you in, charging a fee if you want to move the deal within a certain time-frame. For example, a two-year fixed rate deal might have a “collar” that stops you switching deals for a further three years. To avoid these, ask only for deals with no extended redemption penalties.
If you intend to leave a mortgage during a deal period, it is likely that you will incur early repayment charges, make sure how much these will be as bills can be very large and mean moving loans is not economically sensible.
A further consideration is that frequently switching deals will cost you money. Each time you will face an administration charge, of anything from £100 to £500, and a valuation fee of £150 to £200. You need to factor these costs into the equation when deciding whether to remortgage.
► Overpayments
Most lenders allow overpayments, with certain limits, each year. If you do overpay monthly or by lump sums then you can either reduce the monthly cost or reduce the period of the loan.
► Capital repayment mortgages
There are a number of options with a capital repayment mortgage and there are drawbacks to each option
Capital repayment mortgages do just that, each month you pay interest on the outstanding balance and pay off some of the capital. The monthly cost remains the same but over the years the interest portion reduces and the capital repayment sum increases correspondingly .
► Fixed rate v variable rate deals
Up to 2008 fixed rate mortgages accounted for seven out of ten new mortgages taken out in Britain, while variable rate discounted or tracker deals make up most of the rest of new homeloans, according to the Council of Mortgage lenders
The most popular, and generally best value-for-money, deals offered by lenders are those that offer an initial special rate - either fixed or variable - for a set period, typically between two and five years.
After this initial deal period has ended borrowers will then pay back their mortgage at the lender's standard variable rate also known as SVR- generally around 2% above the bank rate although since September 2007 this is edging up and can be as high as 3.5% above bank rate.
Good value mortgages will allow borrowers to leave at a minimal cost once the initial deal period has ended. They can then attempt to secure another good value deal. Inertia keeps many people with their existing lender, but shrewd borrowers can shop around and take advantage of the system.
► Standard variable rates (SVR)
Borrowers who fail to regularly monitor the value of their mortgage deal tend to end up on standard variable rates. The repayments on these tend to be uncompetitive when compared to special offers on the market. The rate moves broadly in line with the Bank of England's bank rate, although the lender is not obliged to pass on the changes to the letter.
► Discounted mortgages
These deals are linked to a lender's SVR but tend to track it at a discount of between 1% and 2%. These deals leave you exposed to the danger of rising interest rates, as their rate will rise when the bank rate does. The pay-off is that rates tend to be more attractive than fixed-rate deals. They are, of course, more attractive when interest rates are falling and are expected to be lower in 12 months than they are now.
► Tracker mortgages
These deals work in a similar way to variable rate mortgages. The difference is that the mortgage tracks the Bank of England base rate rather than the lender's SVR.
The advantage is that you are guaranteed to benefit from the full effect of any rate cut - lenders frequently shortchange borrowers by reducing their SVR, say, 0.2% when the central bank has cut by 0.25%. Of course, you are also guaranteed to feel the pain of rate rises.
► Interest only mortgages
Increasingly the options, such as discounted and tracker, are being offered in interest only format.
► What is an interest only mortgage?
An interest-only mortgage offers a cheaper way to purchase a property than with a capital repayment mortgage, because borrowers are only paying off only the interest and not the capital.
For example, a £150,000 homeloan at 5% over 25 years would cost £625 per month interest-only, and £877 per month capital repayment.
But at the end of the mortgage term, the interest-only loan will have paid off only the interest - leaving the original £150,000 debt to be repaid, whereas the repayment mortgage would have cleared the debt.
Interest-only mortgages are nothing new and were extremely popular in the heyday of endowment policies, which were sold as repayment vehicles alongside them. They are also popular with buy-to-let investors, who can claim tax back against mortgage interest.
► The problems with interest only mortgages
Regulatory requirements were lifted some time ago that stipulated if a borrower had an interest-only mortgage, the lender had to ensure that they had a repayment vehicle and were making sufficient payments to clear the capital sum at the end of the term.
In the past interest-only mortgages were usually combined with an endowment policy designed to pay off the mortgage debt and this was considered a lower cost way of buying a home combined with long-term investment benefits. But it did not turn out that way with the “guaranteed” sum assured being anything but, leaving borrowers with big debts and misselling claims.
In recent years, they are being taken out by buyers who are struggling with affordability and are willing to gamble on future house price rises paying off their mortgage over increasingly long terms.
Those taking out interest-only deals without repaying capital are taking a risk if property prices fall, as their debt will be bigger than their home's value, and even if the value of their home rises the initial debt will not decrease.
However, this is only a problem if you have to move when the prices have dropped. Otherwise the Council of Mortgage Lenders statistics show the average long term growth averages at 6% a year.
► Repaying the capital sum
Now to complicate matters further most lenders allow you to pay off some of the capital up to a maximum each year. Just as capital repayment allow over payments.
Joint Equity interest only mortgages allow up to 10% to be repaid each year.