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  • The Daily Telegraph

    Bank of England warns of tougher curbs on mortgage lending

    The Bank of England has warned that obtaining a mortgage is about to become even more difficult.

    by Myra Butterworth






Mortgages Guide


There are numerous mortgage products available on the market. Each has its own pluses and its own minuses. The mortgage that is best suited to you is one that reflects your lifestyle and takes into account your individual circumstances. This mortgage guide will help you get a better understanding of what your options are.


Below is a list of mortgage types:


Discount Mortgages


A Discount Mortgage gives you a lower rate for an agreed period. The discount mortgage usually applies an agreed discount to the lenders Standard Variable Rate.


Capped Rate Mortgages


The Capped Rate Mortgage option tries to give you the best of both worlds. The interest rate on a Capped Rate Mortgage can move up and down with the market, however, it will never exceed the specified top level.


Fixed Rate Mortgages


A Fixed Rate Mortgage gives you peace of mind regarding payments. Having a fixed rate mortgage ensures you know the interest rate and your monthly mortgage payments will stay the same for the agreed period. The most common periods for a Fixed Rate Mortgage is 2, 3 or 5 years.


Tracker Mortgages


Tracker Mortgages and Discount Mortgages appear to be similar. However they are different, a Tracker Rate Mortgage is linked to the Bank of England Base Rate so your mortgage will be guaranteed to move in line with any increase or decrease in the Bank of England Base Rate. A Discount Rate Mortgage tends to be linked to the lender's Standard Variable Rate (SVR) and the lender is entitled to increase or decrease their SVR as they see fit.


Cash Back Mortgages


The Cash Back Mortgage gives the customer money as an incentive to take out a particular mortgage. It is normally a percentage of the loan value. However you must remember that you will be tied in for a set time period. If you need to change mortgage for whatever reason during this time you will have to pay back a portion of the cash received.

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Offset /Current Account Mortgages (CAM)


An Offset Mortgage or Current Account Mortgage uses the balance in your everyday current account or savings account to reduce the interest paid on the overall debt. The interest on mortgages of this type is calculated on a daily basis.


100% Mortgages


A 100% mortgage or a 100% remortgage is no longer available in the British mortgage market. It was used by anyone who did not have the cash available for an initial deposit. However an additional cost in the form of a Higher Lending Charge was often paid. This type of mortgage may never return to the market.


First Time Buyer Mortgages


The First Time Buyer Mortgages are available to those buyers looking for their first home. They can offer some really good deals. They can often have incentives attached such as a free valuation or legal fees and they have a higher Loan To Value ratio.


Self Certification Mortgages


Self-Certification Mortgages allow an individual to confirm their income and status without the need for supporting evidence. There are currently no self certification mortgages available in the market. They may return in time as they suit individuals who are self-employed or have irregular incomes.


Buy To Let Mortgages


Buy To Let Mortgages are the type of mortgage required when purchasing a property in order to rent it to tenants.

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When deciding which mortgage best suits you, you need to choose


  • A repayment or interest only mortgage?
  • A Fixed, Variable, Capped, Offset, Discount or Tracker Mortgage?
  • What product features best suit you and your circumstances?


Repayment or Interest Only Mortgage?


Repayment Mortgages


Repayment Mortgages are less risky than an interest only mortgage because your monthly repayments cover both the capital and the interest on the loan. If you make the payments throughout the life of the mortgage at the end you will own the property.


The benefit of a Repayment Mortgage is that it is simple, straightforward and easy to understand. It also avoids the risk of being reliant on investments in the stock market to repay the mortgage lender at the end of the mortgage term.


Interest Only Mortgages


Interest Only Mortgages means the monthly payment to the lender only covers the interest on the loan. The full amount of the loan has to be repaid to the lender at the end of the mortgage term. You need to have an investment product or "financial vehicle" in order to repay the capital to the lender at the end of the mortgage term.


Unlike a Repayment Mortgage, the total amount of your debt does not reduce over time. There is also no guarantee that your investment will grow sufficiently to repay your loan. Hence it is deemed to be a riskier choice than a repayment mortgage. However should your “financial vehicle” or investment product perform really well you get to keep the surplus.


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What if I choose an interest only mortgage?


If you choose an interest only mortgage you will also need to arrange a repayment vehicle to ensure you can pay back the capital to the lender at the end of the mortgage term. There are a number of different options available:


  • Endowment
  • Pension
  • ISA

In most cases it is necessary to seek the advice of a qualified financial planning consultant to determine which financial product best suits your needs.


What are the Mortgage Options?


Once you have decided on either an interest only mortgage or a repayment mortgage you have to choose the type of mortgage to go for. With the exception of Standard Variable Rate (SVR) each mortgage has pluses and minuses.


Discount Mortgages


A Discount Mortgage offers a reduction of an agreed percentage on the lender's standard variable rate for a specified time period. If your mortgage provider changes its SVR it will affect your monthly mortgage payments. At the end of the specified discount period the loan reverts in most cases to the lender's SVR.


Pluses


  • You can make a significant saving on the standard variable rate.

Minuses


  • Payments change when the institution decides to increase or decrease their SVR.
  • Discount mortgages can include early repayment charges.

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Fixed Rate Mortgages


A Fixed Rate Mortgage has a set rate of interest for a specified time period. When you reach the end of the agreed fixed period the mortgage normally reverts to the lender's standard variable rate.


Pluses


  • A Fixed Rate Mortgage offers you the security of knowing exactly how much your monthly repayments will be during the agreed term.
  • If the Bank of England base rate goes up or your lender increases their SVR your monthly mortgage payment is not affected.

Minuses


  • If the Bank of England base rate goes down or your lender decreases their SVR your monthly mortgage payment is not affected.
  • Can be inflexible if your circumstances change.
  • Early Repayment Charges apply if you remortgage early.

Capped Rate Mortgages


The interest rate on a Capped Rate Mortgage will not rise above a certain level for a specified period of time. This offers the borrower similar protection to that of a fixed rate mortgage. However it is allowed to decrease giving you some of the benefits of a variable rate mortgage.


Pluses


  • A Capped Rate Mortgage offers you the security of knowing your monthly mortgage payment will not exceed the agreed rate (the Cap).

Minuses


  • Early Repayment Charges apply if you want to change mortgage during the agreed term.
  • Can be inflexible if your circumstances change.

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Tracker Rate Mortgages


A Tracker Rate Mortgage's interest rate normally "tracks" the Bank of England Base Rate. The interest rate is shown as Base + %. The monthly mortgage payments will therefore increase or decrease over time in line with the fluctuations in the Bank of England Base Rate. Many tracker products also offer flexible terms.


Pluses


  • Often offer very competitive rates.
  • If the Bank of England Base Rate decreases so will your monthly mortgage payments.
  • Flexibility if circumstances change.

Minuses


  • If the Bank of England Base Rate increases so will your monthly mortgage payments.

Cash Back Mortgages


A Cash Back Mortgage offers an incentive in the form of a lump sum when the mortgage is taken out. This is normally a percentage of the total loan.


Pluses


  • Lump sum of cash.

Minuses


  • Early Repayment Charge.
  • Inflexible if circumstances change.
  • Not always the most competitive interest rates.

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Current Account Mortgages & Offset Mortgages


Current Account Mortgages and Offset Mortgages combine a mortgage, a current account and a savings account. The interest is calculated on a daily basis based on the customers overall financial position. Ideal if you have a lot of savings or cash going through your current account.


Pluses


  • Efficient Use of Savings.
  • Calculation of interest on a daily basis.

Minuses


  • Only really suit customers that have large deposits/savings.

Standard Variable Rate Mortgages (SVR)


This is normally the most expensive mortgage to have. The interest rate is set by the lender and can increase or decrease when they see fit. It may also mean that you have ended up having this type of mortgage because your previous deal has ended. Anyone on an SVR Mortgage needs to look for a better rate ASAP.


Pluses


  • None.

Minuses


  • Relatively expensive.

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Which product features do I require?


Again this will be dictated by your individual circumstances but here are a few features that may helpful:


Portable – The mortgage can be moved if you move house before the end of the mortgage term.

Overpayments – The mortgage allows you to pay in extra funds to reduce the debt.

Payment Holidays – Allows you to take a break from your monthly mortgage payment.


Incentives


Mortgage providers often offer incentives to encourage people to take out a mortgage. If you are a first time buyer look out for free valuation, free legal fees or no higher lending charge. If you are remortgaging look out for free valuation or free legal fees. Some mortgage providers will offer Air Miles, cash, vouchers, etc.


Beware


When looking for a mortgage there are a couple of things we would suggest you look out for:


High Product Fees which can significantly increase the cost of a mortgage especially if it is a two or three year deal.


Extended Tie Ins which lock you in beyond the offer period to the providers Standard Variable Rate. This can significantly increase the cost of a mortgage.


Remember – Always Read the Small Print


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