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Choosing your mortgage product
Before you start home hunting, approach several lenders to ask how much they
will lend you and request an agreement in principle confirming it. This will
represent to the seller of the property that you’re interested and that you are
a serious buyer, which may help to speed up the sale.
Most lenders will lend three to three-and a-half times your gross annual income
if you’re buying alone, though some will offer over
five in specific circumstances. With a joint application, it’s either
two-and-a-half times both of your incomes or three times the income of the
highest earner plus the income of the other – whichever is greater. However,
lenders are increasingly assessing borrowers according to how much they can
afford rather than on a strict income multiple.
The larger the deposit you have, the better the interest rate you’ll get.
Lenders do offer 100% mortgages but you may have to pay a fee called a higher
lending charge (HLC) to cover the lender’s increased risk of lending 100% of the
purchase price.
Interest rates
Lenders attract borrowers with special introductory rates. But once this rate
ends, you revert to the lender’s standard variable rate (SVR). This fluctuates
according to the Bank of England base rate and is always higher than the rate of
the initial deal. So if interest rates rise, your
mortgage
payments will follow. The competitive market means SVRs can be reasonable but
borrowers are often encouraged to save money by remortgaging rather than staying
on an SVR.
Early repayment charges
Paying back your mortgage early reduces the lender’s income from interest so
most discourage this by charging a penalty fee during the introductory period of
the mortgage or before a particular date. These charges are usually attached to
fixed, discounted or capped mortgages and
will often be a percentage of the amount you repay or borrowed, or a number of
months’ interest.
They can also apply if you want to
remortgage
so check the terms and conditions of the mortgage before taking it on or you may
find yourself tied in after the introductory period ends and forced to stay on
the SVR unless you pay hefty charges.
REPAYING YOUR MORTGAGE
There are two ways to repay your mortgage
– repayment or interest-only –
however, inventive mortgage lenders will now allow you to combine the two if
it suits your circumstances.
Repayment mortgage
This is the option most people go for. Part of your monthly payment covers the
interest on the loan while the remainder covers a small part of your debt. As
your overall debt decreases, the interest charged falls too, so more of your
payments go towards paying off the debt as time passes. If you
make all the payments as agreed, you are guaranteed to pay off your mortgage in
full at the end of the term – usually a period of 25 years.
Interest-only mortgage
With an interest-only mortgage, your monthly repayments cover only the interest,
not the outstanding debt. Effectively, at the end of the term you still owe what
you originally borrowed so you need to make a separate payment each month into
an investment vehicle to pay off the debt and hopefully generate a lump sum
surplus when your mortgage ends.
Endowment policy: This is basically an investment product designed to generate
enough money to pay back the whole loan. It combines a savings policy and life
assurance to cover your debt should you die before the end of the mortgage term.
The disadvantage of an endowment is that its final value may not be enough to
cover your mortgage so you would have to increase your premiums to make up the
shortfall.
ISA: Individual savings accounts (ISAs) are a form of savings where all interest
and bonuses generated are tax-free. Growth is not guaranteed and life assurance
isn’t automatically included
but some providers now offer all-inclusive mortgage packages.
Pension plans: By linking your pension to your mortgage, part (up to 25%) of the
tax-free lump sum generated at the end of the term can be used to pay off the
outstanding debt. The remainder must
be used to purchase an annuity (where you hand over a lump sum in return for a
guaranteed income). You can only access the money when you reach 50 but this is
a tax-efficient form of investment.
Source: Mortgage Advisor & Home Buyer magazine
