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 base their lending on income multiples. 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.
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.
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.
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.