Mortgages

A guide to the types of mortgages available to finance the pyurchase of your home or second property for investment or as holiday home abroad.

 

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Mortgage Types

There are essentially two different types of mortgage:

• Repayment only (capital and interest mortgage)
• Interest only (ISA, pension or endowment mortgage)

 

Repayment mortgages

Your monthly repayments consist of repaying the capital amount borrowed, together with accrued interest. Your mortgage statement will state the amount borrowed and show it decreasing throughout the term. This would normally be received annually.

Advantages

• At the end of the term, you are safe in the knowledge that the total amount of the debt has been repaid.

• Overpayments and lump sum payments can be made, reducing the interest and capital amounts repayable.

• Life assurance cover is not always necessary when taking out this type of mortgage.

Disadvantages

• There may be financial penalties for making lump sum/overpayments to your mortgage account.

• In the early years of a repayment mortgage the majority of the monthly repayment is interest rather than capital. For borrowers moving house regularly, this can result in only a small amount of the capital being paid off.

• If you have no life assurance cover in place and die before the loan is repaid, the mortgage will still need to be repaid. This may result in the property being to sold to repay the debt owed.

Interest only mortgages

With this type of mortgage, only the interest is paid off with each mortgage payment. The borrower also takes out an alternative ‘repayment vehicle’ (method of paying off the mortgage) such as an ISA, pension plan or endowment policy. More information about endowments (which in the 1980’s and 1990’s were extremely popular), ISAs and Pension plans are below. The most important fact about an interest only mortgage is that the monthly repayments do not repay any of the outstanding capital balance. As a consequence it is important that the payments are maintainedto the repayment vehicle, otherwise it will not be possible to pay off the mortgage at the end of the term.

• Endowment
• ISA Plan
• Pension

Endowment mortgages

The most common type of interest only mortgage, which also provides life assurance cover and a fixed payment for investment. The fixed payments are based on the amount of the loan, together with the mortgage term and are designed so at maturity, the amount invested and earnings are sufficient to pay off the mortgage. Much maligned in the press because of the poorer investment growth rates achieved, in a low inflationary environment. This form of investment is less popular these days. Note: When the endowment matures and 'pays out', there is no guarantee that the balance will be sufficient to repay the mortgage.

 

ISA Plan

The Individual Savings Account (ISA) is a tax free method of saving. Using an ISA as a repayment vehicle is growing in popularity, but due to the ISAs complexity it is only for the financially sophisticated or borrowers taking advice from a suitably qualified financial adviser.

 

Pension Plan

Life assurance cover is provided and monthly payments are made into a pension fund. When the benefits are eventually taken, the mortgage is repaid using tax-free cash from the remainder of the fund. The plan holder can then draw a pension from the balance of the fund. This product, which tends to be used by the self employed, is only for those taking advice from a suitably qualified financial adviser.

 

Cash back mortgages

These deals vary, but as the name suggests you get cash, as well as the money you're going to be borrow for your home. You may use it to pay for home improvements, moving costs and furniture etc.

Cash back deals are perhaps best seen as an incentive to go with a particular lender. It’s rarely a genuine gift and you will find that you have extended tie ins. There is nothing free in the mortgage market the lender will eventually more than make their money back.

 

Current account mortgages

It’s becoming increasingly popular to combine a mortgage and a current (banking & cheque) account. It's good news if you like the option of making overpayments on your mortgage (e.g. if you are self-employed or receive bonus payments). The other advantage is the interest is calculated on a daily basis, so when you pay money into your account, like your monthly wage, the overall loan size is lowered, so reducing the total amount of interest paid.

 

Base Rate Tracker Mortgage

These can get very complicated but in theory they're simply a mortgage that follows the Bank of England base rate at an agreed rate.

You may have a Base Rate Tracker Mortgage which sets your mortgage at 1% above the base rate. Eg. for the first two years.

 

Non standard mortgages

If you have experienced financial difficulty in the past, or are unable to produce full proof of your income, then you may find the main stream lenders are unable to help you.  However, we would recommend that you contact these lenders first as depending on the severity of your situation, you may find they are willing to help. If this is not possible you will find that there are lenders who specialise in this area of the market. These lenders tend to charge higher interest rates or require larger deposits. Once you have re- established your credit status you can change to a standard mortgage.

 

Remortgage

You don't have to move home to move your mortgage. Many homeowners move their mortgage to a different lender to save money, or switch to a different mortgage with their current lender.

You may want to remortgage to

• Improve your home.

• Save money if you're paying your lender's standard variable rate (SVR). Your existing lender, or another lender may offer better rates if you move to a different mortgage.

• Raise money if you want to improve your home, or pay off other borrowings, you may be able to increase your mortgage rather than taking out a separate loan.

 

Overseas mortgages your options

 

1.) Raising finance at home 

Re mortgaging an existing home to release equity is a popular option .Many overseas property buyers live in countries in which the housing markets that have left them with equity in their own homes. The UK property market is a good example of this many people have benefited from steady house price increases leaving them with small mortgages and large amounts of equity.

 

Advantages

• Re mortgaging is not complicated and the process is straightforward
• Huge choice of mortgages products available.
• Overseas property buyers are left with the bargaining power of cash
• Quicker to buy a property abroad
• Mortgage rates may be lower in their own country
• Currency fluctuations can increase spending power
• Mortgage is not secured on property abroad

 

Disadvantages

• Your home mortgage repayments go up
• The size of your mortgage increase
• You may have to pay off mortgage in your retirement
• If you don’t keep up payments you may lose your home
• Mortgage rates fluctuate
• Currency fluctuations may decrease your money

  

2.) Using a local overseas mortgage lender

Many emerging markets are getting to grips with overseas buyers and can now provide a real alternative for the overseas property buyer.

 

Advantages of a local lender 

• They will accurately asses value of property
• Surveys for mortgage purposes undertaken
• Thorough checks on the land and property
• Checks on the developer will be undertaken
• No costs on transferring money abroad

 

Disadvantages

• Higher interest rates aboard
• Higher lender fees
• Loan to value ratio may smaller requiring larger deposit
• Language and cultural barriers
• Complicated procedures to those new to process.

 

3.) Securing an overseas mortgage with an international mortgage provider

International mortgage providers can provide mortgages in a whole host of countries. The choice of countries are increasing as the demand for overseas mortgages develops. International mortgages advisors tend to be knowledgeable in this specialist field and provide overseas buyers with a real alternative to other financing options

 

Advantages

Expert advice

They can take the stress out of complicated procedures

  

Disadvantages

Mortgage secured on overseas property

Fees can be higher

  

4.) Use local financing from a developer

Many developers offer their own in-house financing. This is particularly prevalent in Dubai.

Advantages

• One stop shop the entire prices can be delay with one company
• Incentives are offered and discounts may apply when taking developers mortgage finance

Disadvantages

• Higher interest rates aboard
• Higher lender fees
• Loan to value ratio may smaller requiring larger deposit
• Language and cultural barriers
• Complicated procedures to those new to process.
• Earning in one currency and paying in another can mean frequent variations in payments