Getting a mortgage

Applying for a mortgage is one of the most momentous decisions that you will probably ever take. Make no mistake as to the full implications of taking on a mortgage – it means that for the next 25 years or perhaps longer, a sizeable portion of your income will be taken up, and the remainder will have to be carefully budgeted, to pay for household bills (Council Tax, Utility bills, Maintenance/Repairs, Relevant Insurances etc), living costs and, of course, leisure. This being said, most of us will have no choice but to get a mortgage, if we wish to purchase a property. What we can do, however, is reduce the effects of a mortgage upon our resources by choosing the right mortgage for us.

Here are some of the most common types of mortgage on the market:

Repayment Mortgage

This is the traditional, reliable mortgage that our parents and generations before them took out. An agreed amount (the capital) is borrowed over the term of the mortgage. Interest is, of course payable on this, and is calculated at the Bank of England base rate plus several percentage points.
Your monthly repayments with this type of mortgage tend to be somewhat higher than with other types of mortgage, the reason being that you are making both interest repayments as well as capital repayments. What this means is that every month you are actually reducing the amount you owe to the lender as well as paying interest on the amount owed. In the early years of the mortgage, a large proportion of your monthly payment will be made up of interest repayments. As time passes, and you have gradually whittled down some of the capital owed, more and more of the payment will go toward reducing the capital.
A repayment mortgage is the only way to guarantee that at the end of the mortgage term, the property will be yours outright.

Endowment and Interest only Mortgages

With an endowment, what you are doing is getting a mortgage on which you are only paying interest on the capital you borrowed. Of course, the capital must still be repaid by the end of the mortgage term, and to that end you make monthly payments into an endowment plan. This plan is basically a fund, investing in the stockmarket, which hopes to make sufficient profit over the mortgage term so as to return to you not only enough to repay your loan but also give you a handsome surplus on top, there is also an element of life insurance wrapped up within the policy.
These policies were extremely popular during the 1980’s and 1990’s. Their great advantage was that because you were paying interest only and a relatively small endowment, monthly payments were amongst the cheapest that one could get. Unfortunately, stock market performance over the years was not as much as was projected at the outset of the policies and this has left a great many people with a massive shortfall as the end of the mortgage term approaches. Endowments have now, for the most part, been replaced by the interest only mortgage.

The basic idea behind the interest only mortgage is the same as the endowment mortgage. You are paying off only the interest of your loan, so your monthly repayments are lower and so you are able to afford to borrow more.
It is incumbent upon you to make provision to repay the capital at the end of the mortgage period and to this end you should be making regular monthly payments into some form of investment fund whether this is an endowment plan, stockmarket investments, another property which you might sell at a profit or even a pension plan that has had overpayments made into it. Unlike an endowment mortgage where it was compulsory to join an endowment plan on commencement, it is not a requirement for lenders to ensure that borrowers have such a plan in place with interest only mortgages. Be aware that you MUST ensure that you make some kind of provision to repay the capital owed otherwise you run the real risk of loosing your home.
You may be offered an investment product by the person selling you your mortgage, but is best to shop around before signing up. If in any doubt, consult an independent financial advisor (IFA). Please bare in mind that no investment can guarantee performance over the long term, and it could be possible that these types of mortgages, cheap as they are at the beginning, could eventually cost you dear.

 
The Flexible Mortgage

This mortgage can be useful because, as the name suggests, it allows you to be flexible with your payments so as to accommodate your future circumstances. If, for instance, you should loose your job, you can take a ‘payment holiday’ until you are back on your feet, or should you have a win on your premium bonds, you can make increased contributions to make long term savings on interest repayments.
There are many lenders who offer this kind of mortgage – not all are equally flexible.
What you should look out for is that:
• They allow you to make overpayments as well as underpayments.
• You can ‘borrow back’ on payments that you have already made.
• You can have breaks in making any payments at all (payment holidays).
• The lenders calculate interest on a daily basis.
The most important point to ensure is that you are able to do all these things without incurring any penalties and without there being any pre-set limits such as minimum payment amounts or maximum overpayments per year.

The Offset Mortgage

This is actually a type of flexible mortgage, although it works in a slightly different way. Your mortgage and current account are amalgamated into one account. You can operate this account as normal current account – you get a cheque book, cash point card, standing orders and direct debits etc and your salary is paid directly into this account.
The advantage of this type of mortgage is that you effectively pay less interest. Because interest is calculated daily, and your salary is paid into the account, it effectively reduces the outstanding capital and thus, your interest payments.
A point to be aware of with this type of mortgage is that whilst it can save you many thousands of pounds in interest payments over the years, and if you are diligent, you will repay your mortgage early, if it is not strictly managed, you could be heading for big trouble. There is no natural bar to your spending with this account, it is easy to keep ’borrowing’ small amounts and over a period end up very far behind with what should have been your mortgage contributions. You need to be strict with your budgeting to reap the full benefits of this type of account.

Base Rate Tracker Mortgage

Although you must check the exact detail between different providers, at its most basic, a base rate tracker is a mortgage that tracks the Bank of England base rate plus an agreed percentage through the life of the mortgage. So, if the base rate were 5% and the mortgage providers tracking rate is ‘1% above the base rate’, then you would be paying 6%

 
Variable Rate, Fixed Rate and Capped Rate Mortgages

Variable rate mortgages work very much like rate trackers, in that the rate closely follows The Bank of England base rate. If for instance, the mortgage providers’ standard variable rate is ‘1.5% above base rate’, and the base rate is 6%, then you will be paying 7.5% on your mortgage. The important difference is that whilst the base rate trackers’ ‘rate above base’ is fixed, the standard variable rate mortgages’ ‘rate above base’ can vary.

With a fixed rate mortgage, the lender fixes the rate of interest that you will be paying for a set period – normally up to a maximum of 5 years. After this period you will revert to the lenders standard variable rate. This can be a very good option if you want to be assured of your future payments, as no matter how high the base rate rises, you will still only pay the agreed sum. The disadvantage, of course, is that should interest rates fall, you will also still pay the same rate and not get any benefit from the fall in rates. Always check the small print before fixing your rate. Many lenders charge an admin fee for fixing the rate and also impose very heavy penalties should you wish to exit before the end of the fixed rate period. Be aware that some lenders impose an exclusion period, whereby having just come out of a fixed rate term, you have to go onto the variable rate before being able to take up a fixed rate offer again. This can be anything from 2 to 5 years.

With a capped rate mortgage, the lender agrees to put a ‘cap’ on the maximum amount of interest that you will pay over a set time. During this time, if the interest rate falls, you will still get the benefit of the fall in rates. This, at first, seems ideal as you are getting the best of all possible worlds, but do your costings carefully beforehand, as you may be paying a higher rate than the standard variable rate. Be aware that you may have to pay an admin charge of up to £200 on entry.

Whilst we have covered some of the most popular mortgages, there are a great many more types of mortgage on the market. Some suitable for first time buyers, others only suitable for people already on the property ladder and others still, for use buy experienced investors. Some points to bare in mind before entering into possibly the biggest commitment you will ever make are; shop around for the best deal – the market is very competitive and there are some good deals to be had. Take your time and DO NOT rush into anything, thinking that you will miss out if you do not act immediately. If you are in any doubt, get advice from an Independent Financial Advisor – a little care taken at the beginning can save a lifetime of heartache.