Mister Write - the financial copywriter T 01672 511716 E tm@misterwrite.co.uk F 01672 513303
Torquil Clark Mortgage Guide

The ‘no more than you need to know’ guide to…mortgages

 

Just another milestone…

People who arranged their first mortgage back in the dim and distant can easily forget just how important a matter it can be and how daunting it feels when you embark on the process. Will your application be accepted? What will ‘they’ need to know? How long is at all going take? Why does there need to be so many people involved? They’re just some of the questions and concerns that everyone has when they decide to take on the responsibility of a mortgage. In a way, it’s not unlike the moment you leave your parental home and start paying rent; it’s a strange combination of anxiety and expectation! So the first thing to say about mortgages is that most people feel exactly the same about them as you probably do now.

Everyone wants it to happen

What does seem to complicate the process is the number of people involved. There’s you the buyer, the seller, the estate agent, the building society, your solicitors, the seller’s solicitors, the surveyor and of course ourselves. Believe it or not, each has their own vital role to play. But the really important thing to remember is this: everyone involved wants to make sure that you get your mortgage – nobody is working against anyone else. Sellers are as keen to sell buyers are to buy!

The world is your oyster

Until quite recently, applying for a mortgage was looked on as something of a ‘black art’. The only option most people had was to go to the building society, complete the application form and then wait with baited breath for a ‘yes’ or a ‘no’. That’s no longer the case. Now there are many different types of lenders; some lender specialise in certain kinds of mortgages whilst others prefer a particular type of borrower. Furthermore, lenders are much more flexible in terms of their demands – almost anyone who can prove an income will now be considered for a mortgage. And the number of sources of mortgage finance just keeps on growing and growing. Which is good news for borrowers. Because what all that competition means, is that buyers are in the best position ever to get exactly the mortgage they need – providing you know what you’re looking for. Are you confident that you can sort the wheat from the chaff and find exactly the right mortgage for you? If you have any doubt, please talk to us. Because when it comes to sorting out your mortgage, we can help you in so many ways.

We can do it all for you

As mentioned earlier, there are lenders everywhere. In fact, so many of them that it can be difficult, if not impossible, to pick one out from the herd. But we can – and that’s not all we’ll do for you. Once we find the right lender, you’ll almost certainly have a choice of how you repay your mortgage. Again, we can help you make that decision. In fact you can depend on us to be with you right from the start, and up to the day the property becomes yours. We’ll chase everyone involved, explain what you want explaining and keep you informed on progress. By handing the matter over to us, you can get on with the other important things in your life. For further details of our mortgage management service, please see page XX.

Pay as you go, or pay at the end?

When you take out a loan, any kind of loan, the lender will charge you interest. The same is true of a mortgage. But unlike most other loans you have a choice of how you repay the original amount (the capital) you borrowed. You can do that as you go along, or you can leave repaying the capital to the end of the loan period (the term). A mortgage where you repay some of the loan every month is called a ‘capital and interest mortgage’ and a mortgage where you repay the loan at the end of the term is called an ‘interest only mortgage’.

How a capital and interest mortgage works

Some of your monthly repayment is used to pay the interest and some is used to reduce the original amount (the capital) you borrowed. In the early years of the mortgage, the bulk of your monthly repayment goes towards paying the interest; in the later years the interest charges reduce and more of your repayment is available to reduce the capital. The advantage with this kind of mortgage is that you can be sure that the mortgage will be repaid in full – providing of course you make all the repayments on time.

How an interest-only mortgage works

All of your monthly repayment is used to pay the interest on the loan and therefore the capital you originally borrowed remains unchanged. The advantage of an interest-only mortgage is that your monthly repayments are lower than they would be in a capital and interest mortgage. But when you come to the end of the mortgage, you will have to repay all the capital you borrowed at the beginning. To be sure of doing that, it’s prudent to set up an investment plan such as an ISA, an endowment policy, or a straightforward unit trust plan. If you don’t do that then you may have to sell your home to repay the lender.

How do you want to deal with the interest on your mortgage?

Having decided on either a capital and interest or interest-only mortgage, you then need to consider how you manage the interest that has to be paid on your loan. Here are the main options:

Fixed Rate Mortgages

The interest you pay on your loan will neither rise nor fall for anything between 6 months to the whole of the term of the mortgage.
Advantages:
                You can be sure that your repayments will not increase
                If interest rates rise higher than your fixed rate, you’re saving   money
                Fixed rate mortgages can be cheaper than other options
Disadvantages:
If interest rates fall, you’ll be paying more than you need to
If you cancel the arrangement before the end of the agreed term, the lender may impose a penalty
The lender may insist that you take out insurances such as life insurance and buildings & contents insurance
You may have to pay an arrangement fee

Standard Variable Rate Mortgages


Your monthly mortgage repayment is linked to the Bank of England’s base rate of interest. If the base rate rises, your mortgage repayment goes up; if it decreases it goes down. (Some lenders adjust their interest rates just once a year to reflect all the interest rate changes that have happened during that year, in which case your mortgage repayment will also only change annually.)
Advantages:
You benefit from interest rate reductions
You can pay off a lump sum without penalty on most mortgages
Interest rates can be very competitive
Disadvantages:
You pay more if interest rates rise
Your monthly repayments will vary, so it can difficult to budget accurately

Capped Rate Mortgages


This option is the mortgage equivalent of having your cake and eating it – i.e., the interest rate you pay can’t go up but it can go down. A ceiling (cap) is put on the interest rate you pay; so if the normal variable rate of interest rises above the cap, you’ll not be affected. If however the normal variable rate falls below your capped rate then the interest rate you pay will be reduced, usually to the standard variable rate.
Advantages:
You know what your maximum monthly repayment will be so you can budget accurately
You benefit if normal variable interest rates fall below the capped rate
You could save money if normal variable interest rates rise above the capped rate
Disadvantages:
Your capped rate may be ‘collared’ and set at a level below which it cannot fall
If you cancel the arrangement before the end of the agreed term, the lender may impose a penalty
The lender may insist that you take out insurances such as life insurance and buildings & contents insurance
You may have to pay an arrangement fee

Discounted Rate Mortgages


Here the rate of interest you’ll pay is linked to, but less than, the normal variable rate of interest but only for a set period of time, usually 1-5 years. Discounts tend to attract borrowers, which is why lenders use discounts to bring in extra business as and when they need to.
Advantages:
You save money whilst the discount applies
You benefit if interest rates fall
Disadvantages:
Your monthly repayments will increase if interest rates rise
If you cancel the arrangement before the end of the agreed term, the lender may impose a penalty
The lender may insist that you take out insurances such as life insurance and buildings & contents insurance
You may have to pay an arrangement fee


Cashback Mortgages


A mortgage that offers a lump sum cash rebate of a fixed amount of money or a percentage of actual loan but only on completion. Cashback mortgages are usually offered with a standard variable rate mortgage, but discounted or fixed rate deals can be found although the cashbacks may be smaller.
Advantages:
A cashback mortgage is a way of raising cash, but without having to increase your mortgage or take out a personal loan
Cashback can be put towards your deposit or used to pay mortgage-related fees
Disadvantages:
Rates may be variable so your repayments will increase if rates rise
The Interest rate may be higher than mortgages that don’t offer a cashback facility
If you cancel the arrangement before the end of the agreed term, the lender may impose a penalty
The lender may insist that you take out insurances such as life insurance and buildings & contents insurance
You may have to pay an arrangement fee

Individual Saving Account (ISA) Mortgages


These mortgages are specifically for buyers who have chosen an interest-only mortgage and need an investment to pay off the capital at the end of the mortgage term. You should be aware that ISAs invest in equities so there is a risk that you may not get the full amount you invest back. ISA-related mortgages have three important advantages over other investment options;
They benefit from favourable tax treatment
The charges for an ISA Mortgage are usually much lower than the charges for an endowment mortgage
There are usually no penalties if you cash in an ISA before the end of the policy term
For more information on ISA’s and other investments, please have a look at our Investments guide.

Pensions Mortgages


Another investment option that’s specifically designed to pay off the capital at the end of the term of an Interest-only mortgage. You pay contributions into your own personal pension plan, or an employer’s pension plan. At retirement, the tax-free lump sum that you’re entitled to take from your pension plan (currently 25% of the total fund) is used to pay off the capital you owe. Payments into a pension are eligible for tax relief at basic rate. Higher rate tax payers can claim 40% relief on contributions. There is a risk you may not be able to contribute to a pension due to unemployment. You may also have very little capacity to build any capital for use in retirement. You may not build enough of a fund to pay the mortgage off and are left with a shortfall that needs to be met by other means. The value of the fund can fluctuate as it has equity based elements, and you may not get back what you have put in.

Remortgaging


Remortgaging means changing lenders - usually for a better deal . It’s also an opportunity to borrow more money if you need to, as the repayments will be less than they would be for an unsecured personal loan. But unlike a personal loan, the debt will be secured and you could lose your home if you fail to make the repayments. Remortgaging might be worthwhile if you are not considering moving within the next few years and all of the following conditions apply:

 

Buy-to-let Mortgages


Buying residential property to let out has become very popular and for two reasons: 1 Low interest rates have made mortgages more affordable and 2. Rental income from property investments has become more attractive than the returns obtained from other types of investments. What you can borrow will be determined by rent you expect the property to produce, plus your salary. Some lenders allow you to add the rent to your salary, whilst others base the loan entirely on the expected rent. Any other mortgages you may have may reduce the amount you can borrow. The maximum you can borrow varies from lender to lender; most will lend up to 85% of the property value leaving you to find the deposit of 15%. Please keep in mind that you’ll be offered more attractive terms if you are able to put down 20-25% of the property value as a deposit. Something else to consider is that buy-to-let mortgages are generally more expensive than ordinary ‘family home’ loans and should you need to sell the property quickly it could take months to do that. Generally speaking, the fees will be broadly in line with those associated with conventional mortgages.

Sub Prime Mortgages


Nowadays, people earn a living in many different ways and as a consequence, many individuals don’t fit the criteria set down by the lenders – in XXXX a total of 9.1m people were turned down by the mainstream mortgage lenders. So new kinds of mortgages are being developed for borrowers whose circumstances, or source of income, is unconventional. People who typically fit into the sub prime category include:
The self-employed
Individuals with a poor credit history or have County Court Judgements recorded against them
Anyone who does not fulfil normal lending requirements
There are thousands of sub-prime products on the market, most have higher set-up fees, lower loan to value ratios, higher interest rates and more complex application processes than non sub-prime mortgages. The fees for arranging a sub prime mortgage are usually based on a percentage of the total advance.

Fees and costs

associated with a mortgage


Setting up a mortgage and buying a property takes up the time and attention of a range of different people, which as you might expect costs money. The majority of the fees have to be paid in full on the day of ‘completion’, although some have to be paid sooner. If it’s helpful for you, it may be possible to add some fees to your loan.

A lender’s arrangement fee


A fee that is becoming more common - particularly for fixed or discounted mortgages. You can expect to pay anything from a few hundred pounds to 1% of the mortgage amount, which may have to be paid before you move in, or it may be possible to add the fee to your loan.

Stamp Duty


Stamp Duty is a tax that property buyers (not sellers) pay when buying a property; the rate of tax varies from 0% up to 4% of the purchase price of the property. So where the purchase price of the property is…

Some Postcode areas are exempt from Stamp Duty; the Land Registry can tell you which areas they are.

Mortgage Indemnity Premiums


Also known as a Higher Lending Charge, a Guarantee Premium, or a Mortgage Indemnity Guarantee. No matter what it’s called, the premium is applied when the lender believes that there’s a higher than average chance that the borrower may default on their repayments. The lender uses the premium to pay for insurance that would cover their costs if they had to repossess the property and sell it on. The amount of the premium depends on size of the mortgage, but as buyers don’t like premiums it is quite common for lenders not to apply the charge or to pay the premium themselves.

Survey/Valuation fee


To ensure the value of the property is in proportion to the mortgage required, and before agreeing to an advance, the lender will require a chartered surveyor to inspect the property. There are two different types of inspection: a Homebuyer Survey and a Structural Survey. The Homebuyer Survey usually costs around £450+VAT and the inspection is limited to those areas of the property that are visible and to identifying potential maintenance problems. A Structural Survey, which costs upwards of £700+VAT, is a more detailed inspection, where every aspect of the property’s condition - i.e., plumbing, electrics, foundations etc is checked. In either case, if a problem is found, the lender may advance only a percentage of the mortgage loan, the balance being withheld until the problem has been fixed. The Valuation Fee is usually paid when you submit your mortgage application.

Broker Fee


This is the fee we charge for finding the best mortgage for you on the market and for managing the process to completion. Our fees vary between £XXX - £XXXX or X% of the mortgage advance. Please see page XX for more details.

Telegraphic Transfer Fee


The lender will normally transfer the mortgage funds to the buyer’s solicitor electronically, and charge a small fee to the buyer of between £XX and £XX for doing so. The buyer’s solicitor may also charge the buyer a similar fee for sending the funds to the seller’s solicitor.

Deeds Release Fee


Once the mortgage has been paid off, the lender is usually prepared to release the deeds of the property and returns them to the owner or his solicitor. The fee for this is usually between £XX and £XXX.


How much can I borrow?


Before looking for a home, it’s important to have a fairly accurate idea of how much money a lender might be willing to hand over to you. At the same time, you also need to consider how much you can afford to pay each month. What counts as far as the lender is concerned is your annual income, what you can afford to pay each month and the value of the property. To calculate the maximum you can afford to pay for a home, you just add the cash you have available as a deposit to the size of loan you think your income merits.

Your earnings: As a rough guide, you can expect to be able to borrow your gross annual income multiplied by 3.5. If you’re purchasing with a partner, then his or her income would also be taken into account and you could possibly borrow both your gross annual incomes added together multiplied by 2.5. But if one of you earns more than the other, then you may be able to borrow three times the higher annual income and once times the second annual income.

Affordability: In simple terms, will you have enough money left over after paying your other living costs to pay the monthly repayment? This decision is made by the lender.

The property’s value: The size of the loan relative to the purchase price is called the Loan to Value (LTV) ratio. The higher the LTV ratio – or the smaller your deposit - the more your monthly repayments are going to be. Most lenders will comfortably advance 75% of the property’s value, although advances of 90% -95% are far from uncommon. It’s even possible in certain circumstances to borrow 100% of the purchase price, but you can expect to pay a higher rate of interest and perhaps a Mortgage Indemnity Premium.

Mortgage Calculator


Insert of Mortgage payment Matrix showing the interest rate at various borrowing amounts and the repayment amounts for repayment and interest only mortgage.

Home Information Packs

(HIPS)


On 1st June 2007, the Government will require sellers, or their estate agents, to provide buyers with Home Information Packs. HIPS are designed to make buying and selling homes easier by providing the buyer with key, fundamental information at the earliest possible stage. If there are problems or issues, then the buyer can decide whether he or she wishes to proceed or not. HIPS are likely to confirm:

Additional requirements for leasehold properties:

Home information Packs will not be available for the following types of property:

The Home Condition Report (HCR) will be developed by the Government in association with organisations such as Royal Institute of Chartered Surveyors. The HCR will cover the general condition of the property taking into account its age, character, location and any defects that require attention. It will be a mid range survey, similar to the current Homebuyers Survey but without the valuation. The Energy Performance Certificate will give buyers an idea of the energy costs they can expect to incur if they purchase the property.

Key Questions to ask your lender/adviser


What different payment methods do you offer?
What interest rate will I be charged and how long for?
What interest rate will I pay at the end of the initial deal period?
Are there penalties for paying the mortgage off early?
What will my monthly repayments be?
What fees/charges will I have to pay the lender?
What fees/charges are there for your advice?
Do you consider products from the whole of market or just from one or a limited range of lenders?

Our Mortgage Management Service


We’ve been arranging mortgages for many years for many thousands of clients. We have the people and the systems to do that quickly and efficiently. We find that people come to us because they don’t want the hassle of having to find the right lender and then having to deal with them and all the other parties that are involved in the process. Instead, they ask us to do that for them, which is what we hope you’ll decide to do.

So right from the start you have one point of contact. First of all, we’ll advise you on how much you can borrow, identify the type of mortgage that’s best for you and tell you what you can expect to pay. Once those facts are established, which can be done either over the phone or face to face, we will then start to search the whole of the mortgage market to find the most appropriate options for you. We’ll look at any and all the possibilities and then whittle the most appropriate options down to a shortlist and perhaps one or two final recommendations. If you’re happy with what you see, then we take the process to the next stage. If you’re not sure, then you’re under no obligation to go any further with us and there are no charges to pay. Assuming however that you do decide to proceed, then we will handle the application process from start to finish dealing with the lender, chasing up what needs chasing up and keeping you up-to-date throughout the process. Having sorted out your mortgage, we’ll then review the arrangement at the end of the initial deal period to make sure the mortgage is still the best mortgage for your circumstances.

Mortgage-related insurances

Life Insurance and your mortgage


In blunt terms, Life Insurance is all about helping your family avoid a potential financial crisis that your untimely death may cause. So if you were to die prematurely, or you became very ill, and you had a life insurance policy, your spouse and children are less likely to be faced with big financial problems. The lump sum, tax-free pay out from your life insurance policy could be used to pay off your mortgage and any other debts and can help meet on-going household expenses. Money from a life insurance policy can also help pay childcare and education expenses. That’s what Life Insurance is all about. If you have it there’s less financial pressure on your family; without it, there’s likely to be a lot more.

Level Term Insurance


This is usually the cheapest form of life insurance. It’s called Level Term Insurance because the premiums are fixed as indeed is the lump sum (the sum assured) that’s paid out on the death of the insured life. This kind of insurance runs for a specified number of years (the term) and then expires. So if the policyholder dies before the expiry date, then the policy pays out the sum assured; if however the policyholder is still alive at the expiry date, then the policy terminates, no sum assured is payable and no further premiums are required.

Variations


Decreasing Term Insurance – Term insurance that’s linked to the outstanding balance on a capital and interest mortgage. As the mortgage reduces so does the policy’s sum assured and although the premium is fixed for the term of the policy, the premiums are lower than a Level Term Insurance policy.


Pension Term Insurance – A pension-related life insurance policy where you get tax relief on the premiums you pay - subject to the rules applying to pension schemes. The premium quoted will be net of 22% basic rate tax and premiums are taken from your bank net of basic rate tax; higher rate taxpayers will get a further 18% relief via their annual tax return. If however, your circumstances change - you move abroad for example - you may become ineligible for this type of policy.

A policy that’s more suited to people needing level or decreasing term life cover.

  Pension Term Insurance is not suitable for those looking for family income benefit, critical illness, income protection or whole of life cover and those seeking Pension income. Making pension contributions above the higher amount of either £3,600 a year or 100% of annual earnings (maximum £250,000). Anyone who is likely to have pension funds which total more than £1.5m.

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Critical Illness Cover – an insurance that pays out a lump sum when a policyholder is diagnosed as suffering from a specified but survivable illness and regardless of whether the illness prevents the policyholder from working or not. The types of illness covered vary from insurer to insurer, but in the main are; heart attack, stroke, cancer, major organ transplant and coronary surgery. The lump sum paid out can be used as follows:

A Critical Illness policy can be taken out alone or added to a Term, Whole of Life or an Endowment policy.

Suitable for people who would like to be as comfortable as possible having survived a serious illness.

Family Income Benefit – Rather than paying a lump sum upon death of the insured, this insurance pays a fixed sum of money annually to the policy’s beneficiaries until the policy expires. For example, if a policyholder established a 20-year policy but then died after six years, then payments would be made for the remainder of the term of the policy – i.e., 14 years.

Ideal where beneficiaries want the security of a regular income rather than a lump sum.

Mortgage Payment Protection Insurance


Insurance that’s also known as Accident, Sickness & Unemployment Cover. It’s designed to pay your monthly mortgage payment and other mortgage-related costs if involuntary unemployment, an injury or illness stops you from earning your living. The monthly premium is based on the amount of monthly benefit you require and is not influenced by your age, health or your occupation. You may have to wait up to 60 days before you are paid benefit, which can be paid for up to 24 months or until you return to work - whichever happens sooner.


Income Protection Insurance


This is also known as Permanent Health Insurance and is designed to provide a regular tax-free income, whether you’re self employed or employed, if illness or injury stops you from working; unemployment is not covered. Benefit is paid until you return to work, reach retirement age, or die, whichever happens first. Premiums are dependent on;

Buildings & Contents Insurance


Lenders usually insist that you take out Buildings Insurance as a condition of the mortgage. So that if the property burned down for example, the insurance policy would provide the funds for you to pay for it to be rebuilt. A Buildings & Contents policy covers you for damage to the building plus the contents inside – your furniture, clothes and appliances etc. You select the amount of cover you require (some insurers offer standard cover amounts). Renewable annually. The policy is often sold as an ‘add on’ by lenders – convenient perhaps but the premiums are likely to be higher than they should be.

Buying a home – key checklist


Before you start looking for a property…
Determine how much you can borrow
Work out how much you can afford to pay each month
Then with the benefit of that information, you can start looking for properties that you know are within your price range and having done that…
Decide on the type of mortgage you want
Select a mortgage lender/broker
Agree a mortgage offer
Appoint a solicitor
Make an offer
Carry out surveys
Arrange insurance and contact utility suppliers
Agree terms with the seller
Exchange contacts
Move in

Estimates show that more than half of borrowers pay more than they should (Source; news.bbc.co.uk)

Figures correct for 2006/2007 tax year. Amounts may change subject to future budget announcements.

Your income before tax and National Insurance deductions - less any other remaining regular financial commitments you might have, e.g., credit card or loan repayments.

 

Mister Write's real name is Terry Martin. If you'd like to speak to me about writing financial copy, please use the contact details at the top of of the page. Thank you!

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