Your mortgage

With so much terminology flying around, it is important you understand what you are reading! While your adviser will cover each aspect of the mortgage in detail, here is some finer detail:

Their aims:

Residential mortgages are loans secured against residential property which aim to:

  • enable you to own your property
  • release some of the value of the property, against which the loan is secured, for another purpose.

Your commitment

  • You must declare all relevant information and in particular your credit history.
  • You will need to make monthly repayments to the lender for the term of your mortgage.
  • You may need to make regular payments to a life assurance plan to ensure that the mortgage can be repaid if you die during the term of your mortgage.
  • In the case of an Interest Only mortage, you mortgage payment is only paying the interest due on the loan. A suitable repayment vehicle is required to be in place to repay the capital at the end of the mortgage term.
  • Whatever repayment method you decide on, you will need to carry out regular checks to ensure you have sufficient funds to repay your mortgage.

Risk factors

  • Your home may be repossessed if you do not keep up repayments on your mortgage

  • The lender may make an early repayment charge if you want to repay your mortgage earlier than you originally planned.
  • Your mortgage valuation fee and, in some cases, any initial arrangement fee that you pay the lender may be lost if your mortgage does not proceed. Even if you withdraw your application before a valuation is carried out, you may be charged an administration fee by the lender.
  • While the lender will insist on a level of buildings insurance, it is your responsibility to ensure adequate home contents cover is in place.
  • If you are made redundant or are unable to work due to illness, you may have to wait  before you may be entitled to any help from the State with your mortgage interest payments.

What type of interest rate schemes are there?

Variable rate
The monthly payment fluctuates in line with the lender's mortgage rate. This can cause budgeting problems in times of increasing interest rates. Some lenders offer an annual review so that the amount you pay only changes once a year with the difference adjusting your outstanding mortgage. Lenders may also offer a version where your monthly payment fluctuates in line with the Bank of England Base Rate, often referred to as a 'Base Rate Tracker'.

Fixed rate
The monthly payment is fixed over an agreed period of time and will remain the same regardless of whether interest rates rise or fall. At the end of the fixed-rate term the interest rate usually reverts to the lender's standard variable rate or you may be offered the choice of another product, on the terms available at that time.

Discounted
The lender offers a true initial discount for a given period. At the end of the discounted period, the rate usually reverts
to the lender's standard variable rate. No interest is deferred so the outstanding mortgage will not increase.

Cashback
Some lenders offer a cash payment on completion of the loan, either based on a percentage of the total loan or a flat amount. In some cases, if the loan is redeemed early,a proportion of the cashback may have to be repaid to the lender.

Capped rate
The interest rate is guaranteed not to go above a certain level throughout the agreed capped rate period, but you will benefit from any reduction in interest rates.

Collared rate
The interest rate will not fall below a certain level for the collared-rate period. Flexible mortgages These schemes allow you to overpay, underpay or even take a payment holiday. Any unpaid interest will be added to the outstanding mortgage. Any overpayment will reduce your outstanding mortgage.

Some have the facility to draw down additional funds to a pre-agreed limit. Lenders that offer any type of fixed rate, discount or cashback facilities to attract custom, usually require the mortgage to stay with them for a period of time to recoup their costs. They do this by imposing an early repayment charge for a given period which can extend beyond the benefit period. They will usually make an early repayment charge if you want to redeem your mortgage early. Early repayment penalties will be charged if you die within the early repayment period so you should consider building this in to the level of life cover you have. You should also make sure that you can afford the standard variable rate that will be charged at the end of the discounted or fixed-rate period.

What costs and fees are there likely to be?

Valuation fee

This may include a non-refundable administration fee and must normally be enclosed with the application. The whole fee is non-refundable once the valuation has been carried out. The type of valuation you choose will depend on factors such as the age and condition of the property and whether there is any history of subsidence in the area.

  • Basic mortgage valuation
    This is for the lender's own purposes confirming the property provides security for the loan. You may wish to consider one of the more detailed types of survey.

  • Homebuyer's report
    This provides concise information in a standardised format on the state of repair and condition of the property. The report will include comments on the property's defects and the valuer's opinion as to its marketability.

  • Full structural survey
    This is a structural report based on a detailed examination of the property. Any areas of concern that you might have about the property will be investigated.

Arrangement fee
This may be payable either in advance, where the lender will ask you to enclose a cheque with the mortgage application, or on completion. All or part of it may be non-refundable if the mortgage is declined or withdrawn. This will be specified in your mortgage Key Facts illustration.

Legal costs and fees
The fees charged by a solicitor include the charge for conveyancing (the transfer of ownership of land), the costs of legal registrations and miscellaneous costs (known as disbursements); for example, Local Search fees and Land Registry fees. We recommend you obtain an estimate of these costs early on in the process.

Stamp duty
Stamp duty has recently been changed. Depending where in the UK you are buying a property, there are now two schemes. In Scotland, it is now known as Land & Buildings Transactional Tax, details can be found on the Scottish Government website (https://www.revenue.scot/land-buildings-transaction-tax). The rest of the UK it is known as Stamp Duty Land Tax, and details are available from the UK Government (https://www.gov.uk/stamp-duty-land-tax/overview).

Higher lending charge
This may apply if the amount you wish to borrow is more than, typically, 75% of the value of the property. The lender will require additional security on the amount in excess of this threshold in the form of an insurance policy (a higher lending charge). This policy is used to protect the lender only and is used to cover the lender in the situation where the property is repossessed and the loan plus any unpaid interest exceeds the sale value of the property. You will then owe the insurance company any payment claimed by the lender. The lender will arrange the insurance and the premium will be paid by you, in some cases it can be added to the loan.

Repayment charge
Some lenders make an early repayment charge based on the product selected. Others may charge at any time if you pay off your loan before the end of the normal mortgage term. In some cases this can be a significant amount. Always check the terms in the offer letter from your lender.

Buildings and contents insurance
All lenders require that you fully insure the property for the total cost of rebuilding it. It is also strongly recommended that you take out contents insurance. We can arrange this for you.

Mortgage payment protection
We recommend you consider protecting your mortgage and associated payments in the event of being unable to work through accident, sickness or unemployment. We can arrange this for you.

How does a repayment mortgage work?
Monthly payments are made up of interest charged on the amount borrowed and a portion of the capital to repay the mortgage. During the early years most of each month's payments are interest and it is only later on that you start to repay any significant element of capital.

How does an interest only mortgage work?
Monthly payments to the lender consist of interest only and the outstanding mortgage remains the same. You make payments to a separate investment with the aim of producing enough capital to repay the mortgage in full at the end of the term. There are a number of different investments that can be used. You can also use a combination of them.

What type of protection should I consider?

Life assurance
Having Life cover can help to ensure that your mortgage is paid off if you die.

Critical illness
To provide a cash lump sum which could be used to pay off your mortgage if you suffer a critical illness such as a heart attack or cancer.

Waiver of payment

This is an important benefit that can be added to many plans. It will enable your payment to continue to be paid if you are unable to work due to sickness or accident.

Income Protection

To provide you with replacement income to help maintain financial commitments if you are unable to work because of an accident or illness.

Unemployment cover

To provide you with replacement income to help maintain financial commitments if you are unable to work due to involuntary unemployment.