YOUR GUIDE TO MORTGAGES & MORTGAGE OPTIONS:
A house is the biggest purchase most of us will ever make. Getting a Mortgage is an essential part of the purchasing process for most. There are many different loan options to choose from in the mortgage market. It is important to research and find the right deal for you. There are large savings to be made by shopping around first.
Morgages can be confusing though with many options to choose from:
OPTIONS
FOR REPAYING THE MORTGAGE:
Repayment mortgage - a mortgage repayment method where the capital and interest
is repaid.
Interest-only
mortgage where the capital is not repaid until the end of the mortgage.
Endowment mortgage
- an interest only mortgage where the capital is repaid by one or more endowment
policies at the end of the mortgage term.
Investment backed
mortgage - an interest only mortgage where the capital is repaid with the
proceeds an investment plan at the end of the mortgage term. Sometimes these
are rcalled PEP mortgages or ISA mortgages
Pension mortgage - This is where a tax-free cash lump sum of a personal pension scheme is used to repay an interest-only mortgage at retirement.
TYPES
OF MORTGAGE INTEREST RATES:
Variable rate - the rate varies at the discretion of the lender.
Standard variable
or Adjustable rate - the default variable rate the lender offers to mortgage
borrowers with a standard residential mortgage. This usually has a lower initial
interest rate than a fixed-rate mortgage and could mean you to qualify for
a bigger loan.
Tracker rate
- a variable rate that is linked to an underlying public interest rate (typically
Bank of England repo rate) by a predetermined margin. For borrowers the rate
is often linked to the LIBOR.
Fixed rate -
the interest rate remains constant for a set period, usually 2, 3, 4, 5 or
10 years. Longer term fixed rates (anything over over 5 years) tend to be
more expensive and therefor less popular than shorter term fixed rates. The
main advantage of a fixed-rate mortgage though is that you have permanent
protection against rising interest rates.
Discount rate
- where there is reduction in the standard variable rate (e.g. a 2% discount)
for a set period; typically 1 to 5 years. Sometimes the rate is stepped (e.g.
3% in year 1, 2% in year 2, 1% in year three).
Capped rate - where similar to a fixed rate, the interest the rate cannot rise above the cap but can vary beneath the cap. Sometimes there is a collar associated with this type of rate which imposes a minimum rate. Capped rate are often offered over periods similar to fixed rates, e.g. 2, 3, 4 or 5 years.
OTHER
TYPES OF MORTGAGES:
Buy to let mortgage - a semi-commercial mortgage on residential property rented
out to tenants.
Right to buy
mortgage - a mortgage arranged under the right to buy your home legislation
for council or housing association tenants.
Let and buy mortgage
- you let your existing property and buy a new property with a mortgage.
Flexible mortgage
- allows additional capital payments without penalty and often allows payment
holidays or underpayments.
Adverse credit
mortgage - mortgage to borrowers with credit problems, e.g. county court judgements.
Self-cert mortgage
- a mortgage where the lender does not seek proof of income to demonstrate
affordability; but instead relies on a statement of earnings as certified
by the borrower(s).
Non-status mortgage
- a mortgage where the borrowing is not dependent on the income of the applicant
and the applicant states they can afford the repayments.
Deferred interest
mortgage
Offset mortgage
- a mortgage where the borrower can reduce the interest charged by offsetting
a credit balance against the mortgage debt.
Foreign currency mortgage - where the debt is transferred to one or more foreign currencies to reduce capital and interest payments through fluctuation in exchange rates.
MORTGAGES WORLDWIDE: There are a range of mortgages avaiailable worldwide. The best advise is to shop around for a deal that suits you.
MORTGAGE JARGON: Common mortgage terms explained in brief:
Advance - This is the money you have borrowed plus all the additional fees.
Base Rate - In UK, this is the base interest rate set by the Bank of England. In the United States, this value is set by the Federal Reserve and is known as the Discount Rate.
Bridging Loan - This is a temporary loan that enables the borrower to purchase a new property before the borrower is able to sell another current property.
Conveyance - This is the legal document that transfers ownership of unregistered land.
Disbursements - These are all the fees of the solicitors and governments, such as stamp duty, land registry, search fees, etc.
Early Redemption Charge / Pre-Payment Penalty / Redemption Penalty - This is the amount of money due if the mortgage is paid in full before the time finished.
Equity - This is the market value of the property minus all loans outstanding on it.
First time buyer - This is the term given to a person buying property for the first time.
Freehold - This means the ownership of a property and the land.
Land Registration- This is a legal document that records the ownership of a property and land. This is also known as a Title.
Leasehold- This means the ownership of the property and land for a specified period, which may be sold separately from freehold, which may be owned by another person.
Legal Charge - This is a legal document that records the data of the rightful owner of a property or land.
Loan Origination Fee - A charge levied by a creditor for underwriting a loan. The fee often is expressed in points. A point is 1 percent of the loan amount.
Mortgage Deed - This is a legal document that stated that the lender has a legal charge over the property.
Mortgage Payment Protection Insurance - This is a form of insurance that ensures that the current mortgage payment will be paid if the borrower proves unable to do so.
Private Mortgage Insurance- This is a form of insurance the lender has the borrower take for loans over 70% of the appraised value. This will pay the lender only the owed portion up to 70% on a defaulted loan.
Sealing Fee - This is a fee made when the lender releases the legal charge over the property.
Subject To Contract - This is an agreement between seller and buyer before the actual contract is made.
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