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Section
3 - Types Of Mortgage
Variable
Rate
The
basic mortgage rate, which most lenders offer, is a standard
‘variable’ rate (SVR). This generally moves up
or down according to the Bank of England Base Rate changes.
However, banks and building societies do not always pass on
these changes to their customers, or delay doing so, which
can make it worthwhile shopping around. Special rate deals
revert to the variable rate at the end of the ‘discounted’
period. Some mortgage lenders guarantee their variable rate
will remain within a certain margin of the Bank of England
base rate at all times. Alongside the standard variable rate,
lenders offer a variety of other rates and a range of special
deals, which specific terms and conditions. These take the
form of fixed, discounted, capped, LIBOR, base-rate tracker
and flexible mortgages and deals that offer incentives like
cashback. 
Fixed
Rate
This
type of mortgage sets the interest rate you will pay for a
given period of time – thereby guaranteeing that the
amount you pay back each month will not change for that period.
When the fixed time period expires, you will revert to the
lender’s standard variable rate. The obvious advantages
of fixed-rate mortgages are that if you are having to budget
carefully over the first few years of your mortgage then you
know how much you will be paying each month and you won’t
be caught out by any surprise increase in the interest rate.
Likewise, if interest rates rise above the fixed rate you
are paying then you have the satisfaction of knowing you are
saving money. The reverse is also true. If interest rates
drop below the fixed rate you will lose out, but you will
still be sure of how much has to come out of your bank account
each month.
Fixed-rate mortgages usually last between one and five years,
the best rates occurring in the one to three-year time frame.
Some lenders offer fixed-rate mortgages lasting 10 years or
more – in some cases, the full length of the mortgage
term. How long a fixed rate you opt for will depend on your
view of how interest rates are going to move over the next
few years, as well as the comfort you may get from knowing
that whatever changes do occur, your payments each month will
not change for that period.
Fixed
rates have proven very popular with people looking to protect
themselves against interest rate movements, particularly as
variable rates have been as high as 18 per cent in the past.
However, recent years have seen interest rates continuing
to fall and many borrowers have been turning to base rate
tracker mortgage instead, to ensure they benefit from those
rate decreases as they occur.
Capped
Rate
A
variation on the fixed-rate mortgage, capped-rate mortgages
guarantee that your monthly payment will never go above a
set figure (or ‘cap’) within the time period.
Below that set figure, the rate will move up and down in the
line with the lender’s variable rate. This means you
can be certain of the maximum amount you will pay and may
benefit from lower rates as interest rates fluctuate.
Discounted
Rate
This
type of mortgage gives a discount on the lender’s standard
variable rate for a specified period. This means that whether
the interest rate goes up or down, you will always be paying
a reduced rate for as long as the discount lasts. If interest
rates are falling these deals can be very good news. Likewise,
when rates rise you will always be paying less than borrowers
on the SVR.
With
the Bank of England Base Rate falling and expected to drop
even further during 2002, discounted deals are proving popular
with borrowers looking for a special rate and prepared to
take the risk that rates may rise in the future. This risk
arises because unlike fixed and capped rates, discount rates
lack the comfort of a defined payment ceiling.
Discount
rates are worth considering if you think the rate will average
out below the fixed and capped-rate products in the market.
Be warned, through, discounted deals can have stringent redemption
periods attached.
Base-Rate
Tracker
These
faithfully track, by a set percentage, the Bank of England
Base Rate. Every time that base rate changes so will the payments
on your mortgage. This is fine when rates are going down as
they ensure you immediately benefit from any savings, whether
or not your lender has decided to pass on the change by lowering
its standard variable interest rate. However, if interest
rates go up, then so will your payments and you could be paying
above the odds if your lender decides not to pass on some
or all of the rate increase to its other customers.
A further advantage of tracker mortgages is that many lenders
are now adding flexible features to them, such as the facility
to over and underpay each month.
Flexible
Flexible
mortgages can offer borrowers greater control of their finances
by calculating interest daily and allowing the option of overpayments.
Paying just a few pounds extra each month you can pay back
the capital of your loan faster, considerably reducing the
mortgage term and saving you thousands in interest payments.
Once you have been paying the mortgage for a while, most flexible
loans allow you can make underpayments and take payment holidays
but only to the limit of any overpayments already made.
Some
lenders also offer a cheque book or reserve account facility
allowing you to draw down on your overpayment or, if you have
equity in the property, to borrow more (to a set percentage
of the property’s value and depending on your income).
While most flexible mortgages follow the lender’s SVR
a growing number of flexible lenders are now offering fixed
capped and discounted deals – although often only for
a limited period of four to 12 months.
Current
Account/Offset
Current account and offset mortgages are the big new thing
in the mortgage world. They allow you to save money by ‘offsetting’
the interest you pay by taking account of your credit balances
in other accounts, such as your savings or current account.
Historically most lenders charge you a higher rate of interest
on money that you borrow from them than the level of interest
you will receive from having money in accounts with the same
lender.
Unfair?
A lot of people think so and this is where the new breed of
Current Account/Offset mortgages have arisen from. With these
lenders if you have for example £5,000 in a current
account and a mortgage of £150,000 - then instead of
being charged interest on £150,000 you are charged interest
on £145,000. This means that the money in your current
account has earned the same amount of interest as the level
of interest that you pay on your mortgage. Another added benefit
is that there is no tax due unlike a normal current or savings
account where interest is taxed at 20/40% based on your tax
rate.
CashBack
Under cashback schemes, on completion of your mortgage your
lender gives you a cashback cheque which you are free to spend
on whatever you want. The payment is a tax-free lump sum,
normally either a set figure or a percentage of the total
mortgage loan. Cashback offers can be ideal if all your saving
have gone into providing a deposit for your new home, leaving
you short of money to furnish it or pay for the move.
On the negative side, cashback deals inevitably tie you in
to the lender’s standard variable rate for a number
of years, with an early redemption penalty that can be three
to six months interest or the repayment in full of the cashback
amount.
Pro's
and Con's
It
is important when choosing your mortgage deal that you carefully
weigh up the pros and cons of the various offers and look
at the short and long-term implications.
Banks and building societies are not charities, they have
carefully calculated the cost and weighed up their view of
the long-term in interest rates before setting any special
rates. That said, the market is probably more competitive
now than it has ever been and that is driving lenders to offer
better deals.
Always compare not just the discounted rate but also the lender’s
variable rate. While a lender’s special deals may look
attractive for the fixed or discounted period, if at the end
of that period, when you revert to the lender’s variable
rate, that rate is generally higher than others in the market,
you could lose out long term.
Please
bear in mind that lot's of lenders offer special introductory
rates in the same way that other companies have loss leaders.
This is to tempt you in. At the end of the introductory period
you will move onto the lenders variable rate. You will probably
not have any penalties at this time to move your mortgage
to a new lender. So, you should at this time do three things;
- Make
sure that you have no penalties to change lender.
- Ask
the lender what new scheme if any, that they are prepared
to offer you to retain your business.
- Use
the figures attained in No2 above as a benchmark and shop
around to see if there is a better scheme to be had from
moving your mortgage to another lender.
The
lender is relying on you being too lazy to do this. It is
highly unlikely that your existing lender will contact you
to tell you that you are paying more than you need to and
they will put you on a lower rate.
Section
3 - Other
Costs to Consider?
Competition between lenders is quite fierce and some fees
are written off by lenders in order to attract customers.
Once you have a shortlist of possible lenders it is worth
checking with them to see if they will waive any or some of
the set charges.
Arrangement
fee
This
is an administrative fee charged by the lender to cover the
cost of setting up the mortgage. Some lenders are now waiving
this fee as part of their incentive package.
Survey
fee
Lenders
require a valuation survey to be undertaken to verify that
the property is worth its selling price. It is carried out
by a qualified surveyor who is selected by the lender, and
is paid for by the borrower. The fee will vary depending on
the price of the property. Again, lenders sometimes waive
this fee.
There are two other types of survey, the Home Buyers Report
and valuation and the Buildings Report which is a full structural
survey. Which type of survey you choose as well as the cost
will usually be governed by the size, age and condition of
the house you are buying.
Conveyancing
Fee
Careful
choice of conveyancer is essential whether you use a firm
of solicitors or an independent conveyancer. There are no
set guidelines when it comes to fees for this work and it
pays to shop around. Some providers will change a flat rate
while others will charge a percentage of the property price.
Word of mouth is the best way to find a good solicitor. Be
sure to check that the solicitor is not a 'one-man-band' and
there are at least two partners within the practice.
Searches
Searches will be carried out by your solicitor or licensed
conveyancer with local authority with regard to planning for
the area. They should stop you having any unexpected surprises
post sale, such as finding that a new ring road is about to
be built close by.
Stamp
Duty
Stamp
Duty is a tax paid on the purchase price of your new home.
It is charged for properties above £60,000. The Government
hiked up the cost of stamp Duty in 2000 and is due to change
some of the terms this year. Stamp duty as it currently stands
is.
1% of the house price to £250,000
3% from £250,000 - £500,000
4% over £500,000.
Intermediary
or Broker Fee
If
you use a mortgage intermediary to find and execute your mortgage
deal you are likely to have to pay a fee for the service.
Most will charge a flat fee or a percentage of the property
price. If you pay a fee you should establish why you are getting
a better service and find out when the fee is going to be
charged. If they have found you the best deal and to get the
mortgage through them they are going to charge you a fee then
you can weigh that up against what you have found elsewhere.
Mortgage intermediaries receive a fee from the lender as well.
We think you are bananas to pay a fee up front, before
you even see what you are getting for your money!
Removal
Costs
Going
DIY or hiring a professional firm is the big question here.
As much as the financial costs involved, it is worth weighing
up the time and inconvenience involved in doing-it-yourself,
particularly if you are moving a family. Prices for removal
services vary depending on a number of factors, such as the
number of vehicles needed, the distance to travel, as well
as incidentals such as parking fees while the van is being
loaded.
Mortgage
Indemnity (MIG)
A
(Mortgage indemnity guarantee) MIG is an insurance premium
which can be charged where the amount of the loan exceeds
75 per cent of the property price, ie where the loan to value
(LTV) is greater than 75 per cent. Some lenders do not charge
a MIG and most lenders so only where the LTV is over 90 per
cent.
Section
5 - How To Find A Mortgage
Building
Societies
Building societies used to be virtually the only providers
of mortgages. But as new entrants came into the market and
many societies converted into banks, their share is now just
under 20 per cent. Building societies are mutual, ie they
are owned by their savers and borrowers. An advantage most
have is that they are situated in the high street and have
dedicated advisers, which makes them easy to approach. Some
building societies lend chiefly in their local area and often
offer competitive deals.
Banks
Banks
have been increasing their share of the residential mortgage
market in recent years, partly due to several large building
societies transforming themselves from mutual societies into
banks. Traditionally, banks have been rather more conservative
in their approach and their interest rates, redemption periods
and when it comes to imposing penalties. However, as competition
has been hotting up, particularly with the conversion of the
building societies to Plc status, banks have been forced to
change their attitudes. A number now offer flexible loans
and have very competitive mortgage and remortgage deals.
Specialist
Lenders
Recent
years have seen an increase in the number of lenders focused
on particular areas of the market. Many of these lenders are
small, flexible and quick to develop new products and services.
However, because they underwrite each mortgage on an individual
basis and offer a specialist service, their interest rates
have often been less competitive than those of high street
lenders. That is changing, however, as increased competition
is bringing rates down.
Other
Lenders
Insurance
companies are among the latest entrants to the mortgage arena.
Even supermarkets such as Sainsbury’s and safeway offers
a number of products provided by lending partners such as
the Bank of Scotland and Abbey National.
Intermediaries
An
intermediary can be an individual, firm or organisation which
helps its customer to choose a mortgage and introduce the
mortgage application to the chosen lender. Mortgage intermediaries
include mortgage brokers, independent financial advisers,
solicitors, accountants, estate agents and insurance companies.
Intermediaries can be an invaluable source of independent
advice and impartial information. However, note that some
intermediaries while able to search independently for a mortgage
are tied to a particular insurance company and so will only
be able to offer that company’s products.
If the adviser subscribes to the Mortgage code then he or
she has to tell you if they are independent or a tied agent,
they must tell you of any commission or fees above £250
which they will receive for introducing your business, and
they must state what services and advice they will give you.
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