Choosing A Mortgage
There are FOUR main decisions that need to be made when taking out a personal mortgage, and because it will normally be the largest debt you ever take on, you need to be sure you get it right.
1. Affordability. This is the first step, to find out how much you can sensibly afford to borrow. Interest rates change and you need to make sure that as rates rise you can afford the payments. Our advisers will help you plan your budget and ensure that you aren’t taking on more than you can afford.
2. How to pay it back. A mortgage is simply a loan, a debt, albeit often a large one and with any debt, the sooner it is repaid the sooner you stop paying interest charges. There are three ways forward here:-
• Capital Repayment- All monthly Payments are made to the lender, and comprise of a slice of the capital paid back, with the balance being the interest owed on the outstanding loan amount. In the early years of a 25 year mortgage it is virtually all interest, and at the end it is nearly all loan repayment. The shorter the period of the loan, the more even the spread. The slight disadvantage with this type of loan is that if you change lender in the early years of a long term mortgage, you won’t have paid off much of the loan. The big advantage is that, provided you have kept up the payments, you know that at the end of the mortgage term you are guaranteed to have paid off the loan.
• Interest Only- Here you only ever pay the interest on the money you have borrowed to the lender. This means that while you are paying less than a capital repayment mortgage, you will never pay off the loan and you will always have the debt. Ordinarily, the idea is that at the same time as you take out the mortgage, you start a savings scheme to build up a lump sum that can one day be used to pay off the mortgage. This works only if the savings grow at a faster rate than the level of interest you are being charged, and therefore by its nature involves more risk. Sometimes an interest only mortgage could be sensible if a capital sum is certain in the future or if retaining the debt helps reduce an estate for Inheritance Tax planning (IHT).
• Combination- Many people may have previously had interest only loans (often with endowment policies as the savings element) but now want more certainty and most lenders will now allow you to take a mortgage out where part of the loan is interest only and part is capital repayment. Getting advice can help you get the right way of paying the money back
3. Mortgage Product. Having worked out how much to borrow and how to pay it back, you now need to work out the most suitable way of being charged for the loan, this will include not only the interest rate but any arrangement costs or fees. There are many different products to choose from and our advisers can help you choose the one that suits your needs best. Examples of these are:-
- Variable Rates. This is the standard charge that a lender will make if no special product is chosen and it goes up and down as interest rates change
- Capped Rates. These will have an upper limit so you know how expensive it could get during the period, but can also go up and down like a variable rate. There may also be a lower limit (called a “collar”).
- Fixed Rates. These allow you to fix your outgoings for a set period of time and can be very useful indeed for budgeting. Remember, the lender is not a charity and will have tried to second guess what future interest rates might be in the future before offering the deals. If you have got the “affordability” right in the first place, you shouldn’t get major problems at the end of the fixed rate period.
- Discounted Rates. These offer an initial period where you pay a lower rate before it reverts back to the normal charge. They can be useful to help with start up costs. Again affordability after the discount finishes is they key.
- Tracker Rates. These automatically follow changes in interest rates normally either the base rate set by the Bank of England (but not at the same rate) or the rate at which banks lend to each other, but may have a lower limit below which it cannot fall.
- Flexible Mortgages. As the name would indicate, these allow the borrower much more freedom in how payments are made. There are many variations and may include the ability to pay more, (or less) than normally required (paying more obviously reduces the time your debt lasts and ultimately the amount you pay for your credit), take payment holidays, and borrow back overpayments.
- Offset Mortgages. These are very popular for people who have reasonable levels of savings they wish to keep accessible and also need a mortgage. In effect you have a credit (savings) and debt (mortgage) account with the same bank (or building society), and you are only charged interest on the difference between the two. As mortgage rates are usually higher than those given to savers (the way banks used to make a profit), this means you effectively get the higher rate on your savings by not being charged on the full mortgage amount.
4. Which Lender. Despite the credit crunch there is still a bewildering array of products in the market place. Trying to find the right product from the most competitive lender to meet your needs can be very time consuming and employing an Independent Mortgage Adviser may be able to save you both time and money.
Some types of mortgages may carry charges such as set up fees, booking fees, or an early redemption charge. These will be made clear at the outset. We can be paid by commission, a fee or a combination of both. The precise amount of the fee will depend on your circumstances. Our typical fee is £750.
Your home or property may be repossessed if you do not keep up repayments on a mortgage or other debt secured on it.
The Financial Services Authority does not regulate some aspects of buy to let mortgages and commercial mortgages.
© 2011 Ashwood Law LLP
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Ashwood Law LLP,
Ashwood Law House,
Newton Road, Heather,
Leicestershire LE67 2RD