Mortgage Advice for Scotland
Explanation of different approaches to structuring mortgages and how they impact upon the borrower.
Mortgages Advice - Explanation of Mortgages
Explanation of Repayment Types
Capital and Interest
This means that each monthly payment that you make to the lender will contain an element of capital in addition to the interest payable on the loan. The proportion of each will change throughout the period of the loan. The proportion of capital increases with each monthly payment provided that the payments due are met in full and on time.
Interest Only
As the name suggests, you pay only the interest each month. The actual amount borrowed doesn't reduce during the life of the mortgage and the full amount of the loan remains outstanding to be repaid at the end of the mortgage term. Your monthly payments to the lender are therefore less than with a repayment mortgage, but it is very important to ensure that you have the money available to repay the loan at the end of the term.
To provide money to repay the capital borrowed, it is important to take out some kind of investment plan. If you choose the interest only option you will need to consider an appropriate investment vehicle for your circumstance, for example Endowment policy, ISA or Pension plan.
It is your responsibility to maintain the monthly premiums to ensure continuity of the repayment vehicle and to carry out regular reviews to ensure that the performance is sufficient to repay the loan upon maturity.
Explanation of Types of Interest Rates
Standard Variable Rate
The lenders have the right to change the rate at their discretion. In practice rates tend to move in relation to funding costs, competition in the market and changes in the Bank of England Base Rate. As rates rise and fall so will your mortgage payments.
Discounted Rate
The rate remains variable, as above. However, as an incentive, a lender will offer a discount off the Standard Variable Rate for an agreed period. After the discounted period, the rate charged usually reverts to the lender's Standard Variable Rate.
Fixed Rate
The lender will fix the rate of your mortgage for an agreed period of time. You will know exactly how much you will pay the lender each month during the fixed period, which will help your budgeting. After the fixed period, the rate charged usually reverts to the lender's Standard Variable Rate.
Capped Rate
The lenders will cap the rate for an agreed period of time. If the lender's Standard Variable Rate goes above this capped figure you will pay no more than the agreed cap. If the rate drops below your capped rate you will pay the reduced amount until either the rate rises again or the agreed period ends. This gives you the security of a fixed rate, but with the added advantage that you could pay less if rates fall. After the capped period, the rate charged usually reverts to the lender's Standard Variable Rate.
Tracker Rate
This method of repayment is directly linked to changes in the Bank of England Base Rate. Tracker Rates are set at a certain percentage above or below Bank of England Base Rate, and this percentage difference is fixed - e.g. if the Bank of England Base Rate rises or falls by 0.25% your Tracker Mortgage rises or falls by 0.25% also.
Libor Rate
London Inter Bank Offered Rate. This is essentially the rate used by banks to lend to one another and is a key indicator of the short term price of money. The rate is reviewed periodically and therefore your mortgage payments will change accordingly. When the rate increases so will your mortgage payments, when the rate decreases your payments will reduce also.
Flexible Mortgage
There are various types of flexible mortgages available and they all give you increased flexibility, when compared to traditional types of mortgages.
Typically, a flexible mortgage may include any or all of the following features:
The ability to make overpayments (without penalty), subject to the lenders agreed limits
The ability to underpay your mortgage (within certain limits)
The option to take payment holidays
A facility to borrow more money within agreed limits, for lump sum expenditure, i.e. home improvements
Current account with chequebook and an agreed overdraft facility
Credit card with an agreed spending limit
Debit card
A flexible mortgage can be set up on a fixed, capped, discounted, variable or base rate tracker basis, when it comes to the interest rate that is charged to the mortgage.
Early Redemption Penalties
The lender may apply penalties if you repay part or all of the mortgage within any redemption period. Please refer to the enclosed illustration for details of early redemption charges.
Mortgage Transferability
Some mortgage products may be transferred to other properties subject to survey, and also at the agreement of the lender's underwriters in relation to your status and personal circumstances at that time.
Re-Mortgage
Income support regulations were changed radically 1st October 1995, therefore if your original mortgage was taken prior to 1st October 1995 and you now wish to re-mortgage your home any potential level of benefits could be severely reduced.
Mutual Lenders and Possible Floatation
If your lender is a mutual organisation, you should check whether or not you will be entitled to membership rights and whether or not you will be entitled to any windfall payments if they decide to convert to a company quoted on the Stock Exchange.
Your lender will confirm your entitlement to company membership rights. In the event of mortgage default, you may lose your entitlement to any future windfall payments.
