Financial Guides

Mortgages

At any one time there may be thousands of different mortgage options, only some of which will meet your needs.

It is important to assess whether the repayment will be affordable in the future should the rate rise above the current low rates that have been maintained for some time. However, it is not that long ago that interest rates were over 15% - that is nearly three times the current rate.

You can therefore use the Interest Only mortgage calculator or Repayment mortgage calculator to assess these potential costs and how a variation in the Mortgage Term, Mortgage Amount, Growth Rate and Interest Rate affect the actual costs that you pay.

Types Of Mortgage

To help you understand the mortgage market, here is a description of each type of mortgage scheme.

The Standard Variable-rate Mortgage

With this type of mortgage your payments go up and down in line with the lenders standard variable rate. Mortgage interest rates usually move in line with the base rate set by the Bank of England, although there is often a delay between the two.

The Base-rate Tracker Mortgage

This is similar to a standard variable rate mortgage but the rate is directly linked to the Bank of England base rate and immediately alters with changes in that rate.

The Fixed-rate Mortgage

As the name implies, with this type of mortgage your rate is fixed for a stated period of time. This could help to make budgeting much easier, and could be helpful when you’re buying your first home or starting a family for example.

The Discounted-rate Mortgage

Many lenders offer discounts from their standard variable rate for a set period. This could be a good way for borrowers to keep repayments lower than the standard variable rate in the early years of the mortgage.

The Capped-rate Mortgage

With a capped mortgage your mortgage rate can vary, but only up to an agreed limit, the ‘cap’. Once at this limit, if mortgage rates go higher, then your mortgage rate, your repayments stay the same. If rates go below the capped rate, so will your repayments.

The Cashback Mortgage

Here, the lender offers a cash lump sum to new borrowers. This is paid after completion. The lump sum can be quite large – perhaps several thousand pounds. The cashback can be used in any way you wish, to pay for some home improvements, buy a car or even have a holiday. It’s up to you.

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Repayment Options

How you repay your mortgage depends on your circumstances and how long you expect to own the property you are buying. There are two basic ways to repay what you have borrowed.

Repayment (Capital & Interest) Mortgage

With this method, you make monthly payments to the lender over an agreed number of years (called the mortgage 'term'). Many mortgages last for 25 years but they can be for shorter or longer periods. Your payments gradually pay off the whole amount you have borrowed (called the 'capital') as well as the interest. Provided you make all the payments agreed with the lender, a repayment mortgage guarantees to repay the whole loan by the end of the term. There is no built in life cover with this method and you may be required to effect life assurance to cover the amount borrowed should you die during the mortgage term.

Interest Only Mortgage

With this method, your monthly payments to the lender only cover the interest on the loan. They do not pay off any of the amount you have borrowed. This is why you usually make separate payments into an investment or savings scheme to build up a lump sum. When the mortgage term ends (or earlier), you use the lump sum to pay off the amount you originally borrowed. It is your responsibility to make sure you have sufficient funds available to repay the loan at the end of its term.

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Flexible / Offset Mortgages

Flexible Mortgages

Flexible mortgage is designed to give you more control over your finances with varying degrees of flexibility - you should be able to overpay, borrow back overpayments, underpay and take payment holidays when you make a payment, plus as soon as you make a mortgage payment you start paying interest on a smaller loan amount.

What are the benefits of a flexible mortgage?

Flexible mortgages are specially designed to accommodate the changes taking place in our working environment and lifestyles. Some flexible mortgages allow you to take payment 'holidays' where you can choose not to make monthly payments for up to six months. This is particularly useful for couples starting a family, or people taking time out to study.

However you will have to agree payment holidays with your lender as taking time off could either increase your repayments later on or prolong your loan period.

With a flexible mortgage you can vary the payments to suit your circumstances. If you’ve got extra cash, use it to pay off more of your mortgage. Keep up the overpayments and you could pay off your mortgage years early. And that could save you money, subject to status.

Do you want a payment holiday? With a flexible mortgage you can use the overpayments you have built up to cut back or stop your payments for a while. You could even borrow back money.

Offset Flexible Mortgages

With offset flexible mortgages, on the other hand, the accounts remain separate, but linked. All of the credit balances are offset against the debt, so that the borrower pays less interest and can save thousands of pounds over the mortgage term.

Main features of offsetting**:

• Offsetting - gives you the option to link your mortgage to your savings and/or current account balances and instead of receiving interest on the savings and/or current account balances, you pay no interest on the equivalent amount of the mortgage.
• Unlimited offset - Intelligent Finance do not restrict how much money you can use to offset against your mortgage.
• Additional borrowing - you can release money tied up in their home, based on your income and house value.
• Payment holidays - you can take up to 2 payment holidays each calendar year (not in the first 6 months or last 3 years of the mortgage). Intelligent Finance still charge interest, which, along with missed payments, is added to the loan and your monthly payments are recalculated to cover it.
• Interest calculated on the basis of daily balances - to give you a consistently good deal.
• Portable - you can carry forward the special rate to a mortgage on a new property for the remainder of the special rate period.
• Choose the repayment type - repayment, interest-only, or a combination of both.

The following three options may be available when offsetting:-

1. Shorter Term

When you offset, you reduce the amount of interest paid over the term of their mortgage, which in turn reduces the balance of your mortgage faster and could result in the mortgage being paid off early.

Here's how it works:

• As the money in your savings and/or current account offsets against your mortgage, you earn no interest on that money, but pay less interest on the mortgage.
• Your monthly payments do not change as a result of offsetting so are effectively overpaying each month.
• The mortgage balance reduces faster which means that you could pay off your mortgage early.

This Shorter Term option is suitable for all people who want to pay off their mortgage early.

1a. Shorter Term on an interest-only mortgage

If you choose an interest-only mortgage, it's important to note that the level of savings you offset may have to be higher than if you had chosen a repayment mortgage, if you want to pay your mortgage off early. The most likely benefit of Shorter Term for interest-only mortgages is a reduced final mortgage balance. This means that the repayment plan you have in place to pay off your mortgage may not have to reach the level you had originally expected.

2. Lower Payments

When you offset, you reduce the amount of interest paid over the term of their mortgage. The offset benefit is received in the form of lower monthly mortgage payments, leaving you with more money in your pocket each month.

Here's how it works:

• As the money in your savings and/or current account offsets against your mortgage, you earn no interest on that money, but pay less interest on your mortgage.
• Depending on the amount being offset, your mortgage payments adjust automatically each month, resulting in a lower monthly payment.
• Because you benefit from lower monthly payments, your mortgage balance and term won't reduce as a result of offsetting.

3. Reduced Debt

This payment option enables you to reduce the amount of interest paid during the term of your mortgage and reduce your mortgage balance over your chosen term.

Here's how it works:

• As the money in your savings and / or current account offsets against your mortgage, you earn no interest on that money but pay less interest on your mortgage.
• Your monthly payments do not change as a result of offsetting, so effectively you're overpaying each month until a recalculation* is required.
• Each time a recalculation* occurs, your regular mortgage payments are adjusted based on your reduced balance and spread out over the remaining mortgage term.

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* Examples of a recalculation include interest rate changes, changing from interest-only to repayment mortgage, taking a payment holiday, etc.

** please note that not all of these options are available with all offset products.

The guidance and/or advice contained in this website is subject to UK regulatory regime and is therefore restricted to consumers based in the U.K.
THE FINANCIAL SERVICES AUTHORITY DOES NOT REGULATE SOME FORMS OF BUY TO LET MORTGAGES, LOANS AND DEBT CONSOLIDATION.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP REPAYMENTS ON YOUR MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
THERE MAY BE A FEE FOR MORTAGE ADVICE. THE PRECISE AMOUNT WILL DEPEND ON YOUR CIRCUMSTANCES. HOWEVER WE ESTIMATE IT
WILL BE £299.
Written quotations available on request. All loans subject to status.

THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME.

You should seek independent financial advice on investment vehicles which may be used to repay a mortgage debt.