Scared of the Mortgage Minefield?

Check out the origins of the word ‘mortgage’ – evidently the word ‘mortgage’ comes from the French word ‘mort’ meaning ‘dead’ (oh my God!) and the word ‘gage’ which has Germanic origins, and in this sense its meaning is ‘pledge’ – dead pledge?

The connotations of this are nothing if not scary eh?!

And I bet your financial adviser will be keen to skip over that point!

But fear not, use our no nonsense, cut to the chase mortgage guide to find out what’s what and remove the dread!

The thought of finding and securing a mortgage whether for the first time, for a second home or even if you’re thinking of re-mortgaging can be daunting and confusing.

There are so many lenders out there offering so many different types of product – how do you know what’s on offer or which one is right for you; and then how do you apply and get accepted? The big picture can indeed seem insurmountable. But really it isn’t. Take one step at a time and achieve your goal of owing the home of your dreams. Here are a few steps to get you on the right track.

Step One, what products are on offer?

Here are the main types of mortgage available today.

For detailed information on each type of mortgage and to find out which lenders give the best deals for you, the Tax Consultants Guide recommends that you consult your financial adviser – I mean, you could go round every single lender and pick up every single brochure and leaflet…but then you’d need another house to put them all in!

• Fixed Rate Mortgages – the interest rate the lender sets for you is fixed for a given period of time. There are different periods of time over which you can fix your rate. Generally speaking, the longer the fixed period the higher the fixed rate. Your rate will not change during your agreed fixed period even if the Bank of England adjusts the base rate or if the mortgage company change their overall rates. This can protect you against interest rate rises and leave you paying over the odds if the interest rates fall below your fixed rate.

• Capped Rate Mortgages – for a fixed period of time your lender will fix the maximum rate of interest above which your payments will not rise, but below which your payments will still be subject to the variable rate fluctuations.

• Variable Rate – simply put the rate of interest you are liable to can vary. Generally lenders keep the fluctuations in their interest rates in line with the Bank of England’s base rate. Some companies offer ‘lower’ or discounted variable rates for fixed periods…

• Discounted Variable Rates – these are discounted against the lender’s standard variable rate but still subject to interest rate fluctuations. Payments will rise and fall in line, but discounted against, the standard variable rate.

• Base Rate Tracker – this is a variable rate mortgage directly linked to the Bank of England’s base rate. If the BoE raise their base rate, your repayments rise in line. If they reduce the base rate, of course your payments reduce in line. This type of mortgage protects against mortgage lenders failing to pass on interest rate reductions generated by the BoE lowering base rate, but it is still a variable rate mortgage and you are subject to base rate movement.

• Cash Back – you take out a mortgage with a lender and they give you a cash lump sum to say ‘thank you’ and generally to secure your commitment to them for a fixed number of years. If you don’t keep to your side of the ‘dead pledge’ (!) you may be required to repay some or all of the cash. This type of mortgage is usually offered with a variable rate of interest repayment – however other options are available. If you’re interested in the cash back option, ask your financial consultant to find out what’s on offer.

• Flexible – and finally…leaving the most complicated until last! Flexible mortgages are exactly that – flexible! The level and type of flexibility on offer varies from product to product and lender to lender. Lenders often market these as mortgages to reflect your lifestyle. The possibilities include the ability to repay large sums of your mortgage without penalty, monthly or even daily interest calculation to help you benefit from overpayments, mortgage ‘holidays’ or reductions for short periods of time and membership cash rewards. To find out what’s on offer, ask your financial consultant. If you’re after a particular option for personal flexibility, make sure you discuss your requirements with your adviser and get the right product for you.

Step Two, some things to be careful of.

The Tax Consultants Guide recommends that you always seek the professional advice of a financial adviser who is regulated by the financial services authority.
Your financial adviser has an obligation to make sure that you are aware of
all the terms of your mortgage commitment and that you have read and understood the small print but what else do you need to be wary of?

Well, just like you’re often advised not to buy your holiday insurance from the holiday company as the insurance may be over-priced, some mortgage schemes come with over-priced, tied-in compulsory insurances as well. Some mortgage lenders attempt to undercut the competition to attract you and then make up for their loss leading by bundling in their over-priced insurance policy with the mortgage. Beware, sincerely, this is not the legally compulsory way. If your lender suggests that it is then they are wrong. Shop around!

Redemption penalties during tie-in periods are also something to watch out for. These should be detailed in your mortgage contract and you should make sure you are fully au fait with them in case you ever want to make lump sum repayments or pay back your mortgage in full before it has run to term. Penalties vary from lender to lender and you need to make sure you are comfortable with the terms you are about to accept.

Step Three, repayment

Unlike the many types of mortgage you can choose from, there really are only two ways when it comes to repayment! It helps keep things a little simpler I suppose…

• Interest only

• Repayment

Interest only mortgages – your monthly payment to the mortgage provider is ‘just’ to cover the interest on the loan. Nothing you pay back goes towards the capital lump sum you have borrowed, and which you will eventually need to pay back! So how do you pay back the lump sum after the 25 or so years? Well, the onus is on you to take responsibility for establishing an investment vehicle with projected levels of growth based on your regular payments which will mean the capital repayment at the end of the mortgage term is made. Typical vehicles include various insurance products, endowments, pensions etc.

Repayment or ‘Capital & Interest’ mortgages – your monthly repayment is split to cover interest and capital repayment. During the first years of payments more of your monthly payment is still swallowed up in covering the interest on the loan. Gradually however, the balance tips and you start to pay more off the capital and you start to see the open balance decrease – a nice sight eh?!

Step four, getting help!

Find a financial adviser or a mortgage broker to help you! That’s what these guys do for a living! They take the pain and hassle out of the research and the leg work. The Tax Consultants Guide always advise you to make sure that the adviser you choose is regulated by the Financial Services Authority.

You don’t have to go it alone if you don’t want to! Not all brokers and advisers charge you fees either, they can make commission from lenders if they find you the right product and match you to the right mortgage.

Keep your eyes and your mind open – at the moment it’s a buyers market!