Home buyers guide: The best mortgage for you
Choose the mortgage type that best suits your requirements. To judge this please read our complete guide to the mortgage type that may be on offer to you.
- Simple and straightforward - you pay interest and capital each month
- If you pay on time for the agreed term you are guaranteed to clear your mortgage
- The interest element is larger in the initial years
- Towards the end of the term you are mainly paying off the debt
- You can make lump sum payments off your capital You need to change your payments when interest rates change
- Your monthly payments only cover the interest not the debt
- To settle the actual debt you take out a separate investment
- This can be either an endowment policy, a pension plan or an Individual Savings Account (ISA)
- To clear the debt the investment must generate sufficient income
- Combines a savings policy with life insurance
- If you choose a with-profits plan your monthly premiums are part of a joint investment with others
- Traditionally you were awarded an annual or reversionary bonus according to performance plus a larger terminal bonus at the end of the investment
- Unit-linked endowment - your premiums are used to purchase specific units in stock market linked investments. The growth potential is larger than endowments but they also carry a greater risk
- Recent stock market performance has shown how risky these plans can be
- Many investors now face a shortfall at the end of the term requiring additional funds to clear their mortgage
- Interested in selling your Endowment Policy?
- You maybe eligible for compensation if you were mis-sold an endowment policy
- Individual Savings Accounts offer the attraction of being interest free.
- These are now being bundled into all-inclusive mortgage packages.
- Like endowment policies you can pay off your mortgage early and possibly generate a tax-free lump sum if the ISA performs better than expected.
- The current state of the equity market needs to be considered.
- These allow you to link your personal pension plan to your mortgage
- You use part of the tax-free lump sum it generates at the end of the mortgage term to pay off the outstanding debt
- The remainder must be used to purchase an annuity in the same was as a standard pension plan
- The annuity is used to buy a guaranteed annual income until your death
- The disadvantage is that you can only access this money when you are over 50; and you can only use up a maximum of 25% of the plan's value
- Different from traditional mortgages, they give you more control over your finances - but this can cause pitfalls.
- If you make underpayments and take payment holidays, for example, you debt increases.
- You need to increase your monthly repayments or extend the term of the mortgage to compensate.
- Most flexible mortgages come with an initial offer period - an introductory discount, fix or cap.
- Lenders' Standard Variable Rates on flexible mortgages tended to be higher than on their standard home loans but most are now more competitive.
- Many non-flexible mortgages now have some flexible features such as penalty-free overpayments and daily-calculated interest.
The key features:
Every overpayment has an instant effect on the total amount that you owe if interest is calculated daily rather than annually.
You can make regular or occasional extra payments without being subject to any early redemption penalties. This enables you to pay off the loan with less money and pay it off quicker.
You can make reduced payments for one or more months during a period of reduced income or extra expenditure. Many lenders require you to fulfil certain conditions before doing this; you also need to get permission beforehand.
You can take a break from paying the mortgage for one or more months. Some lenders limit the frequency of underpayments or holidays, some only permit them after six, 12 or 24 months, and others do not permit them in certain circumstances, such as redundancy.
You can withdraw money up to a pre-agreed borrowing limit, or equal to the sum of overpayments made previously. Since interest is charged at the same rate as the mortgage, this is a cheaper way of borrowing money than through personal loans or credit cards.
- Offset mortgages work in a similar way to current account mortgages, except that your separate accounts are linked rather than completely amalgamated.
- You can still use your savings to reduce your debts.
With a current account mortgage, all your accounts - savings, mortgage, current account and even loans and credit cards - are pooled. You have a single cheque book and a debit card.
- There are no monthly repayments to reduce your debt.
- Instead, any money paid into this one account reduces the amount you owe (lenders normally stipulate that you pay your salary into the account).
- All borrowing is charged at the mortgage interest rate, which is lower than personal loan rates and credit card rates and overdraft charges.
- Interest is calculated daily, so every day your current and savings accounts are in credit - the interest on your mortgage will be reduced.
- This could mean paying your mortgage off early.
- The interest is calculated on the difference between the combined balance of your current and savings accounts and your mortgage balances.
- If you run your own business, you might not be able to prove your income in the usual way. Most lenders require three years of accounts.
- If you haven't been in business that long, you may find it difficult to get a mortgage.
- Even with three years of accounts, your accountant will have minimised your declared income for tax purposes.
- Your lender may determine your borrowing not on your ability to pay but on a figure that doesn't accurately reflect your earnings.
- Self-certification lets you declare your income without accounts to back them up. You or your accountant provide a letter stating your income and ability to meet the repayments.
- You will need to provide a large deposit
- If you are self-employed, don't automatically assume that you need a self-cert mortgage.
- Many lenders have relaxed their rules, enabling you to avoid the sizeable fees and redemption penalties that can make self-certification costly.
Financial difficulties in the past may not reflect you ability to repay a mortgage today, but it is hard to find a mortgage if you have a poor credit record.
Problems include previously incurred mortgage arrears, a county court judgement (CCJ) issued for unpaid debts, or been declared bankrupt. If your debts were large or are unpaid, you may need specialist help.
- Specialist lenders (some from the mainstream) can help - at a cost
- Interest rates are high: specialist lenders usually charge between 2% and 4% above base rate.
- You will need to put down a big deposit.
- A way to avoid higher interest rates is to try and take out a joint mortgage with someone with a clean credit record or find a mortgage guarantor.
- If you keep up with your mortgage and other payments for two years or more, your credit rating will be repaired, enabling you to remortgage.
- To discourage this, specialist list lenders may cut their rates after an initial period and can also charge redemption penalties, even after any discount period ends.
- Buy-to-let Mortgages vary - you can get an introductory discount, fix or cap - but you revert to the lender's Standard Variable Rate after this period.
- The amount that you can borrow is determined by the projected rental income.
- To work this out yourself - on average, your rental income will need to exceed your monthly repayments by 25%-30%
- Expect to pay a deposit of around 20% of the purchase price.
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