Guide to Mortgages
Here at Liberty we have a very experienced team of Mortgage Advisers who can source the whole of the market and find the best mortgage for your requirements. We are not "tied" to any lender or product, which allows our team to find a variety of "deals" that your bank or building society may not have access to.
What is a mortgage?
A mortgage is the name given to a loan secured on property. It is usually used to buy the home although it is becoming more popular to consider a new mortgage, where the property is already owned, to access a more competitive mortgage product or to raise capital for other purposes, such as school fees or business investment.
A mortgage is a long-term loan and has traditionally run for a fixed period, typically 25 years. However, most mortgages are flexible enough to allow for early repayment or, if your circumstances dictate, the term can be extended beyond the original loan period.
Mortgages were once the preserve of building societies and the high street banks, however recently far more competition has entered the market and there is now a raft of lenders offering mortgage loans on residential property. This expansion in the number of lenders has lead to a vast array of different loan packages.
Nowadays there are loan deals to suit most people's needs, whether you are buying your first home, a retirement cottage or perhaps an investment property.
What different types are there?
Although there are many different types of mortgages products on the market, generally they can be split into two basic types:
Repayment mortgage: Under these arrangements you are required to make monthly payments which are made up of part capital and part interest. The structure of the repayment method normally means that during the early years of the mortgage, little capital is repaid. The rate of repayment accelerates over time.
Repayment mortgages are normally quite flexible as it is sometimes possible to extend the term of the loan but only with the written permission of the lender. Also, it is normally possible to increase the capital repayment of the loan so decreasing the term, allowing you to repay your debt early.
Interest only: These arrangements do not require that you make capital repayments until the end of the loan. The monthly payments to the lender are made up entirely of interest on your outstanding debt.
In order to clear capital, at the end of the loan term, you must have an amount equal to the outstanding debt. Most people achieve this by making regular contributions to a savings plan; this plan is targeted to accumulate an amount sufficient to repay the outstanding debt at the end of the mortgage term. Any such savings plan (e.g. Endowment Assurance or ISA plan) should be kept under regular review.
Flexible: These are a newer style of mortgage arrangement. They offer you the option to increase or decrease your monthly payments (and sometimes even the opportunity to stop them altogether for specified periods. This flexibility is designed to assist you to manage your cash flow. Many flexible mortgages offer daily or monthly calculation of interest. This system could normally be expected, when compared with a more traditional mortgage, to reduce the overall amount of interest you pay throughout the loan term.
The latest addition to the mortgage range is a combined system of current, savings and mortgage accounts. The mortgage element will still be a repayment, interest only or flexible loan, but the amount of money in your current and/or savings accounts are taken into account considered when the lender calculates the interest due on your mortgage.
For example if you hold a savings account with a balance of £1,000, this amount will be considered by the lender when calculating the interest due by effectively reducing the total mortgage by an amount equal to your savings. Such arrangements are known as offset mortgages.
You may also find a 'drawdown' mortgage, which is helpful if you have a property that requires renovation. You receive a basic amount, but as you complete renovation work on your home, further amounts become available for you to draw down as and when required.
Further differences occur in the way interest is calculated on your mortgage.
- Variable: the interest rate you pay rises and falls in line with the bank of England base rate.
- Fixed: the interest rate is fixed for a given time at the start of your mortgage normally from 1 to 5 years although this can be longer. Note that you may have to pay a higher interest rate when the fixed period finishes.
- Discounted: the lender gives you a discount on its standard variable rate for a given time.
- Capped: the interest rate is guaranteed not to rise above a certain percentage, but it may also have a 'collar', i.e. it will not fall below a certain rate. However there is normally a fixed timescale for the capped rate period.
Different lenders will offer you different incentives to take out a mortgage with them, for example:
- Cashback: on completion of your mortgage, you receive back in cash a payment of some or all fees: the lender pays for your survey, or your legal fees, or will meet the stamp duty charges. The cash back could be paid as either a percentage of the mortgage amount or as a lump sum.
Some lenders will charge you an early repayment charge if you redeem your mortgage early, or want to pay off a part of it.
Please note where immediate offers such as these are provided it is common for lenders to charge you an early repayment charge should you repay your mortgage during the early years of its term.
Your home may be repossessed if you do not keep up repayments on your mortgage.
For mortgage advice we can be paid by commission or we can charge a fee of typically £499.