Understanding mortgages

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This information is an extract from the booklet Housing costs, which is part of our Financial guidance series. You may find the full booklet helpful. We can send you a free copy – see page 7.

Understanding mortgages

What is a mortgage?

If you’re getting a mortgage for the first time, you may be learning about what it involves. A mortgage is a loan that’s normally used to buy a home. The lender is usually a bank or building society. Most people pay the loan back over a long period of time, such as 25 or 30 years. This time period is known as the term.

The loan is secured against the home. This means that the lender can take back the house and sell it (repossess it) if you don’t continue with the monthly payments. But the lender must have done everything they can to help you continue with your mortgage payments. Repossession should only be a last option.

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Types of mortgage

There are different types of mortgage. But there are two main categories:

• Repayment mortgages.

• Interest-only mortgages.

It’s important to know which type of mortgage you have and how well your repayment is going. If you are worried or want to ask questions, you should contact your lender.

Repayment mortgages

This is the most common type of mortgage. You pay back both the actual mortgage loan (known as the capital) and the interest on that loan, over a set period of time. At the end of the term, you will have paid the mortgage off in full.

Interest-only mortgages

With interest-only mortgages, you only pay the interest for the duration of the loan. At the end of the term, you need to pay off the full amount owed as a single payment. You therefore need to have a way of paying this money when the term ends. Under recent changes, anyone getting a new interest- only mortgage needs to show they have a credible plan for eventually repaying the loan.

JARGON BUSTER

Capital

With mortgages, this means the amount of money you have borrowed.

Interest

When you borrow money, you usually have to pay the lender an extra amount, in addition to paying back the capital. This extra amount is called the interest.

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Over the next few pages are some different ways of repaying interest-only mortgages.

Endowment mortgages

This is when you pay the interest on the mortgage loan over a set period. You also pay money into a savings plan (called an endowment insurance policy) with the aim that this will pay off the mortgage at the end of the term. The endowment policy gives you life insurance. It can include critical illness cover (this pays out a lump sum that is tax-free if you are diagnosed with certain life-threatening health conditions).

The endowment policy is usually with a different company from the mortgage lender. The amount of money you get back from the endowment policy (the return) is linked to the stock market. There is normally no guarantee that it will pay off your mortgage in full.

Some endowment mortgages have been mis-sold in the past.

They are not a popular choice for a new mortgage these days. However, many people have endowment mortgages that they took out some time ago. If this applies to you, you need to review the endowment policy regularly to make sure you will still be able to pay off the mortgage at the end of the term. If you think your endowment policy will not pay out enough money to do this, you should talk to your lender about your options.

ISA mortgages

An ISA mortgage is an interest-only mortgage that’s similar to an endowment mortgage. But instead of paying money into an endowment policy, you pay money into an ISA (individual savings account).

An ISA is a savings account that can save you money on tax.

There are two types of ISA:

• Cash ISAs are savings accounts where you don’t have to pay tax on the interest you receive.

• Stocks and shares ISAs can also save you money on tax, but only in certain situations. It’s more likely that you would be using a stocks and shares ISA to pay off a mortgage.

In some cases, because of the tax advantage, your savings may increase faster with an ISA mortgage than with an

endowment mortgage. But if the ISA is linked to a stock market investment that loses value, your savings will also be reduced.

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ISAs that have been set up since April 2014 are sometimes known as NISAs (new ISAs). This is because the rules changed about how much you can save in an ISA. For April 2015–April 2016 the amount you can save in a NISA is £15,240.

Your husband, wife or civil partner (but not an unmarried partner) can now inherit your ISA allowances. This applies to deaths after 3 December 2014. They will get a one-off increase in their own ISA allowance equal to the value of your ISAs. They get this increase even if you do not leave the money or investments in the ISAs to them. However, if you do leave the investments in stocks and shares ISAs to your husband, wife or civil partner, they can simply take over the ISAs with the investments included if they choose to. This may be important if you have a joint mortgage.

Pension mortgages

Pension mortgages are interest-only mortgages. They are sometimes used by people who are self-employed and have substantial pension savings. Each month, you pay the interest on the mortgage loan and pay money into a pension scheme.

The aim is that, at some stage, you will cash in part of your pension savings to pay off the loan.

If you die before the age of 75, investments in a pension scheme are passed on tax-free. This may be important if you have a joint mortgage.

Interest-only mortgages without a planned repayment method

Some people get an interest-only mortgage without having a planned way to repay the loan. They may decide to:

• switch to a repayment mortgage in the future

• sell the property to repay the loan

• repay the mortgage in the future with money from an inheritance or the sale of a business – although lenders are increasingly refusing to lend on this basis.

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Other types of mortgage

Equity-release mortgages

Equity release is a term used to describe a range of products that are used to release the money you have invested in your home (or equity). Equity-release schemes are offered as either:

• lifetime mortgages, which let you borrow money against the value of your home

• home reversion plans, where you are offered money for the sale of all or part of your home.

These mortgages are only available to people aged 55 and over. The mortgage will be paid back if you die or if the home is sold. You may pay back either:

• only the interest on the loan during your lifetime

• no interest, and the interest is added to the outstanding debt – in this case, the debt to be repaid when you die or sell the house builds up.

You can find out more about equity-release mortgages

from the Equity Release Council, which is a trade body for this type of mortgage. Visit equityreleasecouncil.com

Offset mortgages

This is when a mortgage is linked to a bank account,

or sometimes multiple bank accounts. The amount of interest you owe is based on the outstanding mortgage minus the money you have saved in the bank. For example, if you have

£20,000 saved and your mortgage amount is £200,000, you will only pay interest on £180,000.

Offset mortgages may be repayment mortgages or interest-only.

Getting a mortgage when you have cancer

You shouldn’t generally be asked any questions about your health when you apply for a mortgage. If your cancer diagnosis doesn’t affect your employment or income, your application should be straightforward. However, they may ask a general question about whether you are expecting your income and expenses to change in the future.

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The lender will need to consider whether you can afford the mortgage payments. To do this, they will check your income and spending, and look at how your mortgage payments would change if interest rates rose. The lender will need to see evidence of your income, such as pay slips or bank statements.

It may ask for details of your spending, or estimate this based on the average spending of similar households. This is

sometimes called an affordability assessment.

You can find out how much money a mortgage lender is likely to lend you by using the mortgage calculator tool on the Money Advice Service website. Visit moneyadviceservice.

org.uk/en/tools/house-buying/mortgage-affordability- calculator

You can either apply directly to a lender yourself, or speak to an independent mortgage adviser. An independent mortgage adviser will be able to check what’s available for you. A family member or friend may be able to

recommend an adviser, or you can visit unbiased.co.uk, findanadviser.org or financialplanning.org.uk/wayfinder to find one in your area.

You should always check that advisers are approved by the Financial Conduct Authority (FCA). You can check that individuals and companies are on the FCA register by visiting fca.org.uk/register

JARGON BUSTER

Independent mortgage adviser

A specialist who can check and compare mortgage options. They can help you make decisions about your mortgage.

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More information and support

More than one in three of us will get cancer. For most of us it will be the toughest fight we ever face. And the feelings of isolation and loneliness that so many people experience make it even harder. But you don’t have to go through it alone.

The Macmillan team is with you every step of the way.

To order a copy of Housing costs or any other information from our financial guidance series, visit be.macmillan.org.

uk or call 0808 808 00 00.

We make every effort to ensure that the information we provide is accurate and up to date but it should not be relied upon as a substitute for specialist professional advice tailored to your situation. So far as is permitted by law, Macmillan does not accept liability in relation to the use of any information contained in this publication, or third- party information or websites included or referred to in it. © Macmillan Cancer Support 2013. Registered charity in England and Wales (261017), Scotland (SC039907) and the Isle of Man (604). Registered office 89 Albert Embankment, London, SE1 7UQ

REVISED IN MAY 2015

Planned review in 2016

NEXT STEPS

Make sure you have all the information you need about the type of mortgage you have or would like to have. You can call our financial guides on 0808 808 00 00 if you would like more information about the different types of mortgage.

Understanding mortgages