From http://limetreefs.co.uk 1
Mortgages Guide
Mortgages revealed...
The explanations below are intended to give you an insight into some of the more common terms associated with the mortgage process.
Repaying the Mortgage
Whichever mortgage you choose, you will have to repay the capital (amount borrowed) and pay interest. There are two methods available, interest only and repayment. In deciding which method is best there are a number of factors to consider, in particular, your age, marital status, dependants, income, life assurance and investment arrangements.
Repayment Option
The most common type of mortgage is the repayment mortgage. This method offers the greatest simplicity in that part of your monthly payment covers the interest due each month and part goes towards repaying the capital over an agreed term. The aim is that by the end of the term the mortgage should have been repaid. However, in the early years of a repayment mortgage, the interest on the outstanding mortgage tends to make up the greater part of each monthly payment. This means that it can take several years to start reducing the capital significantly.
No other investments or savings plans are required with this repayment method, but it is prudent for you to consider taking out some form of life assurance cover in case anything untoward happens before the mortgage is repaid.
Interest Only Option
On this basis you pay only interest to the lender each month and the mortgage balance does not reduce. At the end of the agreed mortgage term, the full amount borrowed will become due for repayment. As you are paying interest only, the monthly payments to the lender are less than on the repayment basis. It is imperative that you must have sufficient capital available at the end of the mortgage term to repay the capital outstanding. In general most people arrange some form of investment plan to repay the capital at maturity (see section on Investment Plans for further details). Please note that there is no guarantee that the chosen investment will cover the full amount of the loan at the end of the term.
Mortgage Term
You can determine the term that you wish to repay your mortgage over, but traditionally, mortgages are arranged over a 25-year term. The agreement is that you will repay the amount borrowed by, or at the end of this term. When considering the term that you wish to repay the mortgage over you should consider many factors, in particular;
From http://limetreefs.co.uk 2 In most cases you will have to pay your mortgage monthly, usually from earned income. Therefore, you should consider how your income might change in the future and arrange the term accordingly.
On the repayment basis, the longer the term, the cheaper the monthly payments.
However, this means that in total you will pay more interest. If you elect for a shorter term your monthly payments will be higher, but the total interest payable will be lower. You need to decide on a term and repayment that is suitable for your monthly budget and long term needs.
On the interest only basis, if at the end of the term, you aim to repay the capital outstanding from an investment plan, you must ensure that the term of both the mortgage and investment plan are sufficient to allow the plan to build up sufficient funds to repay the mortgage. Therefore, with a shorter term you may have to make higher payments to the investment plan to ensure that sufficient funds are available for growth to repay the mortgage at the end of the agreed term.
On the interest only basis the term does not affect the monthly payments, as you are only clearing the interest payable on a monthly basis. However, the longer the term, the more interest will be payable.
Whatever term is chosen, as interest is paid on capital outstanding, you will pay less interest on a repayment basis (as the balance reduces) against an interest only option (as the capital remains outstanding until the end of the term).
Whatever term is chosen in today’s world it is unlikely that you will remain in that property or with that lender for the full term of the mortgage. Mortgages can be repaid at any time, though there may be early redemption penalties and other charges payable (see section on Early Repayment Charges).
Early Repayment Charges
Many lenders offering fixed and Bank of England tracker deals have tie-ins or Early Repayment Charges associated with such deals.
These tie-ins normally last for the length of time of the new mortgage deal, very occasionally some of these will ‘over hang’ the end date of the initial deal. In such cases of an ‘over hang’ we would look to explain to you fully why we feel such a product was the best for you based upon your own individual circumstances.
The cost of the early Repayment charges varies from lender to lender; however they are often calculated as a percentage of the amount pay off the mortgage debt. Again the amount charged can be a flat figure or can reduce over the term of the product.
Despite the existence of such charges, many lenders also allow clients the flexibility to pay off lump sums off the mortgage balance in addition to the normal monthly payment. Often these amounts are limited to 10% of the mortgage balance per year.
From http://limetreefs.co.uk 3 Full details of the Early Repayment Charges are supplied in the Key Features Illustration issued to each client when a suitable recommendation is made to them and full details will be specified in the lenders mortgage offer.
Portability
You may have to move property during the term of your mortgage and transfer the mortgage. This can be complicated if you have a mortgage product that includes an early redemption penalty. However, some lenders will allow this product to be
“ported”, i.e. transferred to a new property for the same amount and remaining term, without incurring a penalty. Any additional borrowing may then be eligible for a new product. We will ensure that you are aware when selecting a product, not only of the early redemption penalties, but whether or not these can be ported.
When your details will be passed to a credit agency
For lenders to assess your mortgage application form it is usual practice for them to obtain a credit check. The credit agency that a lender uses may vary but the principle is the same. Included with the mortgage application form will be a declaration and part of this grants your permission for the lender to carry out searches through insurance or credit references agencies. The insurance or credit reference agencies may keep details of any searches that are made. Other agency users may see these records to help them make credit decisions, assess insurance risks, debt tracing and fraud prevention, about you and other members of your household. You can ask the lender for details of the agencies these use and to obtain copies of information supplied.
Mortgage Indemnity Premiums/Higher Percentage Lending Fee
Some lenders still charge the above if they are lending you more than a certain percentage of the property’s value (typically 75%). They use this to buy insurance to cover the possibility of the property’s value falling below the amount of the mortgage.
This is of concern to lenders because they rely on being able to sell the property to recover the money lent if the borrower stops making the mortgage payments. The insurance will cover the lender if the property has to be sold for less than the mortgage debt. The insurance offers no protection for the borrower and indeed you will remain liable to pay all sums owing under the mortgage, including arrears, interest and the lenders legal fees. The insurance company generally have the right to recover from the borrower the amount claimed by the lender. When selecting a lender and product, we will advise you if this fee is payable. Together with the amount and how this can be paid, i.e. monthly or added to the mortgage. The lender will also specify this fee and full details on their mortgage offer.
Property Survey There are three types:
(i) A Mortgage Valuation,
(ii) A Homebuyers Survey and Valuation
(iii) A Building Survey (once called a structural survey):
From http://limetreefs.co.uk 4 i. A mortgage valuation
This is a very simple inspection of the property and is the minimum requirement to obtain a mortgage. It will involve a very limited inspection of the property and is not in any sense of the word a survey. It will merely confirm to the lender that the property is worth sufficient to cover the mortgage.
ii. A homebuyer’s survey and valuation
This is suitable for a standard property type which is not very old and will advise on value as well as giving a more detailed report on the condition and state of repair of the property. Minor items of disrepair, which do not materially affect the value, will not be reported.
iii. A building survey
This is a very comprehensive survey of all parts of the property. It does not normally include advice on value. This type of survey may be more appropriate for larger, older properties or non-standard buildings or buildings of a commercial nature. It costs more than a simple survey.
It is up to you which option you choose but you should remember that the risk is entirely yours when buying a property and that if it does have any defects it is unlikely you will have any comeback against the seller. In view of this you are
strongly recommended to have a valuation and survey (option number ii) undertaken at the very least.
Your lender's valuation surveyor can be used if the lender is informed of the requirements. Alternatively, an independent surveyor can be instructed and sometimes this is preferable. However, you may still have to pay the lender's valuation. The advantage of an independent survey, not linked to the mortgage, is that the result will not affect your mortgage offer. Any defects revealed may be rectified by you as and when you choose.
Where the surveyor instructed by your lender finds defects, inevitably it will become a condition of the mortgage offer that the defects are rectified quickly. Sometimes they may even retain part of the loan until the works have been done.
You should also be aware that it is up to you to check such matters as the working of the central heating system, the plumbing, the wiring, etc, since you will have to bear the cost if you discover problems after completion. Services are not usually tested as part of the valuation and survey. Also, it should be borne in mind that using the lender’s surveyor may limit your rights to claim for negligence if something is missed.
The law may take the view that only the lender can sue - as technically they instructed the surveyor (even though you paid the fee). An independent surveyor appointed by you can be sued for negligence directly.
Different types of interest rates available
From http://limetreefs.co.uk 5 There are a variety of interest rates available within the mortgage market. We can provide advice on the different types of rates available, together with specific lenders products and the terms and conditions that relate to these products. As a summary we have described the main types of interest rates available: -
Variable Rate
The monthly payments will be determined by the lender’s standard variable rate (SVR) and will increase/decrease in line with this. The variable rate is determined by the lender and can be altered at any time; this is typically 0.5% above the Bank of England base rate. The variable rates charged by lenders can vary from lender to lender; the resent past has seen many lenders link their SVR directly to the bank of England base rate.
There are usually no early repayment charges on variable rate loans and, as such, they are worth considering if you intend to pay off your mortgage early. However, budgeting for the future is difficult as you will immediately incur higher monthly repayments should interest rates rise. Conversely, of course, you also save money if they go down.
Discount Rate
Generally lenders offer a set amount (expressed as a percentage) off their Standard Variable Rate (SVR) for an agreed period. After the initial period of time the interest rate charged tends to revert to the lenders Standard Variable Rate. As the discount is still linked to the variable rate the monthly payments will still increase and decrease with any changes to the lenders variable rate. The types of discount and period available vary between lenders as does any administration/valuation fees and any early redemption penalties that may apply.
This is a good option for reducing the cost of the mortgage in the early years and to this end they can be especially attractive to first time buyers. However, it must be noted that repayments would still increase in line with any rate changes and that there are usually financial penalties if the mortgage is redeemed early.
Tracker Rate
This is a variable interest rate, but the rate charged is a set percentage rate linked usually to the Bank of England Base Rate. The percentage difference is fixed, and can either be for a set period or the term of the mortgage. Unlike lenders traditional variable rates, with a tracker rate it is guaranteed that every time there is a change in the Bank of England Base Rate, the interest rate charged on your mortgage will also alter.
The benefit of a tracker mortgage is that you are guaranteed that any falls in interest rates will be immediately passed on to you and they therefore tend to suit an optimistic market. In a climate of interest rate rises the added cost is also immediately incurred.
From http://limetreefs.co.uk 6 The percentage difference and term of the tracker rate can vary between lenders. As can the administration/valuation fees payable and any early redemption penalties that may apply.
Fixed Rate
As the name suggests you will pay a fixed rate for your mortgage for a set period of time, irrespective of any interest rate increases or decreases. This can assist with your household budget, as you will have the certainty of a set payment for the fixed rate period.
However, fixed rate funds can be limited and sell out quickly. After the fixed rate period the interest rate charged tends to revert to the lenders standard variable rate.
The fixed rates and period will vary between lenders, and these types of products have an Early Redemption Charge applicable for at least the period of the fixed rate.
Capped Rate
These provide the security of a fixed rate but with the added advantage that if rates fall, the amount you are charged goes down too. The rate quoted is the “cap” and that is the rate you are charged whilst the lenders standard variable rate is at or above this level. However, if the variable rate falls below the “cap” then you will be charged the lower rate. If rates rise again, your rate stops at the cap. Capped rates apply for a certain period and after this the rate charged tends to switch to the lenders Standard Variable Rate. The capped rates and period will vary between lenders.
A variation to this type of mortgage is to include a ‘collar’ which is an agreed rate below which your mortgage interest rate cannot fall. It is a device for securing a lower capped rate as it lessens the risk to the lender.
Flexible Mortgages
The principle of a flexible mortgage is as the name suggests flexibility, although the level of flexibility tends to vary between lenders. Traditionally flexible mortgages may include the following features, daily interest calculation, ability to overpay to reduce the mortgage balance and/or interest charged ability to vary the amount and timing of monthly payments, current account and credit card facilities.
The interest rate charged tends to be on a variable rate basis, which means that your monthly payments will alter in line with any changes to the variable rate. However, there are some lenders who now offer flexibility facilities, combined with other types of interest rate, e.g. discount, fixed.
Various Interest Calculations Lenders Can Make
The development of Flexible products within the mortgage market over recent years has resulted in there now being three ways in which lenders can calculate interest on a mortgage account.
From http://limetreefs.co.uk 7 Annual Interest (annual rest):
Under this scheme all capital payments made throughout the year are only taken into account at the end of the year, usually the 31st December. The effect being that the debt is only reduced once at the end of the year and as a result a greater amount of interest is paid by the borrower through the life of the loan.
This was historically the way all mortgages were calculated in the UK this is now not as prevalent as in the past.
Monthly Interest (monthly rest):
Under this scheme mortgage payments made to the account are debited at the end of each month. The lender then calculates interest again and credits this to the account; the adjustment is made 12 times a year as payments are made. This advantage of this is to reduce the balance 12 times a year and so reduce the interest added to the account.
This repayment method is often found with Buy-to-Let lenders.
Daily Interest (daily rest):
Under this scheme all payments made to the mortgage account are debited to the account on the day they are made. The big advantage of this being that if these payments are made at the start of each month it greatly reduces the amount of interest charged to the account. As lenders credit interest to the account daily the sooner a payment is made the less interest is charged in the future.
This is now the method for calculation interest that the majority of lenders now use.
Interest Rates Payable after Initial Product Period
When considering the most suitable mortgage product, you need to be aware of what will happen to your mortgage payments at the end of the chosen product period. Usually after the initial product period, the interest rate charged will revert to the lenders standard variable rate. In some cases you may be “tied” into this base rate for a set period after the initial period. We ensure that when providing you with Key Features Illustrations of mortgage costs, these will include an indication of the future monthly repayments, assuming the lenders current Standard Variable Rate, and an explanation of any early redemption penalties. It is important that you can afford the monthly payment at the Standard Variable Rate as well as at any initial rate. Some lenders will allow you to select another product at the end of the initial period, but this varies between lenders and may be subject to administration charges and early redemption penalties.
Insurance Services
Limetree Financial Services Ltd, are able to provide full independent mortgage advice and advice with regards to all aspects of insurances and assurances. This means that we can arrange, life assurance, critical illness protection, mortgage payment protection and buildings and contents insurance. We are also able to assist
From http://limetreefs.co.uk 8 you in finding the appropriate advice with regards to investments and pensions when required, through our network of associated and higher professional Financial Advisers.
Types of life Assurance
You may need insurance as part of your mortgage and we can arrange whatever you may need in the way of life, critical illness or income protection cover.
• level term life assurance
Level term assurance is a life assurance contract that pays out a set sum if you die within the term of the policy. Level term contracts are usually used to cover fixed repayment values such as an interest only mortgage where the amount that you owe remains the same until the end of the mortgage. When a term insurance policy expires it has no value so if you do not die within the term you get no money back.
• mortgage decreasing life insurance
This kind of insurance is typically used to cover a repayment mortgage where the amount that you owe reduces as you make your repayments. The premiums will not change during the lifetime of the policy but the amount that will be paid if you die will reduce from the full amount that you specify at the start to zero at the end of the term. When a mortgage decreasing life insurance policy expires it has no value.
• critical illness cover
Critical Illness cover is insurance that pays out if you are diagnosed with an illness specified within the policy. It is designed to help you adapt if your life is changed by an illness. The illnesses covered by each policy vary so it is important to read the full details of the plan that you are considering. As with life cover you have the option of taking out level term or mortgage decreasing critical illness cover.
• income protection insurance
There are two forms of income protection, namely accident, sickness and unemployment (ASU) and income protection benefit (IPB). The main difference between the two is that ASU is designed to cover payments for a mortgage and a nominal amount for ancillary bills, whereas IPB is designed to replace income if needed. The underwriting criteria for ASU is less stringent as the maximum benefit paid is twelve months as opposed to IPB which could pay out until retirement age.
For accident, sickness and unemployment benefit we usually offer products from a selected panel of providers.
Many contracts can also be done on a joint life basis, say for you and your partner, with payment of the insured sum being made upon the death of either party.
Conditional Insurances
From http://limetreefs.co.uk 9 When arranging a mortgage lenders will insist on you arranging buildings insurance, to protect the property against an insured incident. The reason for this is that the property is their security for the amount borrowed and if this were reduced to a pile of rubble then the valuation and their security would be seriously affected.
The property should be insured for a minimum sum insured (usually confirmed by the valuer when inspecting the property) and the cover index linked annually. Some lenders still have in house insurance arrangements and provide details of the cost for arranging buildings and/or buildings and contents insurance. These can then be either paid annually or added to your monthly mortgage payments.
You may be able to arrange this insurance with an insurance broker rather than the mortgage provider. Limetree Financial Services Ltd act as insurance brokers and so would be pleased to provide you with the appropriate illustrations. However, this may be subject to the lenders administration fee, and usually the lender will require either their interest being noted on the insurance policy or for the policy to be issued in joint names. This is to protect the lender in the event of you not paying your insurance premiums or cancelling cover, as the insurance company will also notify the lender.
It is your responsibility to ensure that the property is insured from exchange of contracts. In fact, your solicitor should check that you have appropriate cover arranged and that it is in force prior to completing the exchange of contracts.
Conditional Insurances To Be Arranged With Lender
Some lenders when offering mortgage products will make the mortgage conditional upon you arranging a certain numbers of insurance policies with them, e.g. buildings, contents insurance, accident sickness and unemployment insurance. This is however becoming less common in the current market. The lender will ask you to complete the relevant paperwork and it is important that this is returned prior to the mortgage completing. It will be your responsibility to ensure the paperwork is returned and the lenders responsibility to ensure the policies are put into force.
When selecting suitable products and providers, we will advise you of any conditional insurances.
Investment Plans
If you decide to repay your mortgage on the interest only option, then in general you will need to arrange a suitable investment plan to repay the capital upon maturity. As each type of plan carries risks you need to seek independent financial advice. We can provide an appropriate recommendation with regards to finding the right person to offer this advice to you with regards to the most suitable investment plan.
The three main types of investment plan are:
• Endowments
• Personal Pension Plans
From http://limetreefs.co.uk 10
• Individual Savings Accounts
With any investment plan you should remember the following points;
The regular payments to the insurer or Investment Company will be separate from and in addition to your regular mortgage payments to your lender.
You may already have investment plans running that can cover part of the mortgage and may not be necessary to start a new plan for the full amount of the mortgage.
Investment plans are generally long term arrangements and regular payments will need to be maintained during the term of the plan.
The amount an investment plan produces will depend upon the performance of stock markets and the investment company/insurer which provides the plan. Past performance is no guarantee of future performance.
The value of the investment funds can go up and down, and there is no guarantee that your plan will be sufficient to repay your mortgage in full.
Failure to make suitable arrangements
At the end of the agreed mortgage term, if the mortgage has been arranged on the interest only basis, the lender will expect the capital outstanding to be repaid in full. If you have not arranged a suitable investment plan or do not have sufficient funds available at the end of the mortgage term, the lender could well commence legal proceedings to recover the amount outstanding. Alternatively, the lender may be prepared to renegotiate the mortgage term or you may need to make arrangement with another lender by way of a remortgage.
Responsibility for ensuring suitable arrangements
Ultimately the responsibility for ensuring there are suitable arrangements in force is yours, the borrower. You will need to maintain full monthly payments to any plan during its term. In some cases lenders will insist in checking your arrangements and ask for full details of any plans and copies of any relevant policies. Lenders can also assign policies. This means that a notice of assignment is granted on the policy in favour of the lender. Therefore, for any alteration to the plan, missed payment etc the lender will be notified by the insurance company. Also when the policy matures the proceeds will be paid direct to the lender.
Change in personal circumstances or surrender of an investment,
Your mortgage is an agreement to maintain regular payments, usually on a monthly basis, during the term of the mortgage. If at any time the payments are not maintained the lender will class your account as in arrears. Depending on the lenders policy and procedures you could incur administration costs and additional interest whilst your account is in arrears. As a last resort the lender could apply to the courts for a possession order and eventually repossess your property, rendering you homeless. You must ensure that if you experience any change in your
From http://limetreefs.co.uk 11 circumstances that could lead to financial difficulties, you contact your lender directly at the earliest opportunity.
If you surrender an investment plan early, you may find that the return is less than your investment, or total monthly payments. The reason for this is that your initial premiums are generally used to cover the administration costs and commission payments associated with these plans. Also if you surrender your investment plan and your mortgage is on the interest only basis, you will need to make alternative arrangements to repay the mortgage at the end of the term.
Fees Involved with Arranging a Mortgage
These can vary depending on the lender and product chosen. We will ensure that you are fully advised of any fees or charges applicable to the mortgage chosen. As a summary the main types of fees are: -
Valuation Fee
Most lenders will require a standard valuation report to assess the condition and current market valuation, of the property you intend to purchase. The assessment may be completed by either a valuer employed solely by the lender of an external firm of valuers. The report is generally on the lenders standard format and you will be expected to pay the fee for completing this report for a property purchase. Generally this fee is paid with the mortgage application form and is non refundable. The fees vary between lenders, many lender now waive this fee for remortgage valuations. It should be remembered with this type of report that the valuer is acting on behalf of the lender and you may not receive a copy of the report. If you do receive a copy it is likely to be a limited report and you should consider obtaining are more detailed report for your own purposes i.e. a homebuyers report or building survey. These are more detailed reports which are available but at a higher costs.
Booking Fee/Arrangement Fee
Generally if you are arranging your mortgage on any other basis than standard variable rate, the lender will impose a booking fee and or arrangement fee. This is used to secure the rate, usually in respect of a fixed or tracker rate product that can be withdrawn at short notice, once the funds have been allocated or there is a move in base rates. The fees vary between lenders and either need to be paid with the application (a booking fee) or can be added to the mortgage on completion. We will ensure that you are advised of the fees payable, when they need to be paid and if they are refundable if the mortgage does not complete.
Legal Fees
The legal term for purchasing property is conveyancing and most people appoint a solicitor to do this work for them. In addition to the conveyancing work, there is also the lender’s legal work to be done in relation to the property you are buying. Most lenders will ask the solicitor you appoint to act also for them and this normally saves
From http://limetreefs.co.uk 12 you money. You are responsible for all the solicitor’s costs, so it is worth getting quotes from a number of firms as their charges may vary.
The solicitor will usually request monies to cover the local authority enquiries etc to commence work. The deposit will be required at exchange of contracts, so you will need to ensure that this is available. The remaining fees plus vat are usually paid at completion, together with the Stamp Duty Land Tax.
Stamp Duty Land Tax
Is a tax levied by the government on the purchase of property and payable at completion. It is your responsibility to pay this fee. The charge is levied on all purchases over and above £125,001. The rates payable are not subject to vat and can be altered. Currently the fees payable are: -
£125,001 to £250,000 1% of purchase price
£250,001 to £500,000 3% of purchase price
£500,001 and above 4% of purchase price Mortgage Broker fees
At the outset of any discussions your broker should inform you of any fee that they are going to levy in respect of their advice. It should note the amount and the circumstances under which it is charged.
YOUR HOME OR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE
Limetree Financial Services Limited is authorised and regulated by the Financial Conduct Authority under reference number 489626. The Financial Contuct Authority does not regulate some aspects of buy to let and commercial mortgages. Neither does it regulate taxation and trust advice nor will writing services.A fee for mortgage advice will be charged on completion of your mortgage. This fee will typically be
£205, but the exact amount will be dependent upon your circumstances.
The guidance and/or advice contained within the website is subject to the UK regulatory regime and is therefore primarily targeted at customers in the UK.
Registered in England and Wales No. 6251076. Registered Address: 2 Newton House, Pioneer Court, Chivers Way, Vision Park, Histon, Cambridge CB24 9PT.
