There are a number of different interest schemes available:
Standard Variable Rate
This is as it says, variable, and may rise or fall from month to month and is closely linked to the Bank of England Base Rate.
Fixed Rate
The rate of interest payable is fixed for a set period, after which the mortgage will revert to the lender's variable base rate.
This type protects the borrower from the effects of interest rate rises during the fixed rate term, which can be beneficial to those who wish to be in complete control of their out goings during the early years of their mortgage. However, it must be borne in mind that should the lender's variable rate fall below that of the fixed rate, the borrower would be at a disadvantage.
Discounted Rate
This is where the lender discounts the variable rate by a percentage for a chosen period, after which the mortgage will revert to the lender's variable base rate.
For example, if the discount were 1% and the variable rate 6.7% the borrower would pay 5.7%. Again the variable rate is subject to fluctuation and therefore the rate that the borrower actually pays will also be variable, but the amount of discount remains the same.
Capped Rate
The rate of interest is capped at a certain rate, again, for a predetermined period, which means the rate will not go above that at which it is capped. In this type, the borrower pays the prevailing variable rate but the interest rate is guaranteed not to go above the rate at which it has been capped. In other words, you have the best of both worlds. If interest rates rise, your monthly payments will remain level, and yet if they fall below the capped rate, you will pay less.
Cashbacks
Lenders use Cashbacks as an additional incentive for buyers to use their products. The amounts can vary, from a couple of hundred pounds to 5 or 6% of the mortgage amount.
Again, as a general rule of thumb, larger cashbacks mean higher interest rates. The lender has to make a profit, and cannot afford to let the borrower have it all ways !
Redemption Penalties
It is very important for a prospective purchaser to realize that the lowest interest rate does not always represent the best deal. You may well be tied into a lender for a period of time after the fixed, discounted or capped rate has ended. This means that you will not be able to remortgage or take advantage of any alternative "deals" available and the end of that time.
However, with certain types of borrowing, for example adverse credit, it is not possible to arrange a mortgage without having extended Early Redemption Penalties.
Credit Checking
When you apply for a mortgage, the lender will normally check with one of the Credit Reference Agencies. This will normally tell them if you are on the electoral register at your home address, what loans you have outstanding, whether you have been late with any of your payments, and if you have had any County Court Judgments, (CCJs), or defaults registered against you.
Another part of the report will show how many searches have been made on you in the past. Every time a credit search is carried out, a record of it is added to your file. Some lenders do not like to see a large number of searches registered; it makes them wonder what the problem might be !
If you are in doubt about your credit rating, you can obtain a copy of your credit file by sending a cheque or postal order for £2 to Experian Ltd, PO Box 8000, Nottingham, NG1 5GX. You will need to give them your name and addresses for the last 6 years.
Compulsory Products
Another consideration is whether or not a specific deal requires you to take out an insurance policy supplied by the lender. These may well be considerably more expensive than if you had shopped around for your own policy.
A cheap interest rate may mean a higher all round cost if this is the case. It is worth checking that any offers you receive do not have compulsory insurances attached or if they do that the terms are reasonable.
Accident, Sickness and Unemployment Cover
This is, generally speaking, not mandatory. However, you need to be aware that should you be unable to work for any length of time, you will not receive any assistance from the state with your mortgage payments for at least the first nine months.
Life Assurance
Whilst Life Assurance is not mandatory to all Lenders, most will be much happier to handle your application with it in place.
If you die, your estate will still be expected to repay the mortgage. The cost of this cover is, generally speaking, not high. An Independent Financial Adviser will be able to shop around for you.
Mortgage Indemnity Guarantee Premiums
If you are borrowing over 75% of the purchase price, some lenders will ask you to pay a Mortgage Indemnity Guarantee Premium.
This is a one off payment, which protects the lender against you not paying the mortgage and them having to sell the property for less than the amount owed. It does not protect the borrower in any way.
Not all lenders charge for this. The majority of High Street Lenders will not pass on this cost to you if you are able to put down a deposit of 10% or more.
Surveys
As the lender is using the property as security for the loan, they will insist on a minimum of a valuation survey. This is normally paid for by the borrower, but carried out by the Lender's own surveyor.
The surveyor not only ensures that the purchase price is reasonable, but also checks to make sure that the property is not suffering from any obvious major defects, such as subsidence, bad roof, damp and faulty wiring. He will generally ask for specialist reports to be carried out if he suspects any of the above.
Costs
Costs vary hugely for different purchase prices, in different parts of the country. Some of the costs you are most likely to incur are as follows: Solicitor's fees, (including Land Registry, Local Authority Searches VAT etc), Survey fees, Booking fees, (for fixed rates etc), Mortgage Broker fees, Stamp duty, (a government tax on all property purchases where the value of the property is above £60,000).
The easiest way to obtain a breakdown of your likely costs is to speak to an Independent Financial Adviser.
Summary
As you can see, from this very brief outline, mortgages can be somewhat of a minefield. The information given is for general guidance only. It is normal to obtain Independent Financial Advice prior to purchasing.
YOUR HOME IS AT RISK IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR OTHER LOAN SECURED AGAINST IT.
The above document is a basic overview of mortgages and NOT financial advice. Some of the guidelines within this document change at any time as dictated by trends or market conditions. The document is intended only to offer a rough overview with which the reader may then make further enquiries. We hope these notes have helped you make a start.
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