Mortgages

What is a mortgage; a mortgage is a loan which is secured against the property. The life span of a mortgage will usually be between 15 years 30 years, the average lifespan of a mortgage is usually 25 years. A lender i.e. bank or building society issues mortgages usually up to 95% of a property's value, pre the credit crunch lenders were offering mortgages at over 100% off properties value. Mortgages are calculated in lending multiples this is the method in which banks and building societies use to calculate a mortgage for a particular person or couple. The usual rate for a single person was around 3 1/2 times their annual income as a rule against but pre the credit crunch the banks and building societies were lending based on much greater multiples, up to 5 sometimes even 6 times the annual wage.  

Various types of the most common mortgages

Fixed-rate mortgage

This type of mortgage fixes a set interest rate for a determined period of time, at the end of the set period of time the interest rate will revert back to the mortgage provider’s standard variable rate. This is a very popular type of mortgage as it gives the borrow security for the first few years of a mortgage. At the point of a fixed rate coming to an end most borrowers will go out in search of similar deals with the hopes of transferring their mortgage, this can be hard to find and can lead to borrowers falling into arrears due to higher repayments.

Mortgage for key workers

These types of mortgages are aimed at solving the problem of key workers and affordable housing; these mortgages were designed to give workers the ability to get a foot on to the housing ladder.

The higher homebuyer loan will offer a key worker up to £100,000 towards purchasing a house or flat in London, this is geared towards senior staff i.e. head teachers.

The more popular is the shared ownership loan, this is given to key workers who want to purchase a share in a house or flat, share purchased must be a minimum of 25% of the property's value.

Eligibility to gain access to one of these schemes would be that a property that a key worker wants to purchase lies within the city of London, the South East of England or East Anglia, for these mortgages the key worker must find a property and organise a mortgage with a conventional lender, only then will they have the ability to apply for one of the above schemes, the key worker will then have the choice to apply for up to 75% towards the cost of the property this can only be done once you're mortgage has been agreed with the mortgage provider, once your finances are in place you can then apply for the remained in percentage of the purchase price.

Repayment mortgages

Repayment mortgages have long been thought of as the safest type of mortgage out there, up until a few years borrowers began looking towards the endowment type mortgage, borrowers are now turning away from this type of mortgage due to the problems with the funds performance, due to these problems borrowers found themselves with a shortfall in their endowment policies which is needed to pay off the remainder of their mortgages when it came to maturity.

This cannot happen with a repayment mortgage, the interest and capital is repaid over a set period of time i.e. 25 years there for the borrower can visually see the loan balance decreasing. This can be and has been for a local borrowers the best way to repay what is could be largest single loan they may have in their lifetime, it can give the borrow the peace of mind to know exactly what there repayments are each month, with so many people now in negative equity and the state of the country's finances the way they are, for many borrowers it is comforting to know exactly where they stand with their mortgage repayments even though it may cost the borrowers a little more in repayments each month.

The tracker mortgage

The tracker mortgage follows the Bank of England base rate, also known as the bass tracker mortgage the repayments made can fluctuate depending on where the bank of England has set its base rate, so in essence if interest rates rise so will your repayments and the opposite is true if interest rates drop your mortgage repayments will do likewise.

It is possible to obtain a lifetime tracker mortgage which will attract the Bank of England's base rate for the life span of a mortgage, the second option is a tracker mortgage which tracks the Bank of England's base rate for up to three years after which you will return to the mortgage providers standard bank variable rate.

Changes in the Bank of England's base rate should usually be passed on to the borrower within 30 days of the changes being announced, some mortgage agreements will have what's known as floors and or collars this is a caveat that some lenders have in agreements which will state that they do not have to you pass on some of the reductions to borrower, the borrow should be informed of this prior to signing any agreement, The level at which these caveats are set will be different from bank to bank.

A flexible mortgage

The flexible mortgage allows the borrower the opportunity to vary their monthly repayments and also the ability to pay lump sums or to pay off the entire mortgage if the borrower feels they are able to.

The specific details of the type of mortgage will very from mortgage provider to mortgage provider but the principles are the same; the agreement should include an overpayment facility and a daily or monthly interest rate.

The offset mortgage

This type of mortgage allows the borrow to link the mortgage to the borrowers a savings account, this allows the borrow to offset their mortgage balance against the cash they have in their current account i.e. savings, this allows the borrow to reduce the amount of interests on the mortgage, repayments can fluctuate due to the interest being calculated on a daily basis that.

If they borrow has £50,000 in their savings account and the mortgage off £150,000 borrower would only pay interest on the balance from that which will be £100,000, this gives the borrower the opportunity to reduce the life span of a mortgage by several years.

The offset mortgage and the current account mortgage are pretty similar in that they follow the same basic principles, where they differ is with the current account mortgage interest rate is calculated from one single savings account as opposed to the offset mortgage where the interests is calculated based on a prearranged number of accounts being linked, debt is also taken into account.

Buy to let mortgage

Just before the big crunch this type of mortgage was very popular it allowed investors and property developers to buy a property for the sole purpose of letting it out to tenants.

The buy to let mortgage would usually be based upon the amount of rental income the property could command, although a borrower would require a larger deposit and in the long term it could be slightly more expensive than a traditional mortgage it was beneficial because the a borrowers income would not usually be taken into account.

This led to borrowers building up property portfolios, where they would buy one property then another and another until they had a collection of properties they would do this by remortgaging a previous buy to let property to fund the acquisition of another property for the same purposes, rates that are available for the buy to let property mortgage can vary from mortgage provider to mortgage provider so it is a good idea to shop around and do your homework before applying for one.

Interest rates only mortgage

The interest rate only mortgage is just that, your repayments will only meet the interest rates charged on the mortgage; you are then obligated to make provisions to repay the capital borrowed with either an ISA policy, pension policy or an endowment policy.

The repayments of the capital will differ from lender to lender; some lenders may leave it up to you to make your own provisions while others will demand you use their savings schemes or point you in the direction of an appropriate savings scheme.

The interest rate only mortgage can be beneficial because of its low repayments but the borrow can fall into negative equity in times such as now because the borrower has only made payments on the interest on the loan and not the capital that was originally borrowed, many people with interest rate only mortgages will look to switch to maybe a repayment mortgage especially when times are the way they are at the moment.

The right to buy scheme

This scheme has been with us since the early 1980s; it gives council tenants the opportunity to own they're all homes.

Tenants that occupied their council and sometimes housing association properties for a minimum of two years (changing from the previous three-year) have the right as long as they have the means to apply for the council property they occupy, if a tenant has been in a council property before January 2005 they will also be eligible for a discount but if a tenant took up residency after 2005 the minimum time before they could apply for the right to buy scheme would be five years.

Contacting your local council would be your first port of call if you are interested in the scheme, discounts that are available would vary from property to property they are usually in the range of around 15,000 to £38,000.

The right by mortgage used to be one of the easier mortgages to receive as many mortgage providers were more than happy to offer up to a 90% mortgage sometimes because a tenant would be receiving a discount some mortgage providers were willing to lend up to 100%. Mortgage providers were actively courting tenants for a right to buy mortgages, but with the onset of the global crisis the right to buy mortgage along with all other types of mortgages are harder to get, the need to shop around is imperative, also speaking to the local council may be beneficial as they may point you towards a mortgage provider.

The self build mortgage

In the past people who wanted to build on their own homes had to rely on something called arrears stage, essentially this was a payment mortgage, this type of mortgage meant that any one who wanted to build their own home had to fund the first part of the construction themselves.

Now mortgage providers offer what is called an accelerator mortgage also known as a advanced staged payment mortgage, this is where the construction of a building will be split into stages as is the mortgage therefore funds will be released at set points, these points would usually be when the conveyance had been carried out that would be on the property and more the land, then the next payment would be issued when the foundations have been laid and services have been connected i.e. the mains, the next stage is usually when a property is watertight, that last stage should be when the property is ready for occupation and completely finished. The mortgage lender would verify each stage before releasing any payment this would be done with an inspector that representing the lender. Usually the application for a mortgage would be split into two parts, one part being for the costs of the land for this they may borrow you between 75% and 95%, the same is true for the costs to construct, likewise they will borrow you between 75% and 95% of the costs of construction and materials.

Lenders will often require the full planning permission, the architect and builder's details, the approved building regulation documents along with the building plans and of course the cost of the land and the costs of all building works.