Introduction
A mortgage is a loan borrowed specifically for the purpose of purchasing property. This loan is to be paid back to the lender over a specified period of time and includes interest. Interest on the loan can be fixed or variable depending upon the conditions in the loan agreement. Security on the loan is the property itself which can be repossessed by the lender in case of non-payment of the mortgage amount. The lender is then free to sell that property to make up for the outstanding amount and possibly profit.
Property loan or Mortgage?
This is a little different from the average mortgage, although it is a type of mortgage. A property loan is a loan only for residential property purpose rather than commercial or business purposes. When a borrower puts his house as collateral against the loan, the loan takes the shape of a mortgage. Property loans are often initiated by local governments as an incentive for those who would be otherwise unable to purchase a home, to be able to do so.
Repayment Methods
There are two repayment methods available for mortgages, each with its own set of rules.
ˇ Repayment Mortgage you repay the loan amount with the interest in a single monthly payment. Once you have completed payments for the full loan amount, you own the property;
ˇ Interest only Mortgage you pay interest on the loan in a separate payment from that on the actual loan amount. The loan is secured on some form of investment plan like pension or endowment. There is no guarantee that you will be able to fully pay off the loan at the end of the term agreement using the investment policy.
Interest Rates
Interest rates help determine the amount of your monthly payments. There are various interest rate deals you can get depending on the lender and your credit history. There are three major types of interest rates: fixed, variable and capped.
ˇ Variable Interest Rates in the UK, variable mortgage rates are fixed by the Bank of England each month. Because of this monthly change, the amount you pay will change with each payment. When the rate falls, you can have a significantly lower amount to pay but when it increases, your payment will too.
- Fixed Interest Rates where your interest rate will not change for the duration of your mortgage. This keeps your payments regular and guarantees you ownership of the property upon completion of repayment which takes between 2 and 30 years. The benefit of this occurs when the UK experiences a particularly high interest rate rise. Of course, your interest rate remains the same. On the flip side, if interest rates are low, yours wont be it will be the same as it always was.
- Capped Interest Rates these set a limit on the amount of interest you will pay at any time. The payments can be flexible, just as with bank rates, however, they will not go above a certain rate regardless of what the standard is. A capped rate is therefore a compromise between a variable and fixed rate.
We now look at the most common mortgages in turn:
Second Mortgages
A property may be mortgaged many times. A second mortgage is given secondary importance in case a borrower defaults. So the first mortgage will be paid off first and any other mortgages will be paid off with the remaining amount. This makes a second mortgage much riskier and as such, they carry a higher interest rate as well as closing costs and characteristic mortgage points like any other mortgage. These therefore make the second mortgage more expensive. For this reason a creditor of a second mortgage will often hold the title deeds to the property so that if the borrower defaults, they are entitled to the property more easily than if they handed the title deeds to the borrower.
Second mortgages secured against equity
In a second mortgage, a borrower can borrow up to the equity there is in a piece of property he is offering for re-mortgage. If a homeowner has let his house at a mortgage of 75% of what the house is worth, the second mortgage can be processed with the remaining 25% of the value of the house. As it is covered by the equity and much securer for the lender, this kind of second mortgage is easy to get and will have a lower interest rate.
Line-of-Credit second mortgage
A homeowner can also apply for a line-of-credit in the second mortgage. In this kind of second mortgage, the borrower takes out a loan not in a lump sum but in small amounts as and when required.
Sometimes a second mortgage is taken alongside the first mortgage as the first one may not be enough to cover the cost of a new purchase. A second mortgage can be applied for if the borrower is able to qualify for half of the required percentage.
Second Mortgage in excess
Even if you have a 100% mortgage, you can borrow money as a second mortgage in excess. That means you would borrow 125% of your houses worth. Of course, you are only likely to be able to do this if you have an excellent credit rating. As you would imagine, this kind of loan is not tax deductible and will prove very expensive. (Only the amount which is secured against your property is tax deductible).
Buy-to-Let mortgage (BTL): This is a mortgage for property that will be let by the borrower to other tenants.
When lenders calculate how large a loan the borrower can afford to repay on a BTL they do so primarily on the basis of projected rental income, rather than salary income multiples.
Current account mortgage: this is the most flexible mortgage type as it is combined with a current account. Money in the current account is automatically set against the mortgage balance and interest is only charged on the outstanding amount, so interest payments are minimised.
Offset mortgage: Again, this is a very flexible mortgage which allows a borrower to keep balances (such as mortgage debt, savings account and current account) in separate accounts. For the purposes of interest, all balances are aggregated. Money in savings or current accounts is set against the mortgage balance and interest is only charged on the outstanding amount, so interest payments are minimised.
Self certification mortgage (S/C): a borrower states their income and signs a confirmation of their ability to repay a loan, without having to provide evidence such as accounts, pay slips or bank statements. To ensure that the borrower is being truthful, and therefore for the creditor to ensure they will have their money returned, S/C rates are often higher than standard mortgages.
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Relevant Net Lawman articles on Consumer Credit:
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