Working your way through the mortgage market can seem an overwhelming and intimidating process, especially given the amount of available mortgages and mortgage providers. However, finding the right mortgage means finding a mortgage tailored to meet your needs, taking into consideration your lifestyle, age, family and financial situation.

This guide designed to provide information in important issues, and clear explanations of the terminology you are likely to encounter as you go through the process of purchasing or remortgaging your property.

Types of Mortgages

Generally there are six main types of mortgages offering financial incentives, each of which has its advantages and disadvantages.

Standard Variable Rate Mortgages

Most lenders have a set rate of interest known as the standard variable rate. Lenders adjust their standard variable rates as banks increase or lower interest rates. Although with this type of mortgage your repayments are unprotected from any sudden increases in interest rates you will also benefit from any reductions. This type of mortgage is often taken out in conjunction with other offers such as cashbacks.

Fixed Rate Mortgages

The main advantage of a fixed rate mortgage is that, irrespective of fluctuations in interest rates, your monthly repayments remain the same throughout the offer period. This type of mortgage gives you peace of mind as it enables you to budget properly for your repayments. A fixed rate mortgage is suitable if your mortgage repayments take up a large proportion of your income as it protects you from any sudden and unexpected rises in interest rates. However, you do not benefit from any reduction in the lender's standard variable rate.

Discounted Mortgages

With a discounted mortgage lenders offer a discount on the standard variable rate for a specified term. The savings from discounted mortgages can be considerable although you have no protection against increases in interest rates and may find that an increase takes you over your budget. This is because when banks raise or lower interest rates lenders adjust their mortgage rates accordingly. It is probably more suited to you if you do not mind this uncertainty and your budget can absorb an increase in interest rates or if you think rates will go down during the discounted period.

Capped Mortgages

A "cap" means that there will be a limit to any increase in the variable rate for a selected term. The interest rate charged on your mortgage cannot exceed this limit. However, if the variable rate drops below your capped rate, you will benefit as your repayments will be calculated using the lower variable rate. Sometimes capped mortgages have a level below which interest rates cannot fall. This is called a "collar". This limits potential benefits as variable rates may fall below the level of the collar. Capped mortgages enable you to place a limit on your monthly mortgage commitment and still benefit from falls in interest rates.

Cashback Mortgages

Cashback mortgages provide you with an amount of cash at the outset of the mortgage. In return you usually agree to pay the variable rate charged by the lender, for a specified term. Some lenders will offer larger cashbacks if you agree to pay a premium over the variable rate, sometime known as loading. It is popular with people who need a large amount of cash at the outset of the mortgage, perhaps to help with the cost of moving for example. Some lenders do offer cashbacks in conjunction with other offers such as discounts or fixed rates.

Flexible Mortgages

Flexible mortgages provide flexibility in the amounts and timing of repayments. This gives you the ability to make overpayments monthly or lump sum payments at any time off the mortgage and can therefore offer the potential to pay off your mortgage before the end of it's term and reduce the amount of interest paid to the lender over the period of the loan. This type of mortgage can also offer the opportunity to take payment holidays and borrow back funds previously overpaid.
Some have the ability to be linked to a current account and provide a credit card facility

Repaying your Mortgage

You will need to select a method of repaying your mortgage. This should be given careful consideration. It is vital that a suitable repayment method is in place and that such arrangements are maintained otherwise you could lose your property. There are 2 methods of repaying a mortgage:

Repayment Mortgage (Capital and Interest)

With a repayment mortgage you repay the money you have borrowed, known as "capital", plus the interest charged by the lender over a number of years, or the "term" of the mortgage. Each year the amount owed will decline, but not the repayments. Providing payments are made in full, at the end of the term, no further capital is outstanding. This method of repayment is the least risky and is often considered suitable if you prefer to see your mortgage decline each year.

Investment Backed Mortgage ("Interest Only")

With this repayment method you pay "interest only" to the lender and take out a suitable investment to repay the capital at the end of the mortgage term. An endowment policy is often used to repay the capital although there are other investments to choose from such as pensions, ISA's etc. Although not guaranteed, this repayment method is designed to generate a cash sum sufficient to pay off your mortgage at the end of the term, with the possibility of providing a surplus of cash for you. It is essential that suitable arrangements are made to repay the mortgage, otherwise you may be left with a shortfall at the end of the term, for which you as the mortgagee are responsible. It is the customers clear responsibility to ensure that a repayment method is maintained for the duration of and Investment Backed Mortgage.

Part Repayment/Part Interest

This is a combination of the two payment methods, where part of your original loan is fully repaid over the mortgage term, with the other part, on interest only terms, remaining payable to the end of the term and being repaid from the proceeds of an investment plan.

Mortgage Term

Mortgages are generally taken out over periods between 10 and 25 years, although the term can sometimes vary by 5 years either way of these figures. The majority of lenders will consider terms up to the applicants 65th birthday; some lenders will consider terms beyond this point (up to 75 years in some cases). Acceptance, in relation to the term of the loan, is generally guided by the applicants ability to meet the repayments within their guaranteed income; peoples financial circumstances generally change as they enter retirement and consideration of this will often be the factor that determines the upper age limit to which lenders will lend. The term of the loan will of course effect the level of monthly repayments; the shorter the term the higher the repayment. Affordability is a vital consideration when selecting a mortgage product and the term of the loan.

At the End of a Special Offer Period

At the end of a special offer period you will usually find that your mortgage reverts back to the lender's standard variable rate. You should be aware of the level of payments at the standard variable rate, as this provides a guide to what you may have to pay in the future. It is however impossible to predict whether your payments will be higher or lower, as it is not possible to accurately predict what interest rates will do in the future. Some lenders make it part of the agreement that at the end of a special offer period you must keep your mortgage with them for a fixed period. If you move your mortgage during this period you may incur charges. It will be made clear to you if this is the case.

Paying Your Mortgage Off Early

Although you take your mortgage out over a specified period, you may wish to repay all or part of the loan early. This could happen, for example, if you receive inheritance or a redundancy payment, you wish to sell your property and move on, or a relationship breaks down. You should be aware that with special deals such as a fixed rate mortgage there is often a penalty if you wish to pay it off earlier than the original term. It is not uncommon for a lender to offer a special deal for 2 or 3 years but impose redemption penalties for the following 2 or 3 years. Such lock-ins will be made clear to you, but if you want a mortgage with low penalties or a short penalty period you should bring this to your advisers attention at the earliest opportunity.

Moving Properties

You should be aware of what would happen if you choose a special offer period with a lender, but then decide to move property during the period of the special offer. Some lenders will let you move the mortgage you currently have to the new property, retaining the special terms. This is usually on the proviso that you choose the same lender for your new mortgage. These special offers are described as "portable". Any additional mortgage you require may be offered on alternative special offer rates and periods or the lender may simply charge the standard variable rate. Some lenders do not allow special offers to be moved to a new property - these special offers are "not portable". You should be aware of your lenders policy on this and any redemption penalties you could incur if you decide to move.

Mortgage Fees

As well as the actual price of your house, there may be additional costs involved in buying a new property; these must be taken into account when you consider the affordability of a new property. These extras could include valuation fee, surveyor's fees, land registration fee, stamp duty, removal company costs, legal fees, and any insurances (see above paragraph). Depending upon your circumstances you may also incur costs for Mortgage Indemnity Policy (typically where your loan exceeds 75% of the purchase price or valuation).
A mortgage lender will often charge fees for arranging a mortgage. One such fee may be for arranging a survey (valuation fee). This is to establish the value of the property and its suitability for a mortgage. The lender may also ask for a booking fee or arrangement fee. They may require this to be paid at the time the application is made or they may add it to the loan. In cases where an existing mortgage is being redeemed, there are likely to be associated costs and other possible consequences, in this instance the customer should obtain a redemption statement from the existing lender to ascertain clear details.

Mortgage Indemnity Guarantee

Many lenders will charge a fee for an extra insurance policy called a "mortgage indemnity Guarantee" or "higher loan to value fee". Some, or all of this fee will be used by the lender to obtain mortgage indemnity insurance which provides extra security for the lender. Such insurance does not protect you if the property is repossessed and sold for an amount lower than the outstanding mortgage. Should this happen, you remain liable for all outstanding sums including arrears, interest and the lenders legal fees. In addition, if a claim is made against indemnity insurance, the insurers often reserve the right to recover any money from you which they have paid out. The charges vary greatly and are dependant on the lender and the size of your loan compared to the value of the property. It should be made clear to you if any such fees are to be paid.

Property Construction

The construction type of the property is an important consideration when lenders are making their decisions regarding a mortgage application. Standard property construction is generally deemed to be brick and tile. It is necessary to know at an early stage if the property is of a non-standard construction e.g. concrete, reinforced steel, steel framed, REMA, CORNISH etc. This may influence a lenders decision when considering the property as security for the mortgage. If a property is of non-standard construction this does not necessarily mean an application will be turned down. Please provide us with as much detail as you can if the property is non-standard, or if it is a flat or maisonette.

Mortgage Payment Protection Insurance

It should be clear to the client from the outset that their property is at risk if they are unable to continue to make repayments on the loan secured against their property. Providing an adequate level of protection against accident, sickness or redundancy is considered most important. Your adviser will be able to inform you of appropriate insurance to provide mortgage repayment protection.

Mortgage Payment Protection Insurance (MPPI) also called Accident Sickness and unemployment insurance (ASU) is designed to cover your monthly mortgage repayment and insurance if you become unemployed or unable to work because of illness or accident. Employed and self-employed persons can take it out. Policies usually pay out for up to 12 months. Policies vary, but may have a waiting period of up to 60 days when you first take out your policy.

It is important for you to know that under current legislation regarding Income Support Rules relating to DSS assistance in respect of mortgage interest payments for those claiming income support from 1/10/1995.

Existing borrowers who have mortgages effected before that date no income support is payable for the first 8 weeks. After this 50% is payable for the next 18 weeks and 100% of the mortgage interest thereafter. For all new borrowers affecting loans after that date the following applies:

No income support is payable for the first 39 weeks and then 100% of mortgage interest is normally payable thereafter.

The Interest rate used in calculating the above is determined by the DSS.

There are exceptions, which apply to the above and all queries should be referred to your local benefits Agency.

DO NOT OVER ESTIMATE YOUR ABILITY TO MEET YOUR MORTGAGE PAYMENTS AND OTHER COMMITMENTS BEFORE YOU DECIDE NOT TO TAKE OUT MPPI

Life Insurance

It is strongly recommend that you take out Life Insurance in conjunction with your Mortgage and to an amount that covers the whole term and amount of the loan. If you decide you do not wish for such assurance you will normally be asked to sign a disclaimer.

You may wish to retain any current Assurance Policies that you have. You should be aware that you may need to increase the sum Assured in order to cover your new mortgage or re-mortgage amount and you will be advised of this. You should ensure that you read all Terms and Conditions thoroughly. It is normal to receive commission for arranging this insurance.

You may wish to arrange your own Assurance Policy.

Building and Contents Insurance

It is vital to insure that the mortgaged property is covered against damage and should cover the full rebuilding costs. This cover is normally mandatory by the lender.

If this is a new property purchase, the lender will insist that satisfactory buildings cover is in place on exchange of contracts. Contents cover is normally optional and can include all risks and accidental damage.

Some Lenders insist that you buy their own Insurance in order to take advantage of their best Loan Products.
A Mortgage Adviser will be able to help you decide if the cost of the Products is competitive or whether you would do better to consider other options.

Lenders Conditional Insurance

The Lender does not normally insist on arranging any insurance and it is your responsibility to ensure that you are adequately protected.

However, the Lender will insist that arrangements are made to insure the full rebuilding costs of the building before the mortgage loan will be provided. They will require a copy of the Insurance Schedule noting their interest in the property before completion.

You should be aware that your new Lenders might charge you a penalty if you do not opt for their own Buildings Insurance.