Montpelier Mortgage Guide

What is a 'Mortgage'?

Repaying Your Mortgage

Mortgage Term

Affordability

The different types of Mortgages

Flexible Mortgage

What Happens After Your Interest Rate Period?

 

What is a 'Mortgage'?

A mortgage is a loan secured on your home. How does this work? You borrow a sum of money - the capital - that you either pay back on a monthly basis over a set period of time (the term) or the whole amount at the end of the term.

During the term you also pay interest to the lender. The amount paid is calculated on the capital sum borrowed and is usually expressed in percentage terms e.g. 4.49% means that you would pay £4,490 in interest per year on a £100,000 mortgage loan. The 'Repaying Your Mortgages' section below explains this further.

As the mortgage is secured against your home it is important to protect yourself and your home against the unexpected. In the event of you being unable to keep up your loan repayments, the lender can repossess your home. We cannot predict the future for you but we can help give you peace of mind by ensuring that you are fully protected.

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Repaying Your Mortgage

There are two basic ways of repaying the amount you borrow.

 

Repayment or ‘Capital and interest’ mortgage

Similar to a personal loan, your monthly payment is made up of part interest and a varying proportion of the capital so the mortgage loan amount is gradually paid off year by year throughout the term of the mortgage. Provided you make all the agreed payments, the loan will be fully paid off by the end of the mortgage term.

or

Interest only

The amount you pay to the mortgage lender each month consists only of interest. The original amount that you have borrowed remains outstanding for the term of the mortgage and has to be repaid in full at the end. You will therefore need to build up a suitable capital lump sum over the mortgage term to repay this amount. It is your responsibility to ensure that you have enough money to repay the mortgage at the end of the term; otherwise you could lose your home.

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Mortgage Term

People often assume that the normal mortgage term is 25 years, but there is no reason why you cannot choose a different term if it suits your needs and the lender agrees. If you take a repayment mortgage, the shorter the term, the higher the monthly repayments will be, but the total repayments over the term will be less as you will pay less in interest.

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Affordability

What can you afford? To work out how much you can afford, write down what money you have coming in and what you spend each month. Be realistic. Think about any changes that may affect this e.g. new child, or retirement.

Calculate how much money you have available to pay for the costs associated with buying a house and to put towards the property purchase (your deposit). Remember to allocate funds for any work that you may want to do to your new property.

Normally the bigger your deposit the better the options available to you.

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The different types of Mortgages

There are many different types of mortgages available. Each one is simply a different way of borrowing money to fund your house purchase or re-mortgage.

The range of mortgages available means you are likely to find one suitable to your needs.

In general, mortgage lenders have the following product types:

Fixed	Capped	Cash-back
Variable	Discounted	Tracker

 

Fixed Rate Mortgages	Advantages	Disadvantages
The mortgage interest rate will stay the same for a set time period, for example, two years. At the end of this period your rate will usually change to the variable rate.	Your mortgage repayments will be the same every month for the fixed rate period, even if other interest rates rise. This helps you plan your budget because you'll know your major outgoings in advance.	If other interest rates fall during the fixed period, your mortgage repayments will not reduce. In other words, the amount you pay may be higher than if you had chosen a mortgage where the interest rate varies.

Variable Rate Mortgages	Advantages	Disadvantages
Your payments go up and down as the mortgage rate changes. When we refer to 'variable rate' we mean the lender's standard variable rate - sometimes shortened to SVR.	Your mortgage repayments may fall if mortgage interest rates in the market fall. A variable rate mortgage with no special incentives may allow you to repay some or your entire loan without paying early repayment charges.	Your payments may go up if mortgage interest rates rise. So unless you can afford increases in your payments, you may prefer a fixed rate mortgage where you know how much your monthly mortgage will be.

Capped Mortgages	Advantages	Disadvantages
Although the mortgage rate is variable (and therefore your mortgage can vary up or down), for a set time period it cannot go above a certain level - the cap or ceiling. There is a similar mortgage called a Cap and Collar Mortgage. Here, for a set time period, the rate can vary between a lower limit - the collar or floor - and a higher limit. At the end of the capped or collared rate period you will revert to the standard variable rate.	These mortgages provide certainty that the variable rate charged to your mortgage will not rise above the cap. This means you are protected from significant rises in variable rates. This will help you to budget. In addition, you will be able to enjoy a lower rate if interest rates fall.	It may not be as good as a fixed rate mortgage if rates rise, as the upper limit of a capped rate is often higher than that of a fixed rate. For example, if the variable rate rises to the cap level and remains at this level for any time, then a mortgage with a lower fixed rate may have been better value.

Discounted Rate Mortgages	Advantages	Disadvantages
Your mortgage lender gives you a discount off the standard variable rate for a specified period and calculates your repayments using this lower interest rate. For example, a 1% discount for 12 months off a variable rate of 5% would mean a pay rate of 4% for 12 months. Sometimes these discounts are stepped, for example, a discount of 2% in year one followed by a discount of 1% in year two. After the set period the variable rate usually applies.	Provides you with lower payments in the early years to help with the cost of moving or setting up in your new home. A discount that gradually reduces means you do not usually face a significant increase in payments when the discount period ends.	If interest rates rise your payments may increase.

Cash-back Mortgages	Advantages	Disadvantages
Your Mortgage Lender gives a cash sum to the value of an agreed percentage in relation to your mortgage e.g. 5% of a £100,000 mortgage provides a cash sum of £5,000. This may sound appealing but it will only suit you if you have a specific need for a cash sum with no aversion to being tied to your mortgage lender for a set period of time - usually paying Standard Variable Rate.	It means money in your pocket at a time you may need it most. It can provide you with a useful contribution to the cost of moving, or helping you pay for the decorating and refurbishment work you may have planned for your new home.	Because of the lump sum you receive at the start of your mortgage your rate may not be as attractive as some other mortgage types. The cash-back you receive is not usually available to use as a deposit on your mortgage, as it is usually only available after you complete.

Tracker Mortgages	Advantages	Disadvantages
Your interest rate is linked to an independent rate, such as the Bank of England base rate or the three-month LIBOR (the London Inter-bank Offered Rate) for a specified period. For example, your rate may be 1.5% over the Bank of England base rate for three years.	Your rate will follow the independent rate it is linked to. This means when the independent rate falls, you benefit from the rate cut in full, immediately.	If the independent rate increases your rate will automatically rise so you may find you are paying a rate higher than other variable rates.

 

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Flexible Mortgage

What are flexible mortgages?

Today's flexible mortgages take many shapes and forms, with borrowers choosing from a host of exciting features and methods of rate control. Although you tend to pay slightly higher interest rates for flexible mortgages, the benefits make this product the best mortgage choice for some.

Flexible mortgages originally came from Australia, with the intention of making mortgages more suitable for the different working lifestyles such as being self-employed. The fact that with flexible mortgages you could take a payment holiday, overpay and underpay or even borrow back your overpayments was of obvious benefit for borrowers whose income varied each month.

Flexible mortgages have since become more sophisticated and have attracted other types of customers. Some borrowers opt for flexible mortgages because they wish to get rid of their mortgage quickly by making over payments; some first time buyers are attracted to the flexible elements; other borrowers with large amounts of cash savings do well to take advantage of an Offset mortgage - one of the many types of flexible mortgages that now exist.

It is important to work out whether it will be worth paying extra for features as an increasing amount of traditional mortgage loans now include some flexible elements such as the ability to make overpayments - but usually limited to a maximum percentage per annum. It may be that, with the help of your adviser, you can find one of the best mortgage rates on the market with the level of flexibility you require - without paying the usual higher interest rate of flexible mortgages.

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What Happens After Your Interest Rate Period?

At the end of a fixed, discounted, or capped rate period, the interest rate payable on the mortgage will normally revert to the lenders standard variable rate at the time. Even if there is no change in the current variable rate, you may find yourself paying a higher monthly payment. For example, if you take out an interest only mortgage of £60,000 at a fixed rate of 4.5% for three years, your monthly interest payments will be £225 per month for three years. If, after the fixed rate ends, the standard variable rate is then 6.5% monthly payments will become £325 per month. Remember, if you have a capital and interest (repayment) mortgage the future monthly payments will be based on the reduced loan amount at that time, not on the original loan amount.

We will be delighted to review matters on your behalf to ensure that as a client of Montpelier Mortgages you only ever pay the absolute minimum possible for your suitable mortgage arrangements.

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