For most people, your home will be the largest single investment you will ever make, so making the wrong decision can become a very expensive mistake. Taking the wrong mortgage can end up costing thousands extra over the lifetime of the loan, and what appears to be the cheapest on day one will not always prove to be so over an extended period of time.
Furthermore, to add to the confusion, there are now a bewildering number of mortgage types available to select from. We've written an overview of some of these in the accompanying pages, but to make a truly informed decision, call us on 0208 941 9779 and ask for an appointment with one of our advisers.
This is the simplest type of mortgage. The payments you make to the lender every month pay off both the capital and the interest from the loan. Provided you keep up the payments, you are guaranteed to pay off the loan by the end of the term agreed (usually 25 years).
The lender calculates your monthly repayments depending on the amount borrowed, how long for, the interest rate and how the rate you have chosen is set.
For many people, interest-only mortgages are called 'endowment mortgages', or even 'pension mortgages'. But, strictly speaking, these names describe an interest-only mortgage plus the method by which it is repaid. In other words, an endowment mortgage is an interest-only loan that is repaid by the proceeds of an endowment policy, etc.
An interest-only mortgage is where the lender (a bank or building society, usually) only charges your interest on the loan you've agreed. You don't pay the capital back until the end of the mortgage. The lender will usually ask you at the outset to provide an investment plan of one type or another to repay the loan at the end of the term, such as an endowment policy or NISA savings plan, but sometimes they will leave the repayment plan entirely up to you.
Every month, you then pay this interest to the lender for the duration of the loan. The lender calculates your monthly repayments depending upon how the rate you have chosen is set. At the end of the loan period, the lender will expect the initial capital they lend you to be repaid in full by whatever means you have arranged.
The flexible mortgage is a relatively new type of mortgage, or at least new in the UK. It was invented in Australia and has been used there for many years, but it is now growing in popularity in this country as more lenders adopt it.
The traditional UK mortgage has been with us many generations. It was designed with the assumption that people had full-time employment and could therefore cope with set monthly payments for a 25-year period. However, as many people have discovered, the traditional mortgage does not always cope well with modern employment trends, such as contract working, self-employment, job sharing and part-time work.
This is where the flexible mortgage comes in. It has the facility for both over and underpayments built into the loan. What this means is you can overpay your mortgage when finances allow (pay rise, bonus, an inheritance, etc.), and then, providing you have made overpayments in the past, underpay when finances are tight (job loss, change in circumstance, etc.).
If you overpay your loan by £50 per month for, say, five years on a flexible mortgage, that cumulative amount is then made available as a cash reserve for you to draw on at any time during the remainder of the mortgage term. This cash reserve can normally be drawn on for such things as taking payment holidays or making large purchases. Indeed, some lenders actually issue the borrower with a cheque book and encourage them to use the account as an all-encompassing bank account. However, the amount you can withdraw is limited by the original sum of the loan.
The main benefit of borrowing against your 'mortgage account' is that mortgages are usually the cheapest form of borrowing. In other words, you'll pay less interest on the amount you borrow!
If, on the other hand, you overpay but never make any withdrawals, you can save a significant amount of interest over the life of the loan. This is because most lenders who offer this type of loan calculate the interest you pay on a daily basis (see what to look for), therefore any overpayment comes immediately off the debt and interest payments are adjusted accordingly.
This is one of the major advantages of a good flexible mortgage. Most traditional mortgages calculate the interest charged on a mortgage at the end of the year, or at best the end of the month. The problem with this is that if you pay capital off early, interest charges do not reflect the reduced capital until up to a year later. Cumulatively, this adds up to very significant interest being charged on money already paid back. By charging interest on a daily basis, flexible mortgages only charge interest on the amount borrowed at any time. This saves thousands if regular overpayments are made.
Many flexible mortgages will allow you to draw further funds from your mortgage when you need them without the need for any further authorisation. These withdrawals are simply added to the mortgage debt, allowing you to borrow at your mortgages interest rate.
Some lenders take this facility to its logical conclusion and actually issue you with a cheque book, allowing you to use your mortgage as an all-encompassing bank account.
The lender will set a pre-defined limit to the amount you can borrow, usually up to 80% of your property's value.
A quality flexible mortgage will allow you to make overpayments as often as you like, whether they be lump sum payments you make every year, additional payments every month or a combination of both, without applying any penalties. Furthermore, some lenders will allow you to take 'payment holidays' of up to six months, providing you've built 'credit' up through previous overpayments. This can be especially useful for the self-employed, whose incomes tend to hit peaks and troughs.
Your home may be repossessed if you do not keep up repayments on your mortgage.
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To discuss your financial planning requirements or to obtain further information about our services and how we could help you, please contact Lloyd O'Sullivan Financial Services, telephone 0208 941 9779 or email firstname.lastname@example.org
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