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Your mortgage choices
There are many different types of mortgage to choose from. Westpoint’s mortgage consultant will have a better understanding of the type of mortgage best suitable to your requirements and will advise you accordingly. Here is a brief description of the different options.
Porting
It may be possible to “port” or transfer your existing mortgage to your new property but it is worth checking whether it would be beneficial to renegotiate your mortgage taking into account your new circumstances.
Repayment or interest only?
There are two main ways to repay a mortgage – repayment or interest only.
Repayment mortgages are the most popular as the monthly payments are made up of the amount you borrow (capital) plus the interest. At the end of the mortgage term, as long as you have kept up your repayments, the property is yours.
Interest-only mortgage is a little more complicated. Instead of repaying the capital and the interest, you repay the interest only and use an investment product to pay off the mortgage at the end of the term. The investment usually runs for the same term as the mortgage, so rather than making one payment a month, you make two – one repaying the interest and the other going into the investment.
Interest only mortgages are useful if you are expecting some level of lump sum payment around the end of your mortgage term – for example, an inheritance. However, most borrowers establish an investment vehicle, into which they make separate regular payments. These contributions are then invested in stocks or bonds with the aim of generating enough return to pay off the capital at the end of the term. Example investment vehicles include endowment policies, individual savings accounts (ISA’s), pension plans, buy to let investments or a combination of investments.
However, in recent years, interest only mortgage holders have had to face the reality of the statement that market-linked investments can go down as well as up. This has resulted in many homeowners not having built up a large enough investment (endowment) to pay off their remaining capital at the end of the loan period.
Types of mortgage
Once you have chosen the style of repayment vehicle most suited to your circumstances, you need to decide which mortgage product you prefer. Mortgages usually incorporate one (and sometimes more) of a number of “core” features which are set out below:-
Standard Variable Rate (SVR)
This is the lender’s basic lending rate, which fluctuates with the prevailing base rate of interest and market conditions in general. SVR’s often do not include early repayment charges or other restrictions because the rate is usually higher than other special offers available. Many borrowers move onto the lenders standard variable rate at the end of their promotional offer and never move again (see remortgaging).
Tracker rates
Tracker rates work in the same manner as SVR’s. However, fluctuations are mirrored by the rates set by an independent authority – usually the Bank of England or LIBOR (the London Inter Bank Offer Rate – the rate at which banks lend to each other).
Although the LIBOR rate usually changes daily and is linked to base rates set by the Bank of England, a LIBOR linked mortgage may be adjusted at fixed intervals.
Interest rates under a facility of this nature are normally fixed for periods of three months at a time. A LIBOR rate is generally lower than lenders’ standard variable rate available on the high street and there is a protection against rising interest rates through the three month period. In addition there is the added comfort of knowing exactly what your payments will be during the quarter. However, should rates fall during the quarter, interest will continue to be paid at the rate fixed at the beginning of that quarter.
Discount rates
A discount mortgage is also a variable rate product – one which follows either a SVR or a tracker rate, but at a set discount and for a set period. Usually the shorter the discount period is, the greater the discount. The ‘price’ of the discount rate is usually an early repayment charge if you take your mortgage elsewhere during the term of the discount (for example if you decide to switch to a more competitive rate).
Fixed rates
With a fixed rate product the interest rate is fixed for a given period, typically two to five years. This allows certainty of monthly payments over that period. Should you decide to move to another rate before the end of the ‘fix’ you would normally encounter early repayment charges. Fixed rates are often extremely competitive, particularly in a low rate environment. However there is always the risk that rates could fall further leaving you on an uncompetitive rate and liable to early repayment charges should you decide to move your mortgage.
Capped rates
This product offers similar security to a fixed rate – since the rate you pay during the capped period will not exceed the cap, plus you have the chance to benefit from any fall in mortgage rates. However, rates on capped rate mortgages are markedly higher than for other kinds of mortgages, notably discounted rate products.
You should be aware that these types of mortgage sometimes come with “lock-in” periods – usually between two and five years – during which time you may have to pay a early repayment charge if you try to move your mortgage to another plan or lender.
Drop-lock
A drop lock mortgage is a discount or tracker mortgage which has an option to switch to any of the lender’s fixed rates at any point within the initial period – without paying early repayment charges. This provides an ideal way to benefit from base rates when they are low with the option to switch easily to the protection of a fixed rate should interest rates look set to rise significantly.
Again the most advantageous option or combination of options for you, will depend on your circumstances and Westpoint’s consultants will give you best advice on your choices.
Special deal mortgages have a limited life, typically up to five years, and to benefit from these special deals you may need to move your mortgage from one lender to another several times before finally paying off the original loan, which could have been based on a 25 year term.
Other mortgage choices
Flexible Mortgages ”Aussie Style”
In the last few years a more ‘user friendly’ style of mortgage has appeared in the market. These mortgages include flexible features which give borrowers more control over when and how they make payments, depending on their circumstances at any given time.
For example, you may inherit a lump sum and want to make a large payment towards your mortgage. Alternatively you may feel the need to reduce your payments during a period of heavy spending, or require a drawdown of cash from the payments you have already made.
Lenders are increasingly offering flexible features – to make their mortgages more attractive in the competitive market. In fact, most new mortgages now include the possibility of daily interest calculation and the ability to make free overpayments. Even more sophisticated alternatives include taking ‘payment holidays’, making underpayments or using a drawdown facility on the mortgage.
Most flexible mortgages are those referred to as ‘current account’ or ‘offset’ mortgages. These bring your current and/or savings account together with your mortgage allowing you to offset your credit balance against the mortgage debt and thereby reducing your overall debt. You can have your salary paid directly into this account, effectively reducing the amount of capital outstanding and, therefore, the interest payable whilst still being able to operate it as a conventional current account.
An important point to remember when considering a flexible mortgage is that you may be able to find the component you are interested in within another product which is not specifically ‘flexible’. For example, you may be interested in making overpayments but may be able to make these within one of the fixed, discount, capped or variable rates available on the market.
Penalty free part redemption
Penalty free overpayments – either regular or on an ad hoc basis are a useful component. Good for those who receive bonus payments or who have high but irregular incomes, for example the self-employed.
Suspending or reducing payments
This can be useful but will result in you having more debt to pay back in a short time period. Good if you are disciplined enough to make use of the facility only occasionally. You must make sure you know the exact terms on which this facility is being offered.
Drawdown
A very cost effective way of borrowing larger sums as all your debts are charged at the interest rate on the mortgage loan (rather than a more expensive personal loan rate). It must be remembered that you will have to repay the additional borrowing at some point.
Current Account/Offset Mortgages
A good way of managing your money if you are disciplined with your income. Best suited to those with a reasonable salary or bonus. Can be good for the self employed with erratic but substantial incomes. Not good if you often slip into debt or are undisciplined with money.
CAT-standard mortgage
The CAT standard is the Government’s rating of products according to ‘Charges, Access and Terms’. A CAT-standard mortgage should be fairly priced and contain no hidden charges or penalties for repaying your mortgage early. However, it should be remembered that several mortgages that do not match CAT-standards could still be a very good deal.
It is worth talking to Westpoint’s mortgage consultants about the benefits of a CAT-standard mortgage
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