Mortgages
September 14, 2010 |
UK Mortgages
A mortgage will probably be the single, largest, most important financial commitment you will ever make in your lifetime. A mortgage is a loan from a bank, building society or lending institution that is secured against a piece of real estate property and generally repayable in easy monthly installments over a specified period. The mortgage may be a loan transaction to purchase or improve a house, to use as capital for a business, or to secure another obligation that carries a higher interest.
There are currently an estimated 11.4 million mortgages in the UK. Providing overseeing function over the industry is the Financial Services Authority (FSA) which regulates the financial sector composed of mortgage lenders and other financial institutions. The FSA is a non-governmental body organized to ensure that mortgages and other financial products are sold and handled in an ethical and professional manner. Companies such as banks, building societies and other lending institutions are answerable to the FSA for any wrongdoings or unlawful practices.
Choosing the Right Mortgage
Choosing the correct mortgage for your needs is a hugely important step, considering the magnitude and financial implications of such a decision. To be locked up in a financial commitment for 25 years, for example, will require that you examine all the information and options available to you before plunging into a formal negotiation.
In the first place, why are you getting the mortgage? The purpose of your loan will be the strongest influence in your decision. Of course, you have to consider your financial capacity, how long the loan will be repaid, the tax implications, the alternatives in what-if situations, and the choice of the lending institution. While extensive information on mortgage types and repayment methods abound in the Internet for the resourceful borrower, fundsandfinance.com and its team of professional advisors are always available to provide professional advice to any party who wants to know more about mortgages and other financial products.
Mortgage Repayment Methods in the UK
A mortgage being substantially a loan, repaying it completely means paying the whole original amount in full plus the interest charges on or before the loan term ends.
There are basically two methods of repaying your mortgage. One is by repayment and the other is by interest only. It is important for a mortgage seeker to understand how these two methods work to enable the mortgagor to make a reasoned choice in settling his obligation.
The Repayment Mortgage
In a repayment mortgage, payments are scheduled on a monthly basis to continue until the end of the mortgage term. The monthly installment goes towards paying off both the interest and the capital (or original amount borrowed). At the beginning of the repayment, most of the monthly installments are applied towards the interest being charged, with very little going towards repaying the capital. As the repayment to the capital increases over the period, the amount going to the interest decreases until such time that at the end of the term almost all the repayments are applied to the capital.
It is normal practice for lending institutions to provide during the mortgage negotiation a schedule of monthly repayments covering the entire period of the mortgage. This schedule shows tentatively how the monthly repayments are to be applied to capital and interest. After the mortgage is approved and released, these lending institutions send annual mortgage statements reporting the actual application of payments towards the capital and interest.
Interest-Only Mortgage
Compared to the repayment mortgage, the monthly payments on an interest-only mortgage all go towards paying off the interest on the loan and none on the capital. Since this payment is for interest only, it means that the relative amount of the monthly payment is much lesser than the repayment mortgage, which is favorable to the borrower as it would make the payments more affordable. However, the original capital remains untouched and unpaid at the end of the term.
This arrangement is suited for borrowers who wish to purchase an asset that can appreciate over time. They then sell the asset on or before the loan term ends. Examples of these types of borrowers are the buy-to-let investors who purchase properties in order to rent out and earn an income from the lease.
The interest-only mortgages became very popular during the latest property boom. Statistics from the Council of Mortgage Lenders (CMS) show that in 2007 alone, more than 33% of mortgages recorded in the UK were interest-only mortgages. This surge in the number of interest-only transactions has prompted the FSA to caution mortgage lenders to be strict in their assessment of clients’ suitability for interest-only mortgages.
Factors Affecting Mortgage Repayments
There are other factors, aside from choosing your mortgage type and repayment method, that may affect your monthly repayments on your home loan. One of these is interest rate. The following are some of the interest rate arrangements available in the market:
Standard variable rate. This interest rate may go up or down depending on the monthly base rate declared by the Bank of England.
Fixed rate. In a fixed rate, you pay a fixed rate of interest for an agreed period, after which you move to the lender’s variable rate. This allows you to program your monthly payments for a specified time, usually depending on your future income prospects.
Discounted rate. In a discounted rate, you begin with a fixed lower rate for a specified period, and then move to the standard variable rate after that period.
Capped rate. With a capped rate, you agree to pay a variable interest rate subject to a payment ceiling for a specified period. Some capped rates also carry a collar which is the lowest rate that your interest can get down to. If rate falls below the collar, you pay the collar.
Professional Counsel
Other factors affecting mortgage repayments, or even your suitability for mortgage, are your earning capacity, the amount of loan you can borrow and your credit standing. If you want to know more about mortgages and how you may avail yourself of a loan using your property as your collateral, or otherwise seek professional guidance from financial experts, fundsandfinance.com is ready with its team of experienced and reliable advisors to provide assistance and counsel in all areas relating to finance.
