With a repayment mortgage you will make monthly payments that cover both the interest and the repayment of the loan itself.
The majority of your monthly payments in the early years, will go towards paying the interest on the loan, but in later years most of your payments will go towards reducing the loan. A repayment mortgage offers the reassurance that once the final repayment has been made your mortgage account will be cleared (providing all the repayments have been made). Some borrowers are attracted by the peace of mind a repayment mortgage offers.
Interest Only Mortgage
With an interest-only mortgage you only pay interest on the loan amount for the agreed term of the mortgage. You are usually expected to pay into an investment product for the same term and it is this that will repay the full amount of the loan at the end of the term. This type of mortgage potentially offers more flexibility for people moving house regularly, but clearly carries more risk.
Most mortgages have a set period (term) and this is dictated by individual budgets. Historically terms have typically started at 25 years, but you may be free to choose a shorter / longer term than this. The shorter the term the higher the monthly repayments you will have to make (only applicable on repayment mortgages).
The monthly payment will fluctuate in line with the lender's mortgage rate. This can sometimes cause budgeting problems particularly in times of rising interest rates. You could also be offered a version where your monthly payment fluctuates in line with the Bank of England's Base Rate, often referred to as a 'Base Rate Tracker'. There is no guaranteed link between variations in the ‘Bank Base Rate’ and the lenders ‘Standard Variable Rate’.
The interest rate and monthly payment is fixed over an agreed term and will remain the same regardless of whether interest rates rise or fall. At the end of the fixed rate term the interest rate will revert to the lender's standard variable rate. You may be offered the choice of another product at that time from the lender.
The lender offers an initial discount from their standard variable rate for an agreed term. At the end of the discount period, the rate will revert to the lender's standard variable rate.
Some lenders offer a cash payment on completion of the loan. This can be either based on a percentage of the total loan or a flat amount. Often, if the loan is redeemed early, a proportion or all of the cashback given will have to be repaid to the lender.
The interest rate given is guaranteed not to go above a certain level throughout the capped rate period. The rate can still fluctuate up and down in line with the lenders Standard Variable Rate subject to this agreed maximum. This would run for an agreed term and after that period the ‘cap’ would be removed.
These schemes may allow you to overpay, underpay or even take a payment holiday. All unpaid interest will be added to the outstanding mortgage balance. Any overpaid amounts will reduce your outstanding mortgage balance. Some of these products may allow you to draw down additional funds to a pre-approved limit.
Lenders offer these fixed rate, discount or cashback facilities to attract new customers. These products usually require the clients’ mortgage to stay with them for a period of time to recoup their costs. Therefore customers that move or settle their mortgage will be required to pay an ‘Early Redemption Charge’. This penalty can often extend beyond the initial benefit period. You should make sure that you can afford the standard variable rate that will be charged at the end of the incentive period.
This fee is to cover the cost of the property valuation but may include a non-refundable administration fee and must normally be enclosed with the application. The whole fee is non-refundable once the valuation has been carried out. The type of valuation you choose should depend on different factors, such as the age and condition of the property or perhaps if there was history of subsidence in the area.
Basic mortgage valuation
This is for the lenders own purposes and confirms that the property provides adequate security for the loan.
Home buyer's report
This provides more concise information on the state of repair and condition of the property. This will include comments on any significant defects which would affect the value of the property along with the valuer's opinion as to its marketability.
Full structural survey
This is a detailed report based on a comprehensive examination of the property. Any areas of concern that you may have had about the property will be fully investigated and reported on.
Lenders arrangement fee
This may be payable either in advance, where the lender will ask you to enclose a cheque with the mortgage application, or on completion. All or part of it may be non-refundable if the mortgage is declined or withdrawn. This will be specified in your mortgage quotation.
Legal costs and fees
Fees are charged by a solicitor which will include the charge for conveyancing (the transfer of ownership of land), the costs of legal registrations along with Local Search fees and Land Registry costs (known as disbursements). We always recommend you obtain an estimate of these costs early in the process. It is possible some lenders may offer this as part of their incentive.
Stamp duty is a 'purchase tax' and is payable where the purchase price of the property is more than £125,000. The current charge is 1% of the purchase price of the property. This increases to 3% if the price is more than £250,000 and to 4% if the price exceeds £500,000. (Stamp Duty is not payable for remortgages).
First Time Buyers purchasing a property between 25th March 2010 and 25th March 2012 were exempt from paying stamp duty up to £250,000.00. This stamp duty relief was open only to someone who “had not previously purchased a major interest in land, which is wholly residential anywhere in the world”.
From 5th April 2011, a 5% stamp duty band was introduced for properties with a value in excess of £1,000,000.00.
High Percentage Lending Charge
This can apply if you are to borrow more than 75% of the value of the property, although the level can fluctuate. Some lenders require additional security on the amount in excess of this threshold in the form of an insurance policy which generates a charge to you the client. More recently, some lenders will waive this charge altogether.
Your home may be repossessed if you do not keep up repayments on your mortgage