 |
At any one time there may be well over 2,000 different mortgage options, only some of which will meet your needs.
We use powerful computer databases to sort through the vast range of mortgages and identify the best ones for you, in terms of their features and benefits, and also your own personal circumstances.
There are several elements to be considered when choosing a mortgage such as -
- The interest rate charged now - and in the future
- Charges for early redemption of the mortgage
- The Mortgage Indemnity Guarantee Premium
- Whether to repay capital and interest or interest only
- Selecting the right insurance policy
It is important to assess whether the repayment will be affordable in the future should the rate rise well above the current low rates that have been maintained for some time. However, it is not that long ago that interest rates were over 15% - that is nearly three times the current rate.
You can therefore use the attached Mortgage Cost Analyser to assess these potential costs and how a variation in the Mortgage Term, Mortgage Amount, Growth Rate and Interest Rate affect the actual costs that you pay.
As an independent financial adviser, who is registered with the Mortgage Code Compliance Board, we are in the best position to ensure that you select the mortgage that best suits you. We have technology in place that enables us to search the entire mortgage market in a matter of seconds and rank the results in terms of cost, affordability, maximum loans available and various other criteria.
To help you understand the mortgage market, here is a description of each type of mortgage scheme.
There are two elements to a mortgage :-
- How the interest is charged
- How the mortgage is protected and repaid
Variable Interest
Variable rate is where the rate goes up and down in line with external influences such as the bank base rate. However, you should be prepared for rates to increase during the mortgage term and they can change by a factor of two or even more.
Reduced
Most mortgage lenders offer some form of variable rates with an initial discount for a period of months or years. Generally, the longer the reduced or fixed period, the more you pay.
Fixed
Fixed Rate Mortgages can have the interest rate from just a few months to the entire 25 years. Many fixed rates are lower than the standard variable rate, but with the longer the fixed term fixed rates, the interest can be higher than the current mortgage interest rate. You are gambling the interest rates will rise much higher that your Fixed Rate in the long term.
Fixed rates mean you know exactly how much you will pay each month for a fixed period but bear in mind that if interest rates drop below your Fixed Rate you will be paying more money. Beware of early redemption penalties which are several months' interest payable if you cash in your mortgage early.
Capped
This means that, despite the fact that interest rates may well rise, you are given a rate beyond which you not be will be charged for a period of years or even until the end of the mortgage period. Capped rates can have a "collar" which means they will not go below an certain rate either for that period. Again, watch out for early redemption penalties.
Cashback
This is effectively a bribe to get you to take out a mortgage with that company. Be careful, though, as there are usually changes in interest rates that mean it could be recovered in part or in whole later on.
Repayment
With a repayment mortgage you pay part of the capital with each payment and the interest on the outstanding amount. Naturally the payment, which is normally fixed, pays more capital and less interest as the debt reduces over the years.
It is important to remember that, as the years go by, with this method you actually owe less and less and , providing you continue to make all your monthly payments in full, the loan will be paid off at the end of the agreed term which you can decide but it is normally 25 years.
If move home or re-mortgage, you would have to take out a new loan, and re-commence repayments.
Interest Only
With this form of mortgage, you only pay the interest due to the lender each month and your debt stays the same throughout the mortgage term.
However, the advantage is that the monthly payments to your lender are lower than for a repayment mortgage, but you will have to clear the debt at the end of the term with either a profit-making life policy, and investment like an ISA or from a pension fund tax free lump sum payment.
Endowments
An endowment is a life policy with an investment element that will pay off the loan if you die before the end of the mortgage term but will build a fund that is designed (but not guaranteed) to pay off the mortgage by the end of the mortgage term, if you survive.
You could select a With Profits policy that invests your premiums and pay annual bonuses which will be added to your fund. At the end of the term, there is normally a terminal bonus before the final payout. With Profits policies were designed to be safer and offer reliable growth, but bonuses cannot be guaranteed..
With Unit Linked policies, your premiums buy stocks and shares and, as the prices of these units are published daily, you are able to see the value of your fund at any time. As with all investments, the value of your fund may go down as well as up but these generally produce higher growth in the log-term, but with a higher risk.
Unitised With Profits was the halfway house between the two where your premiums buy units but in a With Profits fund, rather than the more risky stock market funds, however bonuses again cannot be guaranteed.
Unfortunately, the effect of low interest rates and investment returns over the last 5 years has adversely affected the amounts available at the end of the policy term and many investors have been left with shortfalls on their mortgage.
Any endowment policy is designed for the long term but should your circumstances change or you are concerned about potential shortfalls, seek our advice before you cash in your endowment as there are companies that can offer higher amounts than the issuing life company. These are called Traded Endowments and we will assist you in getting the highest return.
Investments
Up until April 1999 it was possible to use a Personal Equity Plan to pay off your mortgage and you are still able to use existing PEPs for this purpose, but you can now use an Individual Savings Account, better known as an ISA with its tax benefits to create an investment fund to eventually pay off your mortgage.
However, don't forget that this form of investment does not include any life cover so this must be provided separately.
As always, the value of your investment may go down as well as up but if you have any potential shortfall, we can advise you on an alternative or additional source of mortgage repayment.
Pension Plan mortgage
A pension mortgage is another investment mortgage. Each
month you pay interest to your lender, while the actual loan
remains the same. The loan is repaid at the end of the term
from the tax-free lump sum that both private and company
pensions provide on retirement.
While tax efficient, a pension mortgage is not flexible.
Pension rules state that you can not touch your funds until
you reach 50 - so that means you are unable to repay your
mortgage before then.
There are other risks that you should also consider. A pension
is intended to finance your retirement. By using part of
your lump sum to pay your mortgage, you are reducing the
funds available to you to live off later. You should also
ask yourself how you would pay for your mortgage if you became
unemployed and, consequently, unable to pay into a pension.
Under current legislation only one-quarter of the pension
fund can be take on retirement as a cash lump sum. The mortgage
can only be repaid from the cash lump sum. Thus in order
to fund a £50,000 mortgage, you would need to build
a pension fund of £200,000.
As well as the above, it shouldn’t be forgotten that
a pension fund is just another form of investment, so there
is no guarantee that the tax free lump sum will be sufficient
to repay the loan.
Other Options
You can use virtually any investment product to help repay your mortgage including Unit Trusts, OEICs, shares or you might even rely on an inheritance to provide the funds to pay off your mortgage providing you are reasonably sure that you will have sufficient funds in time to repay the loan.
And Finally
Whatever mortgage you decide on, remember that this is probably the largest purchase decision that you will make in your life so contact us as your Independent Financial Advisers to guide you through the maze.
|
