Explanation of Mortgage Terms

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Valuation

Lenders need a valuation of the property you are buying (or re-mortgaging) to ensure that they will not be lending you more than the property is worth.

The charge for this is based on the purchase price of the home you are buying (or estimated value if re-mortgaging). The higher the cost, the higher the charge. This is in your interest, as the lender will ensure that the building is worth the money you are trying to borrow.

Home Buyers Report

This is a much more comprehensive survey than the lenders basic valuation. If you are buying a second hand property (i.e. not newly built) it is advisable to have your own survey done. A qualified Surveyor who will look for defects does the survey and will comment on whether they believe it is a good buy at the price.

In some cases (particularly older properties) a full structural survey may be advised.

Warning: Property Values

As you are aware property prices are subject to fluctuation, this means that the price you have agreed to pay for your property is not necessarily an indication of its future value.

Administration Fee

This cost is sometimes called a Booking Fee or Fee, usually charged on special rate mortgages.

Local Search

This is the cost that the Local Authority charge your solicitor for giving information to them regarding such things as planning in the area that the property is in and so on.

Land Registry Fee

This cost comprises both Land Registry Title and Land Registry Search.

Land Registry Search

This is the cost to establish that the person/s selling the property to you owns the property.

Land Registry Title

This is the charge made to check that the property has been registered at the Land Registry. This ensures that ownership is guaranteed by the State.

The charge is on a scale related to the purchase price.

Conveyancing

This cost will vary depending on selected solicitor, this charge is for legal and administrative work to transfer the ownership of a property from one party to another.

Bankruptcy Search

This is the charge for checking that the person/s selling you the property is/are not bankrupt.

Telegraphic Transfer

The charge for transferring the money to pay for your

Stamp Duty

Stamp Duty is a tax that is payable on some deeds and documents, including conveyancing or assignment of property above a certain price (currently £120,000) check with your solicitor as some areas qualify for exemption.

The tax is levied as a percentage of the purchase price of the property as follows:

Up to £175000            0%
£175001 to £250000   1%
£250001 to £500000   3%
£500001 or more         4%

The tax is often misunderstood. The tax is payable in full for properties above the price set and none at all payable for properties below it.

Mortgage Indemnity Lenders will often require insurance to cover themselves against

Guarantee Premium

they set these at varying levels as a percentage of the loan against the value of the new home.

These can start as low as 70% and may be stepped so that greater charges are made the closer the amount of the loan is to the value of the property.

VAT Some costs are liable to VAT. Normally the VAT for the purposes of the illustration are taken out of the costs and shown separately.

TYPES OF MORTGAGE RATES

FIXED RATE

A fixed rate mortgage is one where for a period of time the interest rate is set and will not be affected by changes in interest rates. At the end of the period the interest rate will become the variable rate applicable at that time (see variable rate). Usually the rate is fixed between 2 and 5 years, although longer periods are usually available.

Advantages

Provides guaranteed mortgage repayments for the duration of the fixed period giving protection from rising interest rates.
Variety of periods, so there is likely to be one to meet most needs.

Disadvantages

Probably have to pay an upfront application fee and/or an arrangement fee once the loan is taken.
If interest rates fall below your fixed rate you may be left paying a higher rate than the variable rate.
If you redeem your mortgage during the fixed period and often for a period afterwards, you may have to pay a penalty. This is usually several months' interest repayments.

VARIABLE RATE

A variable rate mortgage is one that changes when the lender announces interest rate changes. So unlike a fixed rate, if the mortgage rate goes up then you will be paying more each month. Equally, if it goes down then you pay less.

Advantages

Usually no application or arrangement fees.
Rarely do they have redemption fees.
Your monthly repayments will fall with reductions in interest rates.
Gives you flexibility.

Disadvantages

Your repayments will rise with interest rates.
Does not give you the ability to budget for repayments.

CAPPED RATE

A capped rate mortgage puts a ceiling on the rate for a period of time. This means that the payments cannot go above the rate set during that time. It can of course change if the rates go down.

Advantages

Gives you a guaranteed rate to which your repayments cannot exceed.
If interest rates fall your repayments will reduce with them.

Disadvantages

Usually the capped rate is higher than a fixed rate because repayments can fall with interest rates.
Usually have to pay application and/or arrangement fees.
If the loan is redeemed during, and in some cases for a short while after, a penalty fee of several months repayments is payable.

DISCOUNT RATE

A discounted rate gives you a guarantee that for a period of time your interest rate will remain at a fixed percentage below the variable rate.

Therefore, if the current interest rate is 7% and your rate is discounted by 2% (i.e. 5%) if the interest rate were to be increased by 1% then your rate would rise to 6%.

Advantages

Gives a reduced repayment over the period of the discount.
Repayments will reduce with interest rate falls.

Disadvantages

Repayments will rise with interest rates.
May have to pay application and/or arrangement fees.
Usually a penalty payment of several months interest will have to be paid if the loan is redeemed during or shortly after discounted period.

TYPES OF REPAYMENT

Interest Only (Endowment, ISA, Pension)

The payments on this type of mortgage are usually paid monthly. An Interest Only mortgage is quite simply repaying monthly, the interest of the loan. The capital is repaid to the lender at the end of the loan period, although not guaranteed.

The lender in most cases will grant this sort of loan on the condition that you have an investment plan in place that will repay the capital at the end of the loan period.

The 3 main savings plans that are usually acceptable to them are Endowment, Individual Savings Accounts (ISA) and Pensions.

Endowment policies have life cover built in that pay the mortgage off in full should you die before the mortgage is repaid. With Pensions and ISA the lender may insist on life cover being taken out and if not it is advisable to consider it as a precaution.

Advantages

Possible higher return than mortgage amount.
Flexibility for movers, i.e., reusable quality of the repayment vehicle.
Disciplined savings.
Can choose ISA Tax free option.
Plan reviews and lower growth should ensure plan is on track to repay the loan, although not Guaranteed.

Disadvantages

No guarantee to repay the loan.
You may be required to increase payments if the plan under performs.

Capital and Interest Repayment

The payments on this type of mortgage are usually paid monthly. The payments include two elements; repayment of the capital you have borrowed (i.e. the mortgage loan); and the interest on the loan.

In the early years (0 - 5) most of each payment goes toward paying the interest and a smaller part goes toward paying off the balance of the loan (the capital). As time elapses (5 - 17) then more of the payment goes to paying off the capital and in the latter years (17 - 25) the majority goes to paying off the balance of the capital.

As a typical example, on a standard 25 year loan, approximately half the capital will be repaid by year 18. The size of the payment you make each month is dependent on the size of the loan, the number of years the mortgage is taken out over and the interest rate.

The lender may insist that you take life cover that will pay off the mortgage in the event of death. If not, it is advisable to consider it as a precaution in any event.

Advantages

Guaranteed to pay off mortgage

Disadvantages

Pays very little off in early years.

OTHER SERVICES

Buildings Insurance

An insurance policy will be required by the lender to cover the rebuilding of your property should it be damaged, this type of cover is compulsory.

Contents Insurance

An insurance policy that will pay out in the event of loss or damage to your household belongings.

Accident, Sickness, Unemployment Insurance

This insurance is to cover loss of earnings in the event of accident, sickness or unemployment.

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