Choosing a mortgage
Product Features
Aside from the set-up fees, redemption penalties and other
charges that are described on later pages, there are a whole
host of other features that may be particular to certain
mortgages or product ranges. Some of these are described
briefly below:
Loan to Value (LTV)
Some mortgages may only be on offer if you are borrowing
a certain proportion of the value of your house. There is
often a maximum loan to value, above which you will have
to choose a different product, or at least pay a MIG fee.
Many lenders offer more favourable deals to customers who
are contributing a sizeable deposit themselves. For instance,
there may be one rate of interest if you are borrowing less
than 80% of the property value and a higher rate if you
are borrowing more than that.
Incidence of interest calculation
Charging interest on the outstanding balance of your loan
at the end of each day means you reap immediate benefits
of any repayments you make. This is a common feature of
flexible mortgages, but is not restricted solely to them.
When interest is calculated annually, repayments are not
updated to include the reduction in capital that arises
from the payments you make throughout the year and any lump
sum deposits that you pay into your mortgage account. As
long as you are making payments on time, the more frequently
interest is calculated the better for you.
Review of rate
The interest rate you are charged can be reviewed either
annually or on a monthly basis. This feature does not affect
fixed rate mortgages during the fixed period, or capped
rate products when the prevailing rate of interest is above
the cap level.
With an annual review, one change is made to your rate
on a fixed date each year to take into account changes in
the variable rate. This provides more stability, as you
know your repayments are not going to change during that
time. You can avoid the effects of fluctuations in the interest
rate but you can also suffer a sudden repayment jump on
the review of rate date if there have been several rate
rises during the course of the year. With an annual review,
you also miss out if rates fall during the year, as your
repayments will stay the same, as opposed to being lowered
due to the rate change.
A monthly review means that the rate you pay is amended
on a set date of each month, usually following a change
in the Bank of England base rate. This means that you see
more fluctuations in your repayments and feel a near-immediate
cost or benefit should the rates rise or fall.
Incentives
A lot of mortgages come with enticing incentives, which
are usually financial or product related. The lender may
offer a discount or fee-free period on buildings insurance,
accident and sickness insurance, redundancy insurance, or
payment protection insurance. This is often done to encourage
you to take up the policy, which you are then fairly likely
to keep in the longer term. Other common incentives include
a free valuation and money towards solicitor's fees.
Term of the mortgage
It is worth looking at the small print to find out the minimum
and maximum terms of the mortgage. The range of acceptable
term lengths can often range from 5 right up to 40 years.
It is also worth knowing whether there is any built-in flexibility
of the term - i.e. whether you are likely to be able to
extend or reduce it in the future. While a longer term will
mean a greater total amount of interest paid, it will also
mean lower monthly repayments, and vice versa.
Repayment method
You will usually have a choice of repayment method but this
won't always be the same choice. Make sure that your favoured
repayment vehicle is acceptable to the lender. Portability
Find out whether you can take the mortgage with you if you
move during the introductory offer period and beyond. This
saves you having to pay off the loan and take out a new
one.
Further advances
Some lenders will allow you to release further funds
once you have repaid a portion of the capital. Four things
to find out are:
