Mortgages

Here at Anculo, we provide help and advice for anything you need financially.

Mortgages are one of the largest single transactions in most people’s lives.

Buying a property can be a stressful and time-consuming experience; nowadays the financing of a mortgage is a case of finding and selecting the most suitable mortgage, rather than simply accepting a lender’s offer. 

Banks, building societies and smaller niche lenders compete for your business, all offering a variety of interest rate deals, associated fees and other enhancements to attract borrowers. 

The two main methods of repaying a mortgage are repayment (capital and interest) and interest only. It is also sometimes possible to set this up using a combination of the two. A description of these methods is provided below.

Repayment (capital and interest) method

Under the repayment method your monthly repayments consist of both interest and capital and, over time, the amount of money you actually owe will decrease. In the early years, your repayments will be mainly interest, so the capital outstanding will reduce slowly at the start of the mortgage. This method ensures that your mortgage is repaid at the end of the term, providing all payments are made on time and in full.

Interest-only method

As the name suggests, you will only pay the interest on the amount borrowed and none of the capital, so the capital is still outstanding at the end of the term. Therefore you will usually need to take out some kind of investment policy to save up enough money to repay the mortgage at the end of the term. 

Traditionally, the preferred product for repaying the capital of an interest-only mortgage was a mortgage endowment policy (which included a set amount of life cover). Customers now tend to use Individual Savings Accounts (ISAs) and pensions to build up a sufficient sum and to take advantage of the tax breaks offered by these products.

Mortgage Products

There are several terms used to describe the interest rates you pay on a mortgage, and the key terms are as follows: 

Standard Variable Rate (SVR) – The SVR is the lender’s standard rate. With a variable rate mortgage you are normally able to switch lenders at any time without being penalised. If you take out a mortgage that has a fixed, tracker or discounted rate, once the set period of time ends the loan will usually revert to the lender’s SVR.

Fixed Rate – A fixed rate mortgage allows you to repay interest at a set rate, irrespective of any interest rate fluctuations. In other words, your monthly repayments will remain the same every month for a time period agreed between you and your lender.

Tracker – A tracker mortgage usually tracks for a set period any movement in an index specified by the lender; this for example could be the Bank of England Base Rate. You will benefit from any falls in the specified interest rates, but will also have to pay more each month should the rate increase.

Discount – The discount mortgage rate is another variation of the standard variable rate. It provides a discount from the lender’s SVR for a set period of time. The variable interest rate still fluctuates, meaning your monthly repayments may differ slightly from month to month, but the discount remains constant.

Fixed, Tracker and Discount rate mortgages often have early repayment charges so you need to be sure this is suitable for you for the foreseeable future. Furthermore, the lender may also charge a ‘booking/arrangement fee’ to apply for these types of mortgage. You should ask your adviser to explain these in more detail, or ask for an illustration.

As a mortgage is secured against your home, it could be repossessed if you do not keep up the mortgage repayments

Equity Release

Equity release can be a financial lifeline for older people who find themselves in need of cash, often living on small incomes despite living in properties worth hundreds of thousands of pounds.

Moving house can be an expensive and stressful process at any age. Many older people would prefer to stay put to and benefit from the ‘equity’ or value tied up in their homes, and equity release schemes allow them to do that.

There are various types of plan available to home owners aged 55 and over. With Lifetime Mortgages where the interest is rolled up, a loan is taken out on the property to provide a lump sum, an income or a combination of the two. No interest is payable until the home is sold, this could be when you and your partner have both died or gone into long-term care.

Equity Release - Continued

With a Lifetime Mortgage with a drawdown facility, you can take your cash in stages. This can be useful as it gives flexibility and the reassurance that you can access further funds at some point in the future should you need them. Interest is also only charged on funds when they are drawn down.

More and more people are using equity release to help enjoy a comfortable retirement, pay down debts, boost their income or plan capital expenditure.

Professional advice is essential; equity release isn’t the right solution for everyone as these schemes are expensive and inflexible. Releasing cash from your home reduces the value of your estate and the amount of inheritance you leave, so you should involve your children and dependants from the outset.

Think carefully before securing other debts against your home. Equity released from your home will be secured against it.

The information within this article is purely for information purposes only and does not constitute individual advice.