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When moving home, or remortgaging, you will need conveyancing services. If you are remortgaging, a lender may, as part of the remortgage deal, offer basic conveyancing and will appoint and pay, for that conveyancing. If you require additional legal services, you will have to either employ your own solicitor, or agree an extra fee for the required extra work with the firm appointed by the lender.
A lender will normally undertake credit searches upon receipt of a mortgage application and may also supply information to Credit Reference Agencies regarding the way that a subsequent mortgage account is managed.
The larger your deposit, everything else being equal, the better will be the mortgage deal that you will get, it is therefore normally best to put down the largest deposit you can.
It is common for an early repayment charge (ERC) to apply if your mortgage has some sort of special deal, for example, a fixed rate. A lender may allow a certain amount, for example, up to 10% a year of the amount borrowed, to be repaid during the early repayment charge period without triggering any charge. An early repayment charge may go on for a period after any particular fixed, capped or discounted rate has ended. Such an ongoing charge is sometimes referred to as an ‘overhang’ penalty charge.
If you need to borrow more than 75% of the property’s purchase price or value, your lender may require high percentage loan insurance (also known as mortgage indemnity insurance). This type of insurance is designed to protect the lender, not the borrower. If the property is repossessed and subsequently sold for less than the amount owing on the mortgage, the high percentage loan insurer will pay the difference between the repossession sale proceeds and the outstanding mortgage to the lender.
The insurer will then normally attempt to recover the money it had paid to the lender from the defaulting borrowers. If a lender requires high percentage loan insurance, it may pay the cost of the cover. However, in the event the borrowers default on the mortgage, even though the lender may have paid the cost of the insurance, this would not prevent the high percentage indemnity insurance provider from pursuing the defaulting borrowers for their loss. If a loan is for less than 75% of the value of your home at the time the loan is taken out, a lender does not normally require high percentage loan insurance.
There are several different types of interest rates generally available. A particular mortgage lender may offer some or all of the different types. The main introductory rates are:
Standard variable rate
If you are on a lender’s standard variable interest rate (SVR), the lender has the right to change the SVR at its discretion. Your mortgage payments will be directly affected by any changes your lender makes. The SVR is usually (but not always) the long-term rate your mortgage will revert to as and when any special initial interest rate you may have, such as a low fixed rate or tracker rate ends. A standard variable rate will not necessarily be reduced (or increased) if the Bank of England should change its base rate.
A lender may offer a discounted rate which will shadow its standard variable rate for a stated period or until a set date. For example, if the lender’s standard variable rate is 7.5% and you have a 1% discount, your ‘pay rate’ will be 6.5% During the discounted rate period, the interest rate you pay is not fixed, it can vary. For example, if your lender increases its standard variable rate from 7.5% to 8% and assuming you have a 1% discount, your ‘pay rate’ will increase from 6.5% to 7%. When the discount ends, the rate charged usually reverts to the lender’s standard variable rate.
If you have a fixed rate mortgage, your interest rate and therefore your monthly mortgage payment will stay the same, no matter what happens to prevailing mortgage interest rates. A fixed rate therefore gives certainty of mortgage costs, which can provide borrowers with peace of mind that their mortgage payments will not increase.
The rate would be fixed for a set period. When the fixed rate ends, the ongoing long-term rate usually reverts to the lender’s standard variable rate. If prevailing interest rates rise during the period of the fixed rate, the borrowers will benefit by paying a comparatively low rate. If, on the other hand, prevailing interest rates fall during a fixed rate, the borrowers would end up paying a relatively high rate until the fixed rate ends.
The lender caps the interest rate for an agreed period of time. If the lender’s standard variable rate goes above this capped figure you will pay no more than the agreed cap. If the rate drops below your capped rate you will pay the reduced amount, until either the interest rate rises again or the agreed period ends. This gives you the security of a fixed rate, (in terms of not having to pay more than the capped interest rate) but with the added advantage that you could pay less if rates fall. Capped rates are not common and due to the fact that the payable interest rate can go down, the rate at which a cap would be set is often higher than a fixed interest rate. When the capped interest rate ends, the ongoing interest rate usually reverts to the lender’s standard variable rate.
Capped and collared rate
Your payable interest rate would usually be the standard variable rate, but with a guarantee that your payable interest rate will not go above the capped rate. However, nor will it fall below the collared rate. For example, if you have a capped rate of 8% with a collared rate of 4% for the duration of the cap and collar, your payable interest rate will only fluctuate between these limits. When the capped and collared period ends, the rate charged usually reverts to the lender’s standard variable rate, with no ongoing limitations to the payable interest rate.
Tracker interest rates are set at a certain percentage above or below the Bank of England or other base rate, and this percentage difference is fixed, and the lender must ‘track’ the base rate. For example, if the Bank of England reduces its base rate by 0.25%, the lender must reduce its tracker rate by 0.25%. You should take care, when considering tracker mortgages, as some lenders operate a ‘collar’, which would mean that if the Bank of England base rate were to fall below the collar, you would not benefit. For example, if you have a tracker rate with a lender which operates a collar, of say 2.75% and your tracker mortgage tracks the Bank of England base rate as (say) 1% over base. If the Bank of England base rate is 3% your payable rate will be 4%. However, if the Bank of England rate dropped to (say) 2% your payable rate would NOT be 2% plus the 1% tracking rate, but would be the collared rate of 2.75% plus your tracking rate of 1% so your payable interest rate would be 3.75%. At a time of relatively high interest rates, such a collar would be unimportant, however, since 5 March 2009, the Bank of England base rate has been 0.5% so borrowers with a collar above this rate will not have benefited.
Libor stands for the ‘London Inter Bank Offered Rate’. The Libor rate is essentially the interest rate at which banks lend to each other. The rate is a key indicator of the availability of funds. Although not directly linked, the Libor rate does impact on lender’s standard variable rates, as it reflects the availability of money which lenders need to subsequently lend to mortgage borrowers.
A cash back mortgage involves a lump sum being paid to a borrower shortly after completion of a new mortgage. Cash back mortgages are not commonplace. One of the reasons for their unpopularity is that a lender would commonly charge a higher interest rate than for a non-cash back mortgage. In the event a cash back mortgage is redeemed during an early repayment charge period, the lender would usually require repayment, in full, of the original cash back sum. Cash back mortgages should not be confused with ‘free conveyancing’ or ‘free valuation’ offers that a lender may offer as part of a remortgaging deal.
Where two or more borrowers take out a mortgage, it is important to realise that all parties are under joint and several obligations to adhere to the mortgage covenants when they commit to the loan. For example, if two people take out a joint mortgage and one person refuses, for whatever reason, to contribute to the mortgage payments (due to separation, divorce, etc), the remaining person is liable to pay the whole of the ongoing mortgage payments until the mortgage is repaid in full. The lender deems that each party to the loan is ‘jointly and severally’ liable to make the required payments. This joint and several liability is not affected by the manner in which the property is held, either as joint tenants or tenants in common.
If a property is held jointly, it will be held in one of two ways, ‘joint tenancy’ or ‘tenants in common’.
If a property is held on a joint tenancy basis, neither of the ‘joint tenants’ (the owners) hold a defined ‘share’. They simply jointly own the whole of the property between them. If one of the joint tenants dies, the surviving joint tenant would automatically own the whole of the property.
However, although the property itself will not form part of the estate of the deceased ‘joint tenant’, 50% of the value of the property, as at the date of death will be counted by HM Revenue & Customs as forming part of the estate of the deceased person for the purposes of calculating any Inheritance Tax liability on his or her estate.
Tenants in Common
If a property is held on a tenants in common basis, each partner holds a defined share, which would normally (but not necessarily) be in equal shares. On the death of one of the tenants in common, his or her defined share of the property will form part of his or her estate and will go to whoever he or she has chosen in a will. If the deceased died without a will, the recipient will be decided by the intestacy rules. The monetary value of the deceased person’s defined share of the property will form part of his or her estate for the purposes of calculating any Inheritance Tax liability.
A mortgage is a transfer of the legal ownership (known as the ‘legal title’) of a property from one person or entity (the borrower, who is known as the ‘mortgagor’) to another person or entity (the lender, who is known as the ‘mortgagee’). Until the mortgage is discharged (fully repaid) the lender is the legal owner of the property. Upon the mortgage being repaid in full, the legal title, and therefore the ownership, of the property will pass to the borrower, who then becomes the owner of the now ‘mortgage-free’ property.
Capital and Interest Mortgage
A capital and interest, or ‘repayment’ mortgage, as it is commonly known, is a mortgage where each monthly payment made to the lender will contain an element of capital in addition to the interest payable on the loan. The proportion of each will change throughout the period of the loan. The proportion of capital increases with each monthly payment provided that the payments due are met in full and on time. In the early years of the mortgage, the monthly mortgage payment consists mainly of interest, therefore little capital is repaid until several years have passed. After about 13 to 15 years, (on a 25-year mortgage) the amount of outstanding capital being repaid each monthly sharply accelerates and the outstanding mortgage then starts to reduce more rapidly.
As the name suggests, only interest is paid each month. The amount borrowed doesn’t reduce during the term of the mortgage and the full amount of the loan remains outstanding at the end of the mortgage term. As no capital is being repaid, monthly mortgage payments are less than with a repayment mortgage, but it is very important to ensure that there is an alternative way to repay the loan at the end of the term. A lender would normally require evidence or a statement from the potential borrower concerning how they propose to ultimately repay the mortgage balance at the end of the term.
If your intention is to repay the mortgage with some form of savings or investment plans, the lender may make it a condition of the mortgage that the investment vehicle be maintained by the borrowers. It may require a ‘note of interest’ being lodged with the investment vehicle provider, so that it would be notified if, for example, the borrowers ceased to pay the premiums. It would be the borrower’s responsibility to maintain the monthly premiums to ensure continuity of the repayment vehicle and to carry out regular reviews to ensure that the performance is sufficient to repay the loan upon maturity. This type of mortgage would not be suitable for any borrower who wanted an absolute guarantee that their mortgage would be repaid at the end of the term. Only a capital and interest ‘repayment’ mortgage can, providing all mortgage payments are made in full and when due, guarantee to fully pay off a mortgage.
This is the commonly-used term to describe the situation where the market value of a property is less than the amount of the outstanding mortgage that is secured upon that property. A borrower who is in such a position would find it extremely difficult or even impossible, to remortgage to another lender.
They would normally have to simply wait and hope that the value of the property increased, or use other funds from elsewhere to put down as a deposit. If the borrower sold the property for less than the outstanding mortgage, the lender would pursue the borrower for the difference.
There are several different types of offset mortgage, but the general principle is the same in terms of the benefits they can give. Typically, you would have a mortgage account and a savings account. The lender’s system knows how much money you have in your savings account and mortgage. You are not charged interest on the balance of your mortgage that equals the amount in your savings account.
For example, if you have a mortgage balance of £100,000 and a savings balance of £25,000 you will only pay interest on £75,000 of the mortgage balance. For ease of explanation, imagine you have an interest-only mortgage, and the interest on a £100,000 mortgage, at an example 5% interest rate, would be £417 a month. If you had £25,000 in the offset savings account, you would still pay £417 a month (as your mortgage balance is £100,000) but you are only charged interest on £75,000 of the mortgage.
You are NOT charged interest on £25,000 of the mortgage, as this is the amount you have in your offset account. Of your £417 mortgage payment, £313 is interest due on £75,000.
The other £104 will be applied to your mortgage balance, and that month, your mortgage would reduce from £100,000 to £99,896. Ignoring interest rate changes, your monthly mortgage payment would remain the same, regardless of how much money is in the savings account. Because your mortgage payment remains the same, your mortgage is effectively being overpaid, with the result that the mortgage will be paid-off earlier.
An offset mortgage is especially valuable to a higher-rate taxpayer, as there is no tax to pay on the return on your savings. This is because the savings account receives no interest. Your return is, instead, by way of a reduction in your mortgage balance. You therefore get a tax free return on your savings equal to the mortgage interest.
If you have an introductory mortgage product, such as a fixed rate, there would normally be an early repayment charge applying during the term of the fixed rate. There would usually be a facility to ‘port’ the mortgage to a new property to avoid having to pay any early repayment charge if you moved home. This would mean that the mortgage, which was originally secured on the previous property, could be secured on the new property. This would be subject to a survey of the new home, and with the agreement of the lender’s underwriters in relation to the borrower’s financial status and personal circumstances at that time. The terms and conditions of the new, ported, mortgage would remain the same as the original mortgage. For example, if the original mortgage was for a fixed rate of (say) 5% and had (say) 18 months remaining on the fixed rate, the new, ported, mortgage would remain on that basis.
If you are unable to pay your mortgage, ultimately, the lender can repossess your home. If your home is repossessed and sold for less than the amount of the outstanding mortgage, you’ll owe the balance to the lender. Your name will also be on the repossession register and it will be harder for you to get a mortgage in future.
The golden rule is to contact your lender when it becomes apparent that you may have difficulty in meeting your monthly mortgage payments. Your lender should be sympathetic and should provide as much assistance as they can.
This is a tax (commonly called ‘stamp duty’) that is normally payable if the purchase price of the property you wish to buy is over £125,000. The rules on stamp duty land tax changed on 4 December 2014. The gov.uk website has a stamp duty land tax calculator
On 1 April 2018, Land Transaction Tax replaced Stamp Duty Land Tax for property transactions in Wales (Stamp Duty Land Tax continues to operate for property transactions in England).
When buying a home, you should have the house surveyed. If you are buying the house with the aid of a mortgage, your lender will insist upon a basic valuation as a minimum. There are three types of survey:
Before a lender will offer a mortgage they will require a qualified valuer to inspect the property and to submit a valuation report. This is to ensure that the property is suitable security for the loan requested. The report does not necessarily give you an indication as to the condition of the property. If the property is new and building work is still ongoing, an additional fee may have to be paid by the borrower for a subsequent valuation when the building work is completed. This report is for the lender’s purposes and the borrower would normally not receive a copy. If you want to have a more in-depth valuation, you could choose to have either a Homebuyer’s survey, or a full structural survey.
A homebuyer’s report is more detailed than a basic valuation. However, it is limited in focus and there is little comeback for the borrowers in the event of serious problems encountered later. Because of this, you may prefer to have a full structural survey. It is likely that major defects will be identified, giving the borrower the opportunity to obtain any necessary reports. It is highly recommended that the valuation be arranged in conjunction with the lender to prevent duplicate valuation costs.
This type of survey gives you the greatest protection in the event of anything untoward coming to light after you have bought your new home. A building survey (previously known as a ‘full structural survey’) is a thorough and complete inspection of the property carried out by a qualified professional surveyor. It is usually quite a bit more expensive than either a basic or homebuyer’s valuation. However, if it is arranged with the prospective lender’s prior agreement, it may be possible to prevent duplicate valuation costs, as the lender may offset the cost of their basic valuation, providing the surveyor you appoint is recognised by them.
As a mortgage is secured against your property, it could be repossessed if you do not keep up the mortgage repayments.
The Financial Conduct Authority does not regulate some forms of buy to let mortgage.