Explanation of types of interest rates/mortgages
Standard variable rate
This is the lenders variable rate, and they have the right to change it at their discretion. In practice rates tend to move in relation to funding costs, changes in the Bank of England Base Rate and competition in the market. As the rate rises and falls, so will your mortgage payments.
The rate remains variable, as above. However, as an incentive, you will be offered a discount off the standard variable rate for an agreed period, after which the rate charged usually reverts to the lender’s standard variable rate, which could be higher than the rate chargeable at the outset.
The lender will fix the rate of interest on your mortgage for a set period of time. During this fixed period your payments will remain the same, helping you to budget. After the fixed period, the rate charged usually reverts to the Lender’s standard variable rate, which could be higher than the rate chargeable at the outset.
The lender will cap the rate charged for a set period of time. Should the lender’s standard variable rate go above this capped figure, you will pay no more than the agreed capped rate. Should the rate fall below your capped rate then you will pay the reduced amount, until either the rate rises again or the set capped period ends. This provides you with the similar security of a fixed rate, in that you have a maximum interest you can pay, but also has the added advantage that you could pay less if rates fall. After the capped period, the rate charged usually reverts to the lenders standard variable rate, which could be higher than the rate chargeable at the outset.
This method of repayment is directly linked to changes in the Bank of England Base Rate. Tracker rates are set at a certain percentage above, or below Bank of England Base Rate and this percentage difference is fixed – e.g., if the Bank of England Base Rate rises or falls by 0.25%, your Tracker Mortgage rises or falls by 0.25% also. They can sometimes be arranged on a fixed, discounted or variable basis.
London Inter-bank Offered Rate (Libor)
London Inter-Bank Offered Rate. This is essentially the rate used by banks to lend to one another. The rate is reviewed periodically and therefore your mortgage payments will change accordingly: if the rate increases so will your mortgage payments and if there is a reduction your payments will decrease.
This may be offered with an interest-rate deal. The lender pays you a substantial sum (for example 3-5% of the amount you borrow) shortly after you take up the loan. If you move to another lender in the early years you’ll have to repay some or all of the cashback received.
There are various types of flexible mortgages available which all provide increased flexibility, when compared to the traditional types of mortgages.
Typically, a flexible mortgage may include some or all of the following features:
- The ability to make overpayments (without charges), subject to the lenders agreed limits.
- The ability to underpay your mortgage (subject to limits).
- The option to take payment holidays
- A facility to borrow more money (subject to limits), for lump sum expenditure, i.e. home improvements.
- Current account with cheque book and agreed overdraft facility
- Credit card with an agreed spending limit
- Debit card (subject to limits)
A flexible mortgage can be set up on a fixed, capped, discounted, variable or Bank of England base rate tracker basis.
Foreign currency mortgage
The sterling equivalent of your liability under a foreign currency mortgage may be increased by exchange rate movements.
Right to Buy
A secure council tenant for at least two years (or five years if tenancy commenced after 18 January 2005) potentially has the right to buy the property at a discounted price.
A secure tenant of a local authority living in a property when the ownership was transferred to a housing association may be eligible for a Preserved Right to Buy (PRTB).
The amount of discount depends on the length of the tenancy. A five-year tenancy usually offers a discount of 35 per cent of the market value of the property. A twenty-year tenancy usually offers a discount of 50 per cent. The discount is limited to the maximum amount available in the area. The maximum discount ranges from £16,000 to £75,000 for both flats and houses depending on location. . If the property is sold within five years purchase, the discount may have to be paid back.
Shared Ownership offers eligible housing association or council tenants the chance to buy a share of the market value of their current home. A discount of between £9,000 and £16,000 depending on the location of the property may be available subject to the size and share being purchased. Not all local councils or housing associations offer the scheme. Tenants can buy a minimum 25 per cent of the value of the property and pay an initial rental charge of not more than three per cent of the market value of the remaining equity owned by the landlord. The amount of discount received is in proportion to the share of the property purchased.
This means that each monthly payment that you make 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 repaid increases with each monthly payment. As long as all repayments due to the lender are made in full and on time the mortgage will be repaid.
As the name suggests, you will only pay the interest each month. The actual amount borrowed does not reduce during the term of the mortgage and the full amount of the loan will remain outstanding to be repaid at the end of the term. It is vital that you ensure that you have the means to repay the loan at the end of the term. You are responsible for ensuring that any investment vehicle is maintained for the duration of the mortgage and should note the consequences of failing to maintain such investment vehicles.
If you wish to take out a mortgage with no repayment vehicle, intending to sell your property at the end of the term to repay your mortgage debt, you must be aware that house prices fluctuate and the value of your property could fall, which may mean that the total amount outstanding at the end of the term could be more than the amount originally borrowed. In this case you would be liable for the repayment of the balance outstanding at that time
Early repayment charge
The lender may apply charges if you repay part or the entire mortgage. Please refer to the illustration for details of any early repayment charges.
Some mortgage products may be transferred to other properties subject to your personal circumstances, survey of the property and the agreement of the lender’s underwriters at the time. Please refer to the key facts illustration for details.
If your lender is a mutual organisation, you should check with them whether or not you will be entitled to membership rights or windfall payments if the lender decides to convert to a Company quoted on the Stock Exchange. Any membership rights or windfall entitlements may be lost in the event of you not making all your repayments in full and on time. i.e. falling into arrears.
New Build Re-inspection fees
You should be aware that for a new build property, some lenders will require a further valuation, at an additional cost, when the property has been fully constructed. Please refer to the illustration for details of any such.
You should note that moving your mortgage to a different lender may incur costs from your existing lender such as early repayment charges and deeds sealing fees. You should consider these costs before taking a new loan with a different mortgage provider
It is a condition of the mortgage that buildings insurance is taken out. The sum insured is usually based upon an estimate of current rebuilding costs and will be increased in line with the House Rebuilding Cost Index. It may be a condition of your mortgage that the insurance is arranged through the lender. Should you wish to arrange your own cover, it is imperative that it is in force at exchange of contracts and you should be aware that the lender might impose a charge for administration of the details. It is your responsibility to ensure that the payments are maintained to ensure continuity of cover and that the policy is in force at exchange of contracts.
We recommended that you arrange adequate cover to offer protection for any fixtures, fittings and all your personal possessions. It is your responsibility to ensure you have adequate insurance cover and that premiums are maintained to ensure continuity of cover.
Higher lending charge
If your mortgage represents a high percentage of the purchase price or valuation of the property, your lender may require extra security for their sole benefit. If this is the case, then you may be required to pay an insurance premium or other charge, in some cases the lender may pay it on your behalf. Where the additional security is provided by means of an insurance policy, your lender will provide you with a written explanation, stating that:
Such insurance is not designed to cover you, the homeowner, and will not protect you if your property is subsequently taken into possession and sold for less than the amount you owe.
You will remain liable to pay all sums owing, including arrears, interest and the lenders legal fees. Interest will continue to mount up as long as the mortgage remains outstanding.
The higher lending charge insurer has the right to sue you for the amount paid to the lender, to cover any shortfall upon sale following repossession. Should this fee be added to your mortgage, you should be aware of the implications of the long term cost effect. Please refer to the key facts illustration for details.
Mortgage payment protection insurance(MPPI)
If you fall into arrears with your mortgage payments due to accident, sickness or unemployment and are unable to bring your repayments up to date, you could eventually lose your home. State benefits have been greatly reduced in recent years and if you do not have other means to make your repayments it is strongly recommended you take out suitable insurance to cover you in these circumstances.
Types of valuations available
Valuation for mortgage purposes
Before a lender will offer you a mortgage they will require a suitably qualified valuer to inspect the property and submit a written report confirming that the property is a suitable security for the loan you have requested. This report does not necessarily give you any indication as to the condition of the property and in some cases you may not be permitted to see a copy as it is purely for the lenders purposes. If the property is new and building works are not completed, you may have to also pay for a second report to be obtained when the property has been finally completed.
This is more detailed than the basic valuation, but limited in focus and there is little comeback in the event of serious problems encountered later. This report could however, identify some defects giving you the opportunity to obtain more specialised reports and estimates. It is highly recommended that a homebuyers report be arranged in conjunction with the lender to prevent duplication of valuation costs.
Full structural survey
This is a thorough and complete inspection of the property carried out by a qualified professional surveyor. It can be expensive, but worthwhile given that your home is the most costly item you will probably ever purchase. It is highly recommended that this be undertaken in conjunction with the lender to prevent duplicate valuation costs.
Property value movements
Property prices and values fluctuate according to market conditions and therefore the value of your property may rise and fall. A fall in the value could result in the mortgage loan being more than the value of your property. This is known as ‘negative equity’.
Arrangement/reservation or booking fee
The Lender may charge these fees in certain circumstances. Refer to the key facts illustration for details. In some cases these fees may be added to your mortgage loan. Should this be the case, you should be aware of the long term cost effect.
Disclosure of personal details
Your lender may undertake credit references upon receipt of your mortgage application. They may also supply information to a Credit Reference Agency regarding the conduct of your account.
Data Protection Act
We will treat all your personal information as private and confidential (even when you are no longer a customer) except where disclosure is made at your request or with your consent in relation to arranging your mortgage. We keep records of all business transactions for an indefinite period (usually the term of the mortgage). You have a right of access to your personal records whether held manually or electronically.
TenetLime will hold client information in a central database for Compliance purposes only.
The information you provide may be disclosed to third parties (e.g. credit reference agencies and product providers) for the purpose of processing your application.
Your Solicitor or Licensed Conveyancer will make a charge for administering a sale, purchase, re-mortgage or transfer of equity. Various other charges, called disbursements may also be payable. They are for items such as Stamp Duty and searches. Refer to your Legal Adviser for full details.
A mortgage can be arranged on a joint tenancy or tenancy in common basis and you should refer to your Solicitor or Licensed Conveyancer for advice regarding this matter.
Joint and several liability
Where two or more borrowers take out a mortgage, it is important that all parties realise that each individual is under joint and several obligation 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 to contribute to the payments, for whatever reason, then the remaining person is liable to pay the whole of the mortgage payment and vice versa. The lender deems that each party to the loan is jointly and severally liable to make the repayments.
Changes in the exchange rate of foreign currency mortgages may increase the stirling equivalent of your debt