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:: MORTGAGES :: |
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FAQ’s
The Financial Services Authority regulates most mortgage sales taken out on or after 31
October 2004.This part of our website aims to help you choose the right mortgage by answering some common questions under the following section headings:
Borrowing &
Getting Advice
How much can you afford to borrow? Can you save money and get the
best deal by shopping around? Do you need to get advice?
How much should I borrow?
How much can I afford?
What is self certification?
How long should the mortgage last?
What if I have a poor credit history?
How do I know I’m getting the best deal?
How do I check whether a firm of a person is authorised
What’s the difference between information and advice?
What information should I receive from my adviser?
Interest Rates
Confused by the different interest rates?
Choosing between
interest rates and mortgages on offer can be confusing. How do you know which interest rate is best
for you? And should you get a flexible, offset or normal mortgage?
You have two important decisions when choosing an interest rate deal; whether to choose a fixed or variable rate mortgage, and whether to choose a short or long term deal. Use the links below to find out which might be most suitable for you.
Standard
variable rate
Tracker
Fixed interest rate
Discounted rate
Capped rate
Collared rate
Standard variable rate with cashback
Mortgage Features
Confused as to what a flexible mortgage is? Or maybe you would like to know more about current account mortgages, use the links below to find out more.
Flexible mortgages
Underpayments and payment holidays
Borrow extra (sometimes called 'loan drawdown')
Is a flexible mortgage right for you?
What is an Offset mortgage?
Current account mortgage
Is an offset or current account mortgage right for you?
Which repayment method?
Repayment mortgage
Interest only mortgage
Advantages and disadvantages of the repayment methods
More information on interest only mortgages
Choosing a repayment vehicle for your interest only mortgage
What are the Fees & Costs?
Adding fees to the mortgage
Incentives
What will I have to pay?
What other fees will I have to pay not in the key facts illustration?
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Insurance Checklist
Which insurance do you need?
Insurance to cover your home
Insurance to cover your mortgage
Keeping up your repayments
You can afford your mortgage now, but what if…..?
Examples of the effect of interest rate rises
What can you do now to help protect yourself?
What if you do get into difficulties?
Reviewing your Mortgage
Your annual statement
Are you getting a good deal?
Questions to ask yourself
Switching your mortgage
Which type of deal do you want?
A 'mortgage' is a loan secured against your home. 'Secured' means that if you do not keep up the payments, the lender can sell your home to get its money back.
Remember: Your home may be repossessed if you do not keep up repayments on your mortgage.
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Borrowing & Getting Advice
How much should I borrow?
You can typically borrow up to
three and-a-half times the main earner’s income before tax, plus one times any
second earner’s income, or alternatively two-and-a-half times their joint
incomes (if this is larger).
Your lender may only count half of income such as overtime, commission or bonuses unless this is guaranteed. Lenders will reduce the amount they will lend if you have substantial outgoings such as other loan payments.
If you are getting advice, the
adviser has a duty to take reasonable steps to ensure that you can afford a
mortgage that he recommends. Whether or not you get advice, lenders are required to lend responsibly. This means that they should, based on things like your income, expenditure and other circumstances, consider whether you can
keep up the mortgage repayments now and in the future; for example after an
initial discount period comes to an end.
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How much can I afford?
To work out how much you can afford, write down what money you have coming in and take away what you spend
each month. Ignore any rent or other payments that would stop once you own your own home, but add in anything new
that you may have to pay, such as buildings insurance, water rates or additional travel costs from your new home.
You can also use our mortgage calculator to work out how your mortgage
payments will be affected by any changes in interest rates.
Once you’ve worked out roughly how much you
can afford to pay, get detailed illustrations from lenders or a mortgage broker
before committing yourself.
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Don't overstretch your budget!
It may be tempting to borrow as much as possible when the initial cost is manageable, but you could get into difficulties and lose your home if you can’t keep up your repayments.
Budget for increased costs in future
If you take a variable rate mortgage be prepared for your monthly payments to go up when interest
rates rise.
If you have a low initial fixed rate or a discounted mortgage, allow for the increased cost when your interest-rate deal comes to an end.
Don’t forget to allow for the possibility that interest rates may have risen over this period as well.
If you have an interest-only
mortgage which then converts to a repayment mortgage at a specified
time, be prepared for a big jump in your monthly payments.
A lender or mortgage broker will
provide you with a Key Facts Illustration which will help you to work out
whether you can afford your mortgage in the future and if rates rise.
For more information, see keeping
up your repayments
Don’t borrow the maximum
you can afford now. Allow some headroom
in case interest rates rise in future.
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What is Self certification?
A lender will usually need proof of your income, but sometimes, they will rely on your own assessment of income (‘self certification’). Self-certified mortgages were designed to cater for people who are self-employed and have
difficulty in showing that their earnings are enough to make the payments on the mortgage they are applying for. This could be because they have not been trading for long enough, they have more than one job, or they rely on bonuses for a large part of their total pay.
Don’t let anyone persuade you to overstate your income in order to get a very large loan.If you lie about your income, you could end up with a loan you can’t afford. You’ll
also be committing a fraud and could get a criminal record.
Don’t be tempted to
overstate your income. If you end up with a mortgage you can’t afford, you
could lose your home.
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How long should the mortgage last?
The ‘standard’ term is 25 years, but you can choose a different term if it suits you and the lender agrees that
you can afford it.
With a shorter term, you’ll have
higher monthly payments but pay less in total (see table below).
With a longer term, you’ll pay less
each month but more in total. Beware of making financial commitments that continue
past your retirement age unless you’re sure you’ll be able to afford the
payments.
Use the Key Facts Illustration to
compare the total cost of a mortgage over different terms.
Example of how term alters the cost
of a repayment mortgage if interest is 6% a year.
| Mortgage Term in Years |
Monthly payment for a
£100,000 loan |
Total amount you will
repay including the amount borrowed |
| 10 |
£1,110 |
£133,200 |
| 15 |
£843 |
£151,740 |
| 20 |
£716 |
£171,840 |
| 25 |
£644 |
£193,200 |
| 30 |
£600 |
£216,000 |
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What if I have a poor credit history?
To a lender, your circumstances might not seem as bad as you might think they are and you may have more choice
than you expect. Each lender will consider your application differently and they may look at a number of factors. For example, many lenders will ignore minor credit problems in the past if all other aspects of your application, such as your employment history, income and record of making mortgage or rental
payments are good.
If your credit history is judged to be poor, some lenders may be willing to lend to you, but at a higher-than-normal interest rate.
Remember, you might have more choice than you think.
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How do I know I’m getting the best deal?
Documents to help you shop around
Key Facts about our
mortgage services
This is sometimes call an “Initial Disclosure Document”. When you approach a mortgage broker or lender, they will give you this document.It will tell you about the service they will provide; whether they will give you advice or not; whether they consider all the mortgages in the market, a limited selection or just one lender’s products; and what they’ll charge you for the service. Use this document to shop around and get the service you want.
Key facts about this mortgage
This is sometimes called a “Key
Facts Illustration”. It summarises the most important features of the mortgage in a standard way so you can compare it with other similar mortgages. Whenever a firm makes a mortgage recommendation to you it must give you a Key Facts Illustration on that basis.
You will still get a key facts illustration if you ask for a written mortgage quote whether you choose to get advice or not. So to help you shop around, once you know how much you might want to borrow, ask for one. By comparing key facts illustrations for different mortgages you will be able to work out which one is best for you. You must always be given a key facts illustration before you apply for a mortgage so that you can make sure it’s right for you.
Approvals in principle and credit checks
When shopping around for your mortgage, a lender or mortgage broker may offer to give you an ‘approval in principle (AIP)’ or a ‘mortgage promise’. This is a promise to lend you a given amount on certain terms and conditions. This can be helpful once you have narrowed down your search and are ready to make an offer to buy a property. The firm will usually do a credit search to provide an AIP and this will register on your credit file, so it might not be a good idea to get one if you are only in the early stages of shopping around. A high number of credit checks over a short period of time may cause problems when you actually apply for a mortgage.
There may be some products where the interest rate depends on your credit
record. In this case a firm will do a ‘quotation search’ rather than a full
‘credit search’.
| If all you want is an illustration
to shop around for the best deal and you are not making an application you
don’t usually need to agree to a credit check. |
How do I check whether a firm of a person is authorised?
Only deal with authorised firms.
Mortgage brokers will either be authorised by the FSA or be agents for other authorised firms. This means they have to follow FSA rules when dealing with you.
Dealing with an authorised firm or the agent means you will have access to the Financial Services Compensation Scheme and a formal complaints procedure.
From 14 January 2005 businesses that help their customers buy insurance products or claim on them (for example, mortgage brokers, insurance brokers, motor dealers, property managers and vets) should be authorised by the FSA. These firms will appear on the FSA’s Firm Check Service (Register) which can be found at http://www.fsa.gov.uk/firmcheckservice/index.html
Why is authorisation important?
If you do not use an authorised firm or
authorised person you will not have access to available complaints procedures and compensation schemes if things go wrong. You will not have this option if you use an unauthorised firm or unapproved person.
The FSA’s Firm Check Service is a user-friendly way of consulting the FSA Register to check if a firm is authorised and able to do the kind of business you are interested in and who to contact in the firm if you have an enquiry or complaint.
If you use an authorised firm you have access to available complaints procedures and compensation schemes if things go wrong. If you use an unauthorised firm you do not have this option.
When you want to use a firm offering financial services always check that the firm is authorised to provide the service you are interested in.
Unauthorised and fraudulent
activity
The FSA have published on their web site a list of unauthorised firms that are currently targetting UK investors.
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What’s the difference between information and advice?
When you ask about financial products or services you will normally be given information by the lender or mortgage broker. This may include printed leaflets and the person you speak to may describe the product or service. But getting this sort of information does not mean that you're getting advice specific to your needs or circumstances.
Buying with advice
- Only FSA-authorised firms and
their agents are allowed to give advice about mortgages and these firms
must follow our rules when dealing with you.
- When you buy with advice, you
have a right to expect the adviser to recommend only products and services
that are suitable for you.
- If the recommended product or
service is unsuitable for your specific needs and circumstances based on
the information you provided, you can complain to the firm and expect
compensation for any loss.
Buying without advice
You don't have to take advice before you take out a mortgage. But if you don't take advice and the mortgage you choose turns out to be unsuitable, you will have less grounds for making a complaint.
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What information should I receive from my adviser?
When you contact a lender or mortgage broker about a mortgage they will give you details of the service they
can provide. You will receive a document sometimes called an 'IDD'.
You will recognise it by this sign:
 about our mortgage services.
| Look out for it. Read it and make sure you understand it. |
The 'IDD' has five separate sections to give you a full picture of the services offered by that
firm/adviser:
Section 1
That the FSA regulates financial services and that they require them to provide it.
Section 2
Whose mortgages they offer - firms may offer mortgages from the whole market, from a limited
number of lenders or from a single lender.
Section 3
Which service they will provide - for example whether they will make a recommendation after they have assessed
your personal needs or whether they will provide information only.
Section 4
What you have to pay for the service - whether or not there is an upfront fee or commission.
Section 5
This section will tell you in what circumstances all or part of an up-front fee may be refundable.
They must also provide the following details, but not necessarily in this document. They can be included elsewhere but must be given before a mortgage application.
- That they're regulated by the
FSA and what business they're permitted to do.
- What to do if you have a
complaint.
- Whether they're covered by the Financial Services Compensation Scheme.
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What other documents must you get?
Whether you take advice or not, you will then be given another document with the following message:
about this mortgage
This will be in the form of a personalised illustration (sometimes called a key facts illustration or KFI).
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Interest Rates
Standard Variable Rate
| Type of interest rate |
Standard Variable rate |
| How it works |
Your payments go up or down when the lender's mortgage
rate changes. (Mortgage rates tend to move in line with the Bank of England
base rate but there is sometimes a delay). |
| Early repayment charge? |
Not usually except when offered with a large
cashback deal |
| Is it for you? |
Yes, if you can afford to pay more when interest rates go up and like the flexibility to be able to make overpayments without penalty (assuming there are no restrictions on making such payments and no early repayment charges apply).
No, if you would be unable to afford the increased
payments. |
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Tracker
| Tracker |
A 'tracker' (changes in line with specified rate) |
| How it works |
A variable rate loan where the interest rate
is set amount above or below the Bank of England or some other base rate and
so always 'tracks' changes in that rate. |
| Early repayment charge? |
During the special deal period -Yes, with some loans
For some time after the end of the special deal - Yes, with some loans. |
| Is it for you? |
Yes, if you can afford to pay more when interest rates go up and want to be sure that falls in interest rates are passed on to you in full.
No, if you would be unable to afford the increased payments. |
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Fixed interest rate
| How it works |
Your payments are set at a certain level for a
set period of time - for example, two years, five years, ten years or even longer.
Unless the rate is fixed for the term of the mortgage, you are usually
charged the lender's standard variable rate at the end of the fixed rate
period. |
| Early repayment charge? |
During the special deal period -Yes, with most loans
For some time after the end of the special deal - Yes, with some loans. |
| Is it for you? |
Yes, if you want to know exactly how much you will pay for a specified period.
Yes, if you think mortgage rates will rise and you wouldn't be able to afford the increased mortgage payments.
No, if you think mortgage rates will fall (and can afford the increased mortgage payments if you are wrong).
Possibly not if you want to make overpayments or repay the mortgage early without paying an early repayment charge |
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Discounted rate
| How it works |
Your payments are variable, but they are set
at less than the lender's standard variable rate for a set period of time. At
the end of this period, you are usually charged the lender's standard
variable rate. |
| Early repayment charge? |
During the special deal period -Yes, with most loans
For some time after the end of the special deal - Yes, with some loans. |
| Is it for you? |
Yes, if money is tight when you first take out the mortgage, but are confident your income will increase and you can afford the increased payments when the discount period ends.
No, if you won't be able to afford the mortgage payments when the discount period ends.
No, if you wouldn't be able to afford the mortgage payments following a big rise in interest rates. |
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Capped Rate
| How it works |
Your payments are variable and often linked to
a base rate, but fixed not to go above a set level (the 'ceiling' or 'cap')
during the period of the deal. At the end of the period, you are usually
charged the lender's standard variable rate. |
| Early repayment charge? |
During the special deal period -Yes, with most loans
For some time after the end of the special deal - Yes,
with some loans. |
| Is it for you? |
Yes, if you like to know the maximum you will pay over a set period.
Yes, if you think mortgage interest rates might rise
above the cap.
Yes, if you want the security of knowing that your
payments can't rise above the set level, but still have the chance of benefiting from any falls in interest rates.
No, if you can find a fixed rate set at a lower rate than the cap and you think rates are unlikely to fall below the level of the fixed rate deal. |
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Collared rate
| How it works |
May be used in conjunction with a capped rate
and/or a tracker. Your payments are variable but will not fall below a set
level (the 'collar' or 'floor'). |
| Early repayment charge? |
Not applicable. |
| Is it for you? |
A collared rate may be part of another interest-rate deal which otherwise appears attractive. Understand that if the rate payable is only just above the 'collar' or 'floor' and you think rates will fall, you may not get the full benefit of a reduced payment. |
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Standard variable rate with cashback
| How it works |
Same as standard variable rate loan (see
above) but you receive a substantial sum (for example, 3-5% of the amount
borrowed) shortly after you take up the loan. |
| Early repayment charge? |
Yes, you will normally have to repay some or all of the cashback if you repay the mortgage in the early years. |
| Is it for you? |
Yes, if you need a large cash sum - for example, to buy furniture.
Yes, if you expect the cash sum to more than compensate for any interest rate rises during the penalty period.
No, if you would be unable to cope with increased payments due to rising interest rates.
No, if you can manage without the cashback now and can get a better overall deal elsewhere. |
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Mortgage Features
Flexible mortgages
A flexible mortgage gives you some scope to
change your mortgage payments to suit your ability to pay. It's also useful if you
want to pay off your loan more quickly.
Several flexible features are
becoming increasingly common and they are not necessarily confined to loans
that have 'flexible' in their name. Consider which of the features below are
important to you.
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Overpayments
You can pay more than the normal monthly mortgage payment and/or pay off extra chunks of the loan. The overpayments can have two effects:
• you could benefit straight away from lower monthly interest
payments (because the amount you owe is now less); OR
• you could continue paying at the higher level and pay off your loan more quickly. Sometimes you can cut years off your mortgage if
you overpay regularly.
To get the benefit of overpayments straight away, choose a mortgage where interest on what you owe is calculated daily or monthly.
True flexible mortgages will not penalise you for making overpayments, however with some other mortgages, especially fixed rate mortgages, you may have to pay an early repayment charge.
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Underpayments
and payment holidays
You pay less than the normal monthly payment for
a limited period (say, six or 12 months). You may even be able to stop making payments altogether. This could be useful if, say, you lose your job or take time off to care for a child.
Most lenders require you to have
built up some overpayments first. While you are making underpayments or taking a payment holiday, interest continues to be charged and added to the outstanding loan. This means that you will have to pay higher repayments in future to get back on track, or you might need to extend the term of your mortgage to keep
the normal repayments affordable. Either way, you will usually end up paying more for your mortgage in the
long run.
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Borrow extra (sometimes called 'loan drawdown')
You can borrow extra without further approval from your lender, provided the total loan does not go over an overalllimit. Alternatively, you may be able to 'borrow back' against earlier overpayments. With a more traditional mortgage, you usually need to apply for a top-up loan which could take longer to arrange.
These flexible features are just one aspect of a mortgage. You also need to consider the other features, the cost of the mortgage, and the type of interest rate. All these are set out in the KFI too.
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Is a Flexible mortgage right for you?
Yes, if you are likely to use these features, for example you are self-employed and receive a variable income, and all other aspects of the mortgage meet your needs then look for a mortgage that has these features.
Possibly not, if you are unlikely to use these features. A mortgage that is not as flexible may be cheaper or more suitable for you because, for example it charges you a lower interest rate, or offers you the security of fixing your payments for a period of time.
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What is an Offset mortgage?
With an offset mortgage, your main bank current account or savings accounts (or both) are linked to your mortgage(and are usually, but not always, held with the mortgage lender). Each month, the amount you owe on your mortgage is reduced by the amount in these accounts before working out the interest due on the loan.
For example: If you have an interest-only mortgage of £100,000 and have savings in your ‘offset account’ of say £25,000, you pay interest on £75,000.
If, in the next month you spend
£5,000 and so only have £20,000 in your ‘offset account’, you pay interest on £80,000.
So, as your current account and savings balances go up, you pay less on your mortgage.As they go down, you pay more.
They can also be tax-efficient if you pay tax on your savings. This is because you do not earn any interest on your savings and so don’t pay any tax on them. Instead you pay less interest on your mortgage. This amount is usually greater than the interest you would have earned after tax on your savings, if they were not offset against your mortgage. This benefit is greater if you are a higher rate taxpayer.
With some lenders, the savings accounts of family members can be combined to offset against one person’s mortgage. This could be useful if, say,
you want to help your child buy their first home.
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Current account mortgage
A current account mortgage is similar to an offset mortgage in that it ‘offsets’ the balance of your ‘savings’ against your mortgage. However in this case, rather than your mortgage and current account being separate pots of money, they are usually combined into one account. This means that the account acts like one big overdraft.
The mortgage lender will draw you up a plan which includes the minimum amount you should leave in your account each month to repay your mortgage over the agreed mortgage term. If you leave more than this in your account then you pay less interest and may pay your mortgage off early but if you leave less in your account each month, you will end up paying more for your mortgage.
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Is an offset or current account mortgage right for you?
Yes, if you are a higher rate taxpayer, have substantial savings to offset and like the idea of the built in flexibility to make overpayments and underpayments.
Possibly not, if after paying your deposit you don’t have much left in savings, and if other
mortgages have a lower interest or other features which are more important to you.
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Which repayment method?
There are two ways to repay the amount you have borrowed (the ‘capital’). Their advantages and disadvantages are described below.
Repayment mortgage (also called capital and interest loan)
Your monthly payments gradually pay off the amount you owe as well as paying the interest charged on the loan. Provided you make all the agreed payments, the loan will be fully paid off by the end of the mortgage term.
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Interest only mortgage
Your monthly payments cover only the interest on the loan. They do not pay off any of the capital. You will need to arrange to pay separately into a savings or investment scheme to build up a lump sum to pay off the mortgage at the end of the term. See Step 8 How to repay your mortgage - Interest-only. It is your responsibility to make sure you have enough money to repay the mortgage at the end of the term, otherwise you could lose your home.
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Advantages and disadvantages of the repayment methods
|
Repayment Mortgage |
Interest-only mortgage |
| Will it pay off the
mortgage? |
Yes, as long as you make all the payments agreed
with the lender, the whole loan will be repaid by the end of the mortgage
term. |
No, not on its own. You need to
have some other arrangement for repaying the loan. You will need to make monthly payments to a savings or
investment plan to build up a lump sum.
But there is a risk that the plan will not grow enough to pay off the
mortgage in full. See More
information on interest only mortgages |
| What if interest rates
go up? |
It doesn't matter which method you have, if interest rates rise, your payments will normally increase (unless you have a fixed interest rate |
Moving home and re mortgaging
Whether you move home and stay with the same lender or take a mortgage with a new lender, you will need to repay the mortgage and start a new one. |
You will usually have paid off some of the ‘capital’ and so will need to pay back less than you borrowed.
When arranging your new mortgage, even if you are borrowing more, see if you can afford the new monthly payments over the term that you had left on the last mortgage – you don't have to take a repayment mortgage over 25 years. |
Because you won't have repaid any ‘capital’ you will need to pay off the same amount that you borrowed.
But you can carry over any accompanying savings plan to your new mortgage and the mortgage term for this part of the loan will be what's left of the term of the plan (that is, you don't need to start again).
If the new mortgage is bigger than the old one, you need to decide how you will pay off the extra loan (this could be done on a repayment or interest-only basis). |
| What if you run into
problems keeping up your monthly repayments? |
You could ask your lender to extend the term or accept interest-only payments for a while. This reduces the amount you pay each month in the short term but increases the total cost of the loan. Your lender might agree to stop your payments for a while. |
Your lender might agree to reduce or even stop the mortgage payments for a while.
But you will not necessarily be able to reduce the amount you pay each month into a savings scheme (particularly if it is an endowment policy). |
| Is this a suitable
mortgage for you? |
Yes, if you want to be absolutely sure that your loan will be fully repaid at the end of the term. Don’t forget your monthly payments could increase if interest rates rise. |
Whether an interest-only mortgage suits you depends on whether you’re comfortable with taking the risk of repaying your mortgage with a savings plan which is linked to the stockmarket.
If you are not comfortable with this risk, a repayment mortgage is likely to be a better choice. |
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More information on Interest only mortgages
An interest only mortgage is one way to repay your mortgage, the information below will help you to decide whether an interest-only mortgage is right for you.
What is an interest-only mortgage?
An interest-only mortgage means your monthly payments cover only the interest on the loan. They do not pay off the amount you owe. So, at the end of the mortgage term, assuming you have made all the interest
payments, you will owe the same amount that you borrowed at the beginning. You need to have a lump sum available to pay the mortgage back in one go at this time.
Make sure you make arrangements to
pay off the loan when the mortgage ends. If you don't, you could lose your home.
How to pay off an interest-only mortgage
If you choose an interest-only mortgage, make sure you know from the outset how you intend eventually to pay off the loan. You don't have to arrange this through your lender. Your main options
are to:
Save regularly
You make payments into a savings or investment scheme each month to build up a lump sum to pay off the loan when the mortgage term ends (or sooner if you can afford it). There is a risk if the savings plan does not build up a big enough lump sum by the end of the mortgage term.
Convert to a repayment mortgage later
This might be a suitable option if,
say, your earnings are low now but are expected to be much higher in future, for example, when you've finished training or gained professional qualifications. Using an interest-only mortgage keeps your monthly payments down until you can afford the higher monthly payments of a repayment mortgage.
Because you're putting off repaying the capital you will end up paying more interest and more in total for your mortgage over the term.
Use a lump sum from somewhere else
For example an inheritance, or
selling something such as another property or a business. This is usually a risky strategy - how sure
are you that the inheritance will materialise, what happens if your business fails?
Sell the mortgaged property to pay off the loan
This is suitable only if you won't need to live in the property - for example, if it is a buy-to-let property or a second home, or you are buying something smaller or cheaper.
What you could use to pay off an interest-only mortgage?
· Endowment mortgage
· ISA (Individual Savings Account)
· Pension Mortgage
The return offered by a bank or building society account is usually too low to pay off the amount borrowed.
Instead, it's usual to accept some risk in the hope of a higher return by choosing schemes whose return is linked to the stock market. With these stock-market-linked schemes, there is no guarantee that your money will
grow enough to pay off the mortgage in full by the end of the mortgage term.
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Choosing a repayment vehicle for your interest only mortgage - some stockmarket schemes to pay off a mortgage
| Method |
Advantages |
Disadvantages |
| Endowment mortgage - a type of investment which aims to build up the lump sum you need by investing in shares or unit-linked schemes. You must save into the investment plan every month until the mortgage term ends. |
Life insurance - is built into it. Some policies include cover for critical illness, accidents or unemployment.
Risk – varies with the type of investment you choose. With-profits funds are aimed at people seeking medium-risk investments; unit-linked funds often enable you to switch between funds, so you can choose the risk profile that suits you. |
Commission and charges – these are taken out of the fund which means less of your money is invested to grow.
Inflexible – there may be financial penalties if you stop paying into the plan before the end of its full term or cash it in after only a few years.
Keeping track – Your policy provider will send you reviews every 2 years. You may need to increase your payments if the investment is not performing well. |
Individual savings account (ISA) mortgage –
You put your savings into shares or unit trusts. The ISA wrapper means that growth from investing your savings is tax-free. |
Tax – currently the return on investments held in an ISA is free of personal taxes.
Choice – You can use cash, stocks and shares and life insurance to build up your ISA savings.
Flexibility – You can vary the amount you save, stop paying in or withdraw your money at any time. You can also switch investments easily. |
Limit – you cannot pay more than £7,000 into an ISA in each tax year until 2005/2006. Then the limit is £5,000 from April 2006.
Commission and charges - set-up costs and a percentage of the fund must be paid each year.
Life insurance - not included.
Risk –could be a problem if you need access to your investment when share prices are low.
Keeping track – could be a problem as there's no automatic review process. You may not realise when you need to increase your payments. You may need to increase your payments if the investment is not performing well. |
Pension mortgage
your savings are paid into a personal pension plan from which you eventually take a tax-free lump sum and use it to repay the loan. |
Tax – you get income tax relief at your highest rate on contributions you make into the pension plan. The lump sum you get when you retire is tax free. |
Charges and premiums – can be high if you need to ensure your investment will pay off the mortgage.
Inflexible – you can't take any of the money till at least age 50 and this could rise to 55 by 2010.
Life insurance - not included. But if you die before pension age, the money in your fund could be used to pay off the mortgage - but it may not be enough.
Risk –There will be less money for your retirement because you're using the lump sum to pay off the mortgage.
Keeping track - could be a problem as there's no automatic review process. You may need to increase your payments if the investment is not performing well. |
You can mix and match by using a combination of interest-only and repayment mortgages to repay your mortgage loan.
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What are the fees and costs?
Buying a house is an expensive project, but the costs involved in getting a mortgage need not be. All mortgage related fees which you'll have to pay will be set out clearly in the key facts illustration (KFI) that the
lender or mortgage broker gives you. They must give you a KFI before you pay any fees related to the mortgage
application.
But this won't include other costs such as stamp duty or your conveyancing fees, so use the table below to see what else you might have to pay.
Adding fees to the mortgage
Often you can add certain fees charged by the broker and lender to the mortgage. This can help with the initial cost of the mortgage but will cost you more in the long run as you will pay interest on the fees. If you want to
do this ask your lender or broker to give you a KFI on this basis or if they have already done that, ask for one where the fees are not added.
Compare the costs in the KFI before making a final decision.
Incentives
Lenders sometimes offer incentives which reduce the cost to you of taking out the mortgage. This can range from a free valuation or legal fees paid to a small or large cashback. If you want to pay off your mortgage early, you may have to pay back the value of these.
Check Key Facts Illustration for this. Always compare the costs of
mortgages with these features to those without. Often those without will be cheaper in the long run.
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What will I have to pay? (these will be shown in the key facts illustration)
| Fee or charge |
What for? |
How much? |
| Mortgage broker fee |
For arranging the mortgage or providing you
with advice. |
Depends on broker; they might get commission
from the lender but some charge a fee say, for advice. |
| Mortgage booking fee or mortgage arrangement
fee |
A commitment or administration fee usually
payable to the lender to reserve the mortgage funds. |
Varies but typically £100-£500. |
| Valuation fee |
To assess that the property is appropriate security for the mortgage. |
Depends on lender and value of property. |
| Higher lending charge |
To get insurance cover in case you don't pay the mortgage, and they repossess your home and have to sell it at a loss. |
Depends on how much you borrow and the size of your deposit. |
| Fee to insure your property |
If you do not insure your property through the lender. |
Typically £25 but may be payable yearly or each time you change insurer. |
| Telegraphic transfer |
For your solicitor if you've arranged to transfer the mortgage funds electronically the same day. |
Typically £40-£50. |
| Re-inspection fee |
If the lender needs to re-inspect the property after the original
valuation, usually to check if you've made agreed repairs. |
Typically £50-100. |
| Early repayment charge |
If you repay your mortgage early. |
Depends on the terms and conditions of your mortgage and the size of your loan. |
| Fees to repay the mortgage |
For your lender when you repay your mortgage. |
Typically £75-200 as-well as any early
repayment charge. |
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What other fees will I have to pay not in the key facts illustration
The table below sets out the other fees and charges you might have to pay.
| Fee or charge |
What for? |
How much? |
| Estate agency fee |
Marketing and selling your home. |
Typically 1-3% of the selling price; ask for a
quote. |
| Stamp duty |
Tax payable to the government when buying. |
Varies depending on purchase price. |
| Legal fees |
For solicitor for searches, land registry etc. |
Budget for at least £400 - ask for a quote. |
| Survey fee |
To surveyor if you want a more detailed report on the property. |
Varies according to surveyor and type of report - ask for a quote. |
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Insurance checklist
There are many types of insurance you can take out with a mortgage – your broker or lender may try to sell you a range of policies. Some are a must to get the mortgage - others are not. Others may depend on your circumstances.
The FSA have regulated the sale of most types of general insurance products from 14 January 2005.
Which insurance do you need?
Buildings insurance
Everyone needs buildings insurance to cover their home in case the building is damaged or destroyed. While you have a mortgage, the lender will almost certainly insist that you have this cover.
Some lenders insist that you take out cover they arrange. This is called
‘tied’ insurance. Some insist you take insurance but don’t insist that you take their policy. This is called ‘compulsory’ insurance.
Many let you shop around for your own cover but charge an administration fee for checking the cover is enough. Some insurance providers will pay the fee for you.
Other lenders leave you free to choose your own insurance and do not make a charge.
Look at the key facts illustration (KFI) to see if you have to arrange tied or compulsory insurance, whether you have to pay an insurance charge, and what optional insurance the lender may offer.
Contents insurance
You will also probably want contents insurance to cover your furniture and possessions against loss or
damage.
Insuring yourself and your mortgage
There are various types of insurance to pay off your mortgage or meet the monthly payments if something unexpected happens. Whether they are right for you depends on your personal circumstances
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Different types of insurance
Insurance to cover your home
| Types of insurance |
What's it for? |
Is it right for you? |
| House buildings insurance |
Covers the cost of repairing or rebuilding
your home if it's damaged or destroyed |
Yes, everyone who has a mortgage must have this cover (though if you live in a flat you might pay for it out of the service charge instead). |
| House contents insurance |
Covers the cost of repairing or replacing your possessions if they're damaged, destroyed, lost or stolen |
Yes, if you could not otherwise afford to replace your possessions. |
Insurance to cover your mortgage
| Type of insurance |
Is it right for you? |
| Critical illness cover
Pays out a lump sum if you suffer a life-threatening illness, such as cancer or heart attack. Can be used to pay off the mortgage or for anything else. |
Yes, if clearing the mortgage would be a top priority in case of serious illness.
Yes, if you have dependants and no other household income to repay the mortgage.
No, if you have enough funds available.
No, if you want to be covered for a wider range of health problems - consider income protection insurance instead.
No, if cover would not apply to you because of an existing illness. |
Income protection
Replaces a substantial part of your income if you are unable to work over a long period because of illness or disability (so could be used in part to meet your mortgage payments). Continues to pay out until you recover or reach retirement whichever is sooner. |
Yes, if you can afford it and the cover clearly applies to you - for example, if you are in good health.
No, if you have other sources of income in the event of illness, for example if you have a policy through work/your employer.
No, if cover would not apply to you, which is possible if you have existing health problems or a dangerous job. or your employer). |
Life insurance/mortgage protection cover(term insurance)
Pays off the mortgage loan if you die.
Note that endowment mortgages automatically include life cover - you do not need a separate policy for any amount covered by the endowment policy. |
Yes, if you have dependants.
Yes, if you share the mortgage costs with someone else (joint mortgage).
No, if you have no dependants and it is not a joint mortgage. (The lender will take possession of your house, sell it to get their money and the rest goes to your estate.)
No, if you have enough life cover already. |
Mortgage payment protection insurance (MPPI) also called ASU (accident, sickness and unemployment insurance)
Meets your mortgage payments for one, or maybe two years if you are unable to work because of illness or unemployment. |
Yes, if the cover clearly applies to you - for example, if you are a permanent full-time employee in good health.
No, if you have other sources of income to repay themortgage in the event of illness or unemployment.
No, if cover would not apply to you, which is possible if you are a contract worker, part-timer, self-employed or have existing health problems.
No, if you already have enough cover (perhaps through income protection insurance or your employer). |
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Is it right for you?
Where you have to take out the
insurance as part of a mortgage deal it might not be the cheapest or best
available, or it might not be right for you.
Don’t forget the premium can also
increase in the time you have to keep it – you may find it difficult to cancel
this policy later unless you repay the mortgage.
Watch out for these costs when
considering a ‘tied’ deal. Remember there are plenty of good mortgage deals around that don’t make you buy
insurance from the lender or broker.
It may be convenient to arrange insurance with your lender or mortgage broker but you don’t have to accept a mortgage deal with insurance tied in. It’s worth shopping around for insurance. You will often be able to save money compared with what’s on
offer from the lender.
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Keeping up your repayments
You can afford your mortgage now, but what if...?
Taking out a mortgage is one of the biggest financial commitments you can make, both in terms of the amount you borrow, and the length of time it may take to repay it. You may be able to afford your mortgage today but what would happen if?
Your income falls?
Your income could fall if:
- you lost your job, or
had to take a drop in income;
- you or your partner
stopped work to have a child or to look after a dependant; or
- you became ill and
couldn't work.
Interest rates rise?
- Your mortgage payments to your lender could go up (or
down) if interest rates change. Mortgage interest rates are related to the
interest rate set by the Bank of England and lenders usually apply some or all
of any change to your mortgage.
- Unless your mortgage
rate is fixed for the full term of your mortgage, this will affect you.
- Often, special rates are for a set period so when they come to an end your payment will change - it
could be much higher.
Although interest rates
have been stable over the past few years, this could change. In the past, interest
rates have risen from 7.5% to 15% in just a few years. Interest rate rises
could increase your monthly payments considerably, making it difficult for you
to afford them.
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Examples of the affect of interest rate rises
Example one - repayment mortgage
You borrow £100,000 over 25 years
on a repayment mortgage, initially at a rate of 4%:
| Interest rate |
Monthly repayment |
Increase from 4% |
| 4% |
£528 |
- |
| 6% |
£644 |
+£116 |
| 8% |
£772 |
+£244 |
| 10% |
£909 |
+£381 |
| Interest calculated monthly |
Example two - interest only
mortgage
You borrow £100,000 over 25 years
on an interest-only mortgage, initially at a rate of 4%:
| Interest rate |
Monthly repayment |
Increase from 4% |
| 4% |
£333 |
- |
| 6% |
£500 |
+£167 |
| 8% |
£667 |
+£334 |
| 10% |
£833 |
+£500 |
| Interest calculated monthly |
Don't forget that rates could be higher than those shown here.
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Mortgage payment calculator
When setting up a mortgage or re-mortgaging it is tempting to consider only what you will be paying per month at current rates of interest. If interest rates rise your payments will go
up and over the full term of the mortgage you could end up paying a great deal more than you expected.
It is also worth bearing in mind that some of the fixed rate interest deals look more expensive now, but they may turn out to be cheaper in the long run if interest rates rise above the fixed rate.
These calculator gives you the chance to work out what the effect of various interest rates will be on your payments.
If you have a repayment or interest only mortgage see what effect interest rates will have on your payments.
Go to mortgage calculator
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What can you do now to help protect yourself?
- Plan your budget based on what you might have to pay in future as well as the
initial cost
- Don't forget to include all your household expenses, such as buildings and/or
contents insurance premiums, council tax, etc.
- Try not to take the maximum mortgage on offer - just because you can afford it
now, doesn't mean you can afford it in the future.
- Think about whether you need a fixed rate so that you know your mortgage
payment won't go up for a given period - don't forget that if rates fall, your
payment won't.
- Build up your savings so that in an emergency (for example, you lose your job)
you can still afford to pay your mortgage and bills for a short time.
Use the comparative tables on the FSA’s website to compare rates on savings accounts
- Work out how long you could live on your savings if you lost your job.
- Check what benefits your employer would provide if you became ill.
- Insurance - various products can insure you in the event of redundancy,
critical illness, or accident. You
should consider these but make sure they meet your needs: there are
restrictions on when and how much they will pay out. Make sure you understand the limitations of any policy and how it protects you. See our insurance
checklist
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What if you do get into difficulties?
Talk to your lender if you cannot meet your mortgage payments, they will have a set procedure for dealing with
your case.
State benefits - may be available but may cover you only after an initial waiting period; for example:
- you won't qualify if you have a joint mortgage and only one of you loses your
income;
- you won't qualify if you have savings of more than £8,000;
- you may only qualify for help nine months after you become unemployed (unless
you took your mortgage out before October 1995);
- payments will only cover the 'interest' part of the mortgage; and
- there is a limit on the amount of mortgage that qualifies.
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Reviewing your mortgage
Every year your lender must send you a statement and this is a good opportunity to check your mortgage and consider any changes.
You should also review your mortgage whenever the period of a special deal -
for example, a fixed or discounted interest rate - comes to an end.
Your annual statement
Use your annual statement to check that your mortgage details are as you would expect them to be. The statement will include:
- the date and amount of payments you have made during the year compared to those
that were due, including payments for any tied products that you took out
through the lender (for example, buildings insurance);
- the amount of interest you have been charged over the year;
- the balance of the loan still owed at the statement date;
- the term remaining on the mortgage;
- the cost of paying off the mortgage including any early repayment charges; and
- where early repayment charges apply, the date that they will stop.
If you have a repayment mortgage, the balance shown on your statement should get smaller over the years.If you have an interest-only loan, the balance should stay the same, unless you choose to make some early capital repayment.
If you have an interest-only mortgage (or part of your loan is on that basis), the statement should either give details of any savings scheme you have taken out through the lender or warn you that you should have some arrangement in place for repaying the mortgage at the end of its term.
Check that it is on track to do this.
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Are you getting a good deal?
If you move home, you'll probably shop around to find a competitive mortgage. Even if you are not moving, there is no reason to stick with a poor deal.
Questions to ask yourself
Q Are you still on a special deal or are you now paying the lender's standard variable rate?
If you are still on a good deal then make a note of when
this finishes and remember to review it again closer to this time.
Q Would you have
to pay an early repayment charge to switch?
It may not be worthwhile switching yet depending on how
much the charge is. If this is the case, make a note of the date that the early
repayment charge will no longer be payable (from your annual statement) and
review it again closer to the time.
Q Are you paying
the lender's standard variable rate and there are no early repayment charges?
You should definitely review the products in the market and see if you can save money by switching to a new deal. Use the information in your annual statement, to compare your mortgage with other mortgages available both from your current lender, and from other lenders. Use the information in your statement such as the amount you owe, the term remaining, the interest rate and monthly payment to shop around.
Get a key facts illustration (KFI) for mortgages
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Switching your mortgage
Gone are the days when you took out a mortgage and kept the same one for 25 years. Nowadays, it’s common to shop around every few years to make sure you
are getting a good deal.
Switching can cut your monthly payments. But you’ll need to weigh up these monthly savings or other benefits against the up-front costs of making the switch. The main factors to consider
are set out below.
Make sure you recoup the costs of switching over a period which is less than any special deal – for example, over less than two years if you switch to a two-year discounted rate.
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Which type of deal do you want?
Do you want a special interest rate deal or, say, a mortgage with flexible features?
Mortgage Features
Do you want a repayment or an interest-only loan or a combination of both? You don’t have to stick with the same repayment method. If you are switching from an interest-only to a repayment mortgage, you do not have to stop or cash in any associated savings scheme.
Which repayment method?
Switching can be an opportunity to borrow extra money, especially if the value of your home has increased since you took out your existing mortgage. But don’t borrow more than you can afford to pay back. Don't forget that you may be saving money now which means you can afford the new payment, but this payment could still go up in future unless you take a long-term fixed rate.
When switching your mortgage, this can also be a good opportunity to pay off some of your mortgage and borrow less.
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How much can I afford?
What will it cost you?
Especially in the early years, your mortgage might have early repayment charges. These can be hefty if you are still in the period of a special deal, such as a fixed, discounted or cashback mortgage.
Even if there are no early repayment charges, your lender might make an administration charge and if you are switching to a new lender, your home will have to be valued and there will be legal costs to pay. With some mortgage deals, the lender will pay these fees for you.
What are the fees and costs?
Also, if you are switching lender,
check whether they will charge you interest to the end of the month even if you pay off the mortgage earlier. In this case, make sure you switch your mortgage at the end of the month.
Remember that if a deal has no fees
the rate might not be as good as one that charges fees.
Always ask for a KFI for mortgages
you are considering and compare the different deals to work out which is best for your circumstances. Remember, when you’ve found a good deal, it’s worth going back to your existing lender to see if it will offer you a similar deal to keep you as a customer.
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