organisations (building societies
and credit unions) or proprietary lenders (typically
banks). Since 1982, when the market was substantially
deregulated, there has been substantial innovation and
diversification of strategies employed by lenders to
attract borrowers. This has led to a wide range of mortgage
types.
As
lenders derive their funds either from the money markets
or from deposits, most mortgages revert to a variable
rate, either the lenders standard variable rate or
a tracker rate, which will tend to be linked to the
underlying Bank of England (BoE) repo rate (or sometimes
LIBOR). Initially they will tend to offer an incentive
deal to attract new borrowers. This may be:
A
fixed rate; where the interest rate remains
constant for a set period; typically for 2, 3, 4,
5 or 10 years. Longer term fixed rates (over 5 years)
whilst available, tend to be more expensive and therefore
less popular than shorter term fixed rates.
A capped rate;
where similar to a fixed rate, the interest rate cannot
rise above the cap but can vary beneath the cap. Sometimes
there is a collar associated with this type of rate
which imposes a minimum rate. Capped rate are often
offered over periods similar to fixed rates, e.g.
2, 3, 4 or 5 years.
A discount rate;
where there is set margin reduction in the standard
variable rate (e.g. a 2% discount) for a set period;
typically 1 to 5 years. Sometimes the discount is
expressed as a margin over the base rate (e.g. BoE
base rate plus 0.5% for 2 years) and sometimes the
rate is stepped (e.g. 3% in year 1, 2% in year 2,
1% in year three).
A cashback mortgage; where
a lump sum is provided (typically) as a percentage
of the advance e.g. 5% of the loan. To make matters
more confusing these rates are often combined: For
example, 4.5% 2 year fixed then a 3 year tracker at
BoE rate plus 0.89%.
With
each incentive the lender may be offering a rate at
less than the market cost of the borrowing. Therefore,
they typically impose a penalty if the borrower repays
the loan; this used to be called a redemption penalty
or tie-in, however since the onset of Financial Services
Authority regulation they are referred to as an early
repayment charge.
Self
Cert Mortgage
Mortgage lenders usually use salaries declared on
wage slips to work out a borrower's annual income
and will usually lend up to a fixed multiple of the
borrower's annual income. Self Certification Mortgages,
informally known as "self cert" mortgages,
are available to employed and self employed people
who have a deposit to buy a house but lack the sufficient
documentation to prove their income.
This
type of mortgage can be beneficial to people whose
income comes from multiple sources, whose salary consists
largely or exclusively of commissions or bonuses,
or whose accounts may not show a true reflection of
their earnings. Self cert mortgages have two disadvantages:
the interest rates charged are usually higher than
for normal mortgages and the loan to value ratio is
usually lower.
100%
Mortgages
Normally when a bank lends a customer money they want
to protect their money as much as possible, they do
this by asking the borrower to pay a certain percentage
of the loan in the form of a deposit.
100%
mortgages are mortgages that require no deposit (100%
loan to value). These are sometimes offered to first
time buyers, but almost always carry a higher interest
rate on the loan.
UK
mortgage process
UK lenders usually charge a valuation fee, which pays
for a chartered surveyor to visit the property and
ensure it is worth enough to cover the mortgage amount.
This is not a full survey so it may not identify all
the defects that a house buyer needs to know about.
Also, it does not usually form a contract between
the surveyor and the buyer, so the buyer has no right
to sue if the survey fails to detect a major problem.
For an extra fee, the surveyor can usually carry out
a building survey or a (cheaper) "homebuyers
survey" at the same time. |
