Mortgage advice

What is a mortgage?

A mortgage is a traditional method of borrowing to purchase a property, either residential or commercial. The money is obtained through a variety of lenders and repayments can be offered through interest only or repayment and through variable methods which are listed below.

Types of mortgage interest rate

1. Variable Rate

This implies that the interest rate currently being charged on the mortgage is that of variable and is the standard repayment rate of interest. This type of mortgage's interest rate depends on the current state of the economy. As interest rates are continually adjusted by the Bank of England’s MEC committee payments can vary. Most mortgages typically come with a period of variable rate normally after a period of introductory level rates (be they fixed, capped or discounted).

2. Capped

Like a variable rate mortgage this varies with general interest rates but is capped at a certain interest rate and cannot rise above it, but can fall. Most promotional rates last for a period of normally 2 or 3 years, after which variable rates are applied.

3. Discount

This is the typical option of the first time buyer. A lower introductory rate is used at a time when typically most new homeowners find money tight. Occasionally this type of mortgage can incur early redemption penalties if the mortgage is changed over to another provider.

4. Fixed

As it implies, the interest rate is fixed for a period of time normally, 2, 3 or 5 years, and gives you the peace of mind of knowing that your monthly payments cannot increase.
Typically, this is for a period of the mortgage with the remainder reverting back to the variable rate. This can be viewed as a more secure option.

5. Tracker

Similar to the discount mortgage the tracker is linked to the bank base rate, currently 5.75%, normally plus a margin of usually half to one percent. It rises as the bank base increases and obviously decreases when it reduces.

6. Cash Back Deals

These offer the enticement by offering you money back on the completion of your mortgage, but almost certainly the interest rate charged is that of the variable rate and therefore not particularly competitive, although they can be attractive when rates of interest are low.

Repayment Methods

Interest only mortgage

With an interest only mortgage the loan itself is paid, with the final lump sump to be paid at the end of the mortgage term. Usually the mortgage itself is attached to an investment product which the consumer pays into for the term of the mortgage. This has the potential to build up a lump sum that can then be used to pay off the mortgage. However the mortgage doesn’t have to have this investment option and may instead be relying on other
investments or perhaps an inheritance.

Listed below are the three type of interest only mortgage.

Endowment

Until recently this was the most common type of interest only mortgage. Recently policy changes however have stripped these products of any tax benefits. The performance of this type of product recently has been poor and Wrightways now wouldn’t recommend this product and doesn’t actually supply it.

ISA Plan

This mortgage entails an ISA be paid into, building up a lump sum of capital which is used at the end of the mortgage term to pay off the loan. This runs alongside a conventional interest only mortgage and is considered be a sophisticated financial package. Currently ISA's are a tax efficient way to save because income derived from them is tax-free. However due to the Volatile nature of the investments market there is no guarantee your ISA will return the lump sum required to pay of your loan.

Pensions mortgages

A pension mortgage is tax efficient and life assurance is provided however it is not a suitable solution for everyone. Like other interest only mortgages only the interest is paid back with a lump sum due at the end of the term. There are a number of tax advantages with a pension mortgage, as the payments into the pension plan qualify for tax relief at the basic rate on payment.

Those in the top rate band currently 40% may claim higher rate tax relief on pension contribution. If life cover is required a term insurance policy can be linked to the pension plan, which will also qualify for tax relief at the top rate on your premiums. However this does come with some disadvantages. For example if you were to become unemployed or join a pension scheme at work then you would may no longer be eligible to make contributions to the scheme. Cashing in this plan early may result in financial penalties.

Remortgage

There has never been a better time to remortgage! Many products now come with free legal advice and valuations of your property so the cost of moving your product is now almost nothing!

With rates being low your mortgage could be costing you more than it has to. With Wrightways we can advise you on whether you are paying too much and what might be the best package for you.