Choosing a mortgage is a tricky task. It is a huge commitment (because of course,
Your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it
As there are so many different types of mortgage to pick from it is worth getting independent
financial advice in order to find the right mortgage for you
, the property
and the current financial climate
You will find that there are plenty of people willing to help you find a mortgage.
The Estate agent (Americans might refer to one of these as a Real estate agent or even a Realtor) representing the vendor (seller)
of the house will be keen to ask if you have a mortgage.
Other than satisfying themselves that you are a serious buyer, with money behind you,
they are also hoping to make a little extra money
by acting as a mortgage broker. The broker you use (either a traditional financial advisor or an in-house
estate agent mortgage advisor) is not paid by the client, but instead receives a finder's fee from the lender.
As a house-buyer you should never have to pay for mortgage advice.
Types of mortgage
The most traditional form of mortgage is a variable rate mortgage..
The rate is the lender's SVR (Standard Variable Rate, see the list of mortgage jargon below for more details).
These rates can go up and down whenever and however the lender wants. Usually they pretty much
follow the national base rate of interest. Compare to Tracker mortgages.
A discount mortgage is one in which a discounted rate
(a certain percentage lower than the lender's regular SVR)
is agreed for a fixed period of a few years.
Discounts are sometimes stepped.
You might, for example, find a stepped discount mortgage, with a 1% discount
off the lender's SVR in the first year, 0.5% in the second year
and a 0.25% discount in the third year.
A fixed rate mortgage sets an unchangeable interest rate, fixed for a certain period
(usually 3 to 5 years). For the borrower these mortgages eliminate the uncertainty of
monthly repayments which might become more expensive if interest rates go up.
The trade off is that if interest rates were to go down during the fixed period, you would be
missing out on a cheaper rate. Clearly choosing a mortgage is largely to do with
predicting the future of both the financial and housing markets.
Capped rate mortgages set, for a fixed period, a maximum rate above which the
lenders variable interest rate will not climb.
If the variable rate is below the capped rate, the variable rate will be used instead.
Clearly, the mortgage company are not a charity,
so the cap will be set to take into account what the lender believes interest rates will
do during the capped period.
However, if you are worried about interest rates rising beyond your ability to repay,
a fixed rate or capped mortgage might be the way forward.
Capped rate mortgages sometimes also have a minimum rate of interest attached.
This is sometimes referred to as a 'cap and collar' mortgage (the cap is the maximum and the collar is the minimum rate).
The interest rate for a tracker mortgage is linked to the national base rate of interest
rather than the mortgage company's SVR (standard variable rate).
Any decrease in the base rate is 'tracked', or matched, immediately by the mortgage's rate,
even though the lender's normal variable rate might not have gone down.
Of course, the base rate might go up and your mortgage's interest rate would go up with it.
On the bright side, if you'd picked a variable rate mortgage you can be sure that the lender's SVR
would have gone up by at least the same amount.
Tracker mortgages are good for people who believe that the base rate will drop over a period
of time, and who want to take advantage of every tiny drop as it happens.
Less popular these days, an endowment mortgage is one in which the borrower pays off only the interest during
the term of the mortgage. The remaining loan, which is to say the capital, is paid off with the proceeds of an
endowment policy (or some other investment) which matures at the same time.
Current Account Mortgages
Current Account Mortgages, or CAMs are the most modern and flexible of mortgages.
They usually allow you to make overpayments and even underpayments of your mortgage,
great news if you get a big bonus and don't want to be penalised for paying off a chunk of your debt,
or if your income is irregular and some months you can only afford to pay lass than usual.
Mortgage lenders offering CAMs have begun to offer many options. One is an 'offset' mortgage,
where you also link your savings account with your mortgage.
These savings are offset against the mortgage, meaning that rather then earn interest on your
savings you instead use that interest to pay off the mortgage. You could have done that
by siphoning the interest off the top of your regular savings account of course, but this
was the lender will give you the interest at the same rate as the mortgage, which
is sure to be a higher rate than most savings accounts will give you.
There are many more types of mortgage, this list represents only the common ones.
However like ice cream flavours, sometimes they are just the same things in different combinations.
For example, you might see a stepped discount tracker with a cap and collar.
Mortgage lenders, use plenty of very specialised jargon
. Anyone looking at mortgages will be expected to learn several new acronym
s. To confuse matters, different companies will use different (but synonomous
Here is an attempt to clarify some of it.
Annual Percentage Rate
The fairest way to compare one mortgage with another is
to compare their APRs. It includes not only the interest rate (calculated for a year)
but also any charges and arrangements fees charged by the lender.
Standard Variable Rate
The rate the mortgage lender uses for variable rate mortgages.
This rate of interest is always higher than the base national interest
rate and can change whenever the lender wants it to. Some lenders have agreements, such as
"our SVR will never be more than 1% above the base rate". This, while reassuring, should not
be confused with a tracker mortgage in which the interest rate is linked directly to the base rate, giving
the borrower the immediate benefit of any base rate reduction.
Confusingly, you might also hear it called the lender's 'basic rate'.
Loan to Value
The 'loan to value' of a mortgage is the amount of the loan expressed as a percentage of the
value of the property against which that loan is secured.
This equates to the (inverse of the) size of the deposit.
For example, a 90% loan-to-value mortgage on a ?100,000 house would require a 10% (?10,000) deposit..
Mortgage lenders often describe the minimum deposit required in terms of the maximum LTV.
While many will not lend over 95%, some will offer 100% and even 125% mortgages.
You should generally expect to pay lower a lower APR on a mortgage with a lower loan-to-value.
MIG / MIP / MIF
Mortgage Indemnity Guarantee / ... Premium / ... Fee
The MIG is a fee which the borrower pays to the mortgage lender. The lender uses it to insure
themselves against potential losses caused by the borrower defaulting on the mortgage.
The MIG is sometimes paid upfront but is more usually added on top of the borrowed amount.
It is calculated differently by different companies, and can be anything from a few hundred pounds to a couple of thousand.
If you redeem (pay back or re-mortgage) before the full term is up, you may also have to pay the
MIG in full.
Here's how it works.
If you are unable to make repayments on a mortgage then the lender repossesses your home.
If they sell it on for a loss (quite likely, as they will be in a hurry to get rid of it)
then the insurance they purchased with your MIG will pay for any shortfall.
So you'd think it was sensible to pay the fee to prevent problems if
you're house is repossessed, right? Sadly not. In these situations, the insurance company can and
will come after you to recoup their losses.
You pay the MIG to protect the mortgage lender, not yourself.
MIGs are becoming less common except on mortgages with a high loan-to-value.
There is no advantage (to you, the borrower) in picking a mortgage which includes a MIG over one which
When a mortgage is paid off early (either because the borrower has become unexpectedly wealthy or,
more commonly, because they are re-mortgaging to find a better interest rate), a penalty fee
is usually imposed. This penalty is calculated differently by different lenders,
but will often be a percentage of the remaining loan.
Redemption penalties are so significant that borrowers consider themselves 'locked in'
to the mortgage for the period in which the penalty is payable.
This lock-in period is, for most people, only a few years, and usually ends at the same time
as any fixed or capped rate, or discounted rate scheme. Sometimes though, redemption penalties are applicable even
after the mortgage has reverted to the lender's variable rate.
An extended tie-in period which lasts for longer than the scheme is known as 'overhang',
and can used to lock borrowers in to the mortgage after it has ceased to be the cheapest option.
Redemption penalties are very common.
As long as you are comfortable that, during the period in which the penalty is applicable,
the deal you are getting is a good one then, only exceptional circumstances will necessitate you paying it.
Overhang, however, is scary and to be avoided. Many advisors would ignore mortgages with
on overhanging tie-in period. When comparing cheap-looking deals
(for example, hugely discounted rates for a couple of years, with an initial
cash-back lump sum) be sure to look out for overhang.
These offers will sometimes have hugely overhanging redemption penalties.
Some good questions to ask are:
- When the discount runs out, what interest rate will you be paying?
- Is that interest rate variable, capped or fixed?
- Is the interest rate linked to the base rate of inflation, or can that interest rate go up whenever the lender feels like it?
- If you find a better deal, how much will to cost to redeem this mortgage?
- How long will it be before you can redeem without paying that penalty?
The length of time over which the mortgage will be repaid. The average mortgage has a term of 25 years.
During this time, compound interest means you pay back almost double what you borrowed.
Recently there has been some much publicised concern about 50 year mortgages. Over 50 years the
total amount repaid is much more painful, not to mention the fact that you repay the loan for pretty much
your entire life.
A survey of the property undertaken by the lender to assess its value.
A valuation is the only survey strictly required by most mortgage companies.
However, unless the house is brand new it is also worth paying for the more detailed home buyers report
or even, with very old properties, a structural survey. These two surveys will cost more but will involve a
deeper inspection of the property and very detailed feedback on any work which the property requires.
As I've never tried to buy a house in another country, there might be a British slant to this
writeup. While I'm sure the basic concepts are universal, if you think I need to add something, or clarify some local aspect of this writeup, do let me know