Mortgages

Summary

Interest Only Mortgages
These loans require a payment to the lender in respect of the interest on the loan. Payments are usually made monthly. At the end of the term of the loan there will still be an amount outstanding equivalent to that when the loan was taken out. For that reason it is prudent to start a form of savings plan to run along side this type of loan so that the outstanding capital can be repaid at the end of the term. Subject to the movement of interest rates, the payments to the lender would remain level throughout the term.

Capital and Interest Repayment Mortgages
With a capital and interest mortgage, often called a repayment mortgage, the lender receives a monthly payment which is made up of both some capital and some interest. In the early years, the payments will be mainly interest as the amount outstanding is higher. However, as this amount reduces, so does the interest due and so in later years the amount will pay off the capital quicker. Providing the payments are maintained throughout the term of the mortgage this method should repay the outstanding debt by the expiry date.

Buy-To-Let Mortgage
Buy-to-let mortgage schemes are aimed at those individuals who wish to buy property as an investment, with the objective of obtaining rental income from their tenants. They may also view property as a good investment for capital growth.

Generally, the lender will not calculate the amount which it is willing to lend on a multiple of the borrower's income, but rather on the amount of rental income which it expects to generate. An example would be; Maximum loan to value 80%, with 130% of expected annual rental income.

The lender must exercise care in connection with the tenancy agreement and the borrower must take care with regard to appropriate tenant selection.

Secured Loans and Unsecured Loans

Secured Loan
A secured loan is 'guaranteed' by some sort of collateral, usually your home, which will be at risk if you fail to make repayments. You can use it for just about any reason. Some lenders will make secured business loans as well. Most people choose secured loans as opposed to unsecured loans because the interest rate is often lower. The amount that you borrow may be limited by your collateral value. The larger the collateral, the larger the amount of loan money that you can secure on it. If you have had credit problems in the past, this may affect your ability to get your funding, however, there are lenders that will consider providing loans to people with adverse credit history.

Unsecured Loan
An unsecured loan is not guaranteed by any collateral, so the applicant must have a positive credit record and financial situation. Usually you can use your loan for almost any reason (some lenders may have restrictions). Loan amounts can range widely.
Companies that issue unsecured loans generally require:
• A positive credit history
• Your income is such as that your payments would not be a burden to you
• You have previous good credit references
• If you feel that your credit situation might prevent you from eligibility, you can apply for a secured loan instead.

• Think cafefully before securing other debts against your home.
• YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
• The FSA do not regulate all Buy-to-Let mortgages.
• The availability of a loan can depend on the credit status of an individual.

This summary in no way constitutes the complete explanation of mortgages or loans or how they may suit you. For further details of mortgages and loans and how these may help your personal circumstances please seek independent advice.

Protecting your Mortgage

Mortgage Protection Assurance
This is a form of decreasing term assurance (see Term Assurance) and is designed to reduce in line with the outstanding capital on a repayment mortgage. Therefore if the client dies during the term of the loan, the assurance should pay off the outstanding debt. 

Endowment Policies
An endowment is a combination of life assurance and regular savings and is often used as security to pay off the outstanding debt on an interest only mortgage. If the client dies during the term of the loan then the life assurance will be sufficient to repay the outstanding amount on the mortgage. If the client survives to the end of the term the savings should have been sufficient to repay the outstanding capital at this time, although there is no guarantee with this.

ISA / UT
As previously mentioned, an interest only mortgage will require some method of saving to run alongside so that the capital may be paid off at the end of the term. ISAs and UTs (see Capital Investment) can be used for such a purpose. Payments can be made either on a single, annual or monthly basis to build up a fund from which the outstanding capital can be repaid.

Pension plans
Pension plans may also be used to help pay off the outstanding debt at the expiry of an interest only mortgage. The regular payments into a pension plan will build up a fund which can be accessed at retirement. Part of this fund, typically 25%, may be taken as a tax free cash sum and it is this which can be used to repay the debt. This method of saving can be particularly useful for higher rate tax payers as tax relief is given at the highest rate on premiums into the plan.

This summary in no way constitutes the complete explanation of mortgage plans or how they may suit you. For further details of mortgage plans and how these may help your personal circumstances please seek independent advice.