loan search for homeowners

There are four main types of mortgages on the market including interest only, fixed rate, variable and discounted rate. All are significantly different and offer varying advantages.

Over 200,000 homebuyers in London during 2005 took out an interest-only loan according to the Council of Mortgage Lenders (CML). None of whom had a repayment vehicle in place and of these, 60,900 were first-time buyers.

There are no figures available for the total number of homebuyers with interest-only loans. However, figures for new interest-only house purchase loans have been running at between 10 and 20 per cent for all new first-time buyers over the past 10 years, and roughly the same for other homebuyers.

With more than half of all mortgages and remortgages now arranged through an intermediary, mortgage brokers could be in the firing line for claims of mis-selling if the homebuyer's loan reaches maturity and there is not enough cash to pay off the loan.

Using an interest-only mortgage will keep your monthly payments down until you can afford the higher monthly payments of a repayment mortgage.

But because you're not paying anything off the amount you owe, you will probably end up paying more interest in the long run. With an interest-only mortgage, your monthly payments only cover the interest on the loan and do not actually pay off the loan itself.

Interest only mortgages or remortgages are a high risk strategy that could come back to haunt advisers that set up the arrangement. An increase in interest rates could also hit these clients hard as they would have no fall-back option of reverting to an interest-only mortgage.

Simply enough, to combat the issue, clients must be told that if they can not afford to pay for a mortgage, don’t take one out.

If you take this option you will need to make separate arrangements to pay off the loan when the mortgage ends. You can make your arrangements through your lender – but it isn’t compulsory.

In comparison the CML reported in April that almost nine out of 10 first-time home buyers chose a fixed-rate mortgage loan in February.

Its report added to reports that record numbers of first-time buyers were taking up fixed-rate mortgages amid fears that interest rates will continue to rise. But how safe is a fix-rate mortgage?

Fixed-rates at least offer some protection if interest rates do rise. However, buyers shouldn’t be easily persuaded by the low rates of interest alone and should consider all the other costs of a new mortgage.

Soaring house prices, especially in London, mean first-time buyers are having to save even harder for a deposit. Nationwide said last week that the average price paid by first-time buyers in the UK had increased from £131,903 in April 2006 to £145,801 in 2007.

That means a first-time buyer today would have had to find almost £700 extra for a 5 per cent deposit as the house prices have increased by a massive 10 per cent.

New homeowners need to know exactly how much their monthly repayments will be so they can budget, which is why fixed rates are becoming increasingly popular.

Borrowers should look out for higher lending charges. These are fees imposed by a lender when the amount borrowed exceeds a given percentage of the value of the property.

Those with a small deposit are often affected the most as the charge usually applies when borrowing more than 90 per cent of a property's value. The fees can also be as high as 7.5 per cent of the amount borrowed.

However, not all fixed-rate mortgages come with high fees and there are other issues to be addressed such as the guarantee that interest rates elsewhere won’t lower. Also borrowers should know if they will actually be able to commit to paying off the mortgage for the fixed term.

While fixed-rate mortgages or remortgages may seem to be the borrower’s way around forking out hundreds of pounds with rate rises, it is an agreement that must be entered into with caution and you must be very positive that your financial situation will either stay the same or improve.

Every mortgage lender has a standard variable rate, or SVR, of interest on which it bases all its mortgage deals.

The standard variable rate is, in turn, based on the Bank of England’s base lending rate – and this is decided at monthly meetings of the Bank’s monetary policy committee, or MPC.

Every time the MPC raises its rate, mortgage lenders race to increase their standard variable rates, generally by the same amount. And every time the MPC lowers its rate, the lenders do too.

However, that doesn’t mean mortgage lenders charge the same as the Bank of England.

Mainstream lenders which target customers with reasonable credit ratings, generally set their standard variable rates at about 2 percentage points above the BoE’s base lending rate.

This means if the base lending rate is 5.5 per cent, most SVRs will be around 7.5 per cent. But some lenders will set theirs higher, while others, who are trying to increase their customer base, might go a bit lower.

A discounted rate mortgage is a variation on the Standard Variable Mortgage Rate.

In order to maximise their business, the lenders will offer a discount off the standard variable mortgage rate and apply the discount for a period of time. The borrower's monthly payments will alter to reflect the change in the lenders standard variable mortgage rate but will stay a margin below.

Although a discounted rate means fluctuating payments, a big advantage is that from day one the borrower knows by how much the mortgage will increase on the day the discount ends.

Whatever plans you make to repay your mortgage, remember to review them from time to time to make sure that they are still on track. In the first place, interest only loans should be a last resort and should always only borrow what you are guaranteed to be able to pay back.

 

The author is Melinda Varley who is an experienced journalist currently specialising in articles for the financial field. Melinda has held several positions for magazines and newspapers and has written hard copy and for online audiences, both in the UK and Australia, which is where she originates from.

This article does not represent ‘financial advice’ as each person's individual requirements will be unique to their needs. If there is something in the article which you wish to rely on then please check those details with the person with whom you arrange a secured loan, remortgage or any other financial service.

The views in this article represent those of the author and not those of Netbasic Limited.