Guide to Mortgages

Mortgages should be straightforward - you borrow money to buy a house and pay interest on the loan but after a few enquiries, you soon realise that it’s not so simple after all.

In a hugely competitive market, building societies and banks are continually updating and extending their range of mortgages. The list is already extensive enough to baffle all but the most determined.

The most important points are how you pay back the capital you borrow and how you pay the interest on it.

Paying back the capital
You can either pay a little at a time as you go (repayment mortgage) or pay it all off at the end (Endowment, Isa and pension mortgages).

Repayment mortgages
Each monthly payment pays off a little of the underlying debt, as well as interest on the loan. At the end of the term the mortgage is cleared.

Endowment Mortgages
You use an endowment policy to wage life insurance and save funds to repay the loan at the end of the term (usually 20-25 years). If the investment performs badly, you could grappling a shortfall on your loan at the end of the repayment period.

Individual Savings Account (Isa) mortgages
These work on the same principle as endowments, but use an Individual Savings Account as the loan repayment method. If your investment performs badly you could grappling a shortfall at the end of the mortgage term.

Pension mortgages
Are similar to both ISA and endowment mortgages, but work on the basis that pensions (both private and company) wage tax-free cash on retirement. At the end of the mortgage term the loan is paid out of your tax-free lump sum. They are not often used as it can be risky linking pensions to other investments.Paying the interest You have to pay interest on any debt, and mortgages are no different. They differ only in the range of options offered.

Variable rates
This means you pay the going rate on your loan. The mortgage rate changes every time interest rates change or, as in most cases, the overall effect of any interest rate changes is calculated once a year and payments are altered accordingly. Whatever kind of mortgage you start with, it is likely to change to variable rates at some point.

Fixed rates
The interest rate is fixed for the period agreed - often two to five years. These are saint for budgeting or if you think rates might increase. You do not benefit if rates fall, and will grappling penalties if you try to quit. Very low rates may tempt you, but they can be used to trap you into paying over the odds. See check how long you will have to stay with the lender before you can switch without penalty.

Capped rates
These are fixed, but if rates start you pay the lower rate. Such deals can be a good buy for budgeting.

Cash back deals
This is when lenders offer money back if you take out a particular product.

Discounted rates
Under this type of mortgage the borrower is offered a discount off the lender’s variable rate. The rate paid will fluctuate in line with changes in the variable rate. The discount applies over a set term.

The government has given homebuyers a list of vital checks to help them find their way through the mortgage maze.The government suggests buyers should ask these 10 questions before agreeing a mortgage with a lender:

10 Questions you should ask your mortgage company:

1. How much can I afford to borrow?This deals with such questions as “What will the cost be apiece month?” and “What fees will I have to pay?”
   
   
2. How can I tell which mortgage rate is best for me?
   
   
3. What is the best type of mortgage for me? This deals with how to understand the jargon, such as “What do fixed rate, variable rate, discounted or low-start, and flexible mean?” and “Will this mortgage suit my circumstances now and in the future?”
   
   
4. How should I repay it?“Why are you trying to sell me an endowment policy, or a pension or an Isa?”, “Why is it best for my circumstances?” and “What commission are you being paid?”
   
   
5. Can I make lump sum payments to reduce the size of the loan?
   
   
6. Are there any redemption penalties?
   
   
7. Does this mortgage come with compulsory insurance?
   
   
8. What other charges will I have to pay?
   
   
9. What happens if I can’t pay?
   
   
10. What about the small print?
    

Bad Credit Remortgages Advice

In recent years, more lenders are increasingly offering Bad Credit Remortgages. A UK remortgage with bad credit is when mortgage holders pay off their current mortgage using a new mortgage. The lender uses the same property as security.

The term “bad credit”, is a credit rating that describes a person as having poor credit status. Those who have filed for bankruptcy, failed to repay past loans, and have received court judgments for unpaid debts, are categorized as people with a bad credit history. A FICO score of 580 and below is considered to be a bad score.

Benefits

With increased remortgage availability, there has been an increase in lender competition. This means that interest rates have decreased significantly. If you have bad credit, there are a number of benefits to taking out a remortgage.

By switching to a discount or fixed rate remortgage, you save a substantial amount of money. By consolidating debt, you can pay off credit cards, loans etc. You could also obtain the necessary cash for projects such as home renovation or buying a new car. There are also a full range of fixed, capped, discount, tracker, and flexible bad credit remortgages deals out there.

Implications

It is very important to consider the repercussions of taking out a bad credit remortgage. If you are unable to keep up with the mortgage repayments, your home may be at risk for repossession. By adding further debt to your mortgage, you will increase the overall cost, as well as the length of the repayment term.

You should also be aware of the extra costs involved with a home remortgage. It is important to evaluate costs such as a property valuation on your home, legal costs, administration fees, and compare it to the overall costs if you chose not to remortgage. It is also essential to understand that rescheduling your debts over a longer period, and making a smaller monthly payment, will mean that you will repay more interest and therefore more money.

You should also remember that you will be switching unsecured debt into borrowings that are secured. Bad credit remortgages are more expensive than mainstream mortgages and will remain so. The disadvantage is that you may have to pay a slightly higher interest rate than you would with a regular mortgage. As well, you can only get a bad credit mortgage through a mortgage broker.

Considerations

Although your credit status is probably the most significant factor determining what kind of mortgage rate is available to you, many lenders are now taking a more flexible position on who they lend to. If you have a bad credit history, and you are looking to get a better deal, getting good financial advice can really help.

Seek a bad credit advisor’s advice, and most importantly, make sure you can handle more debts secured against your home. If you do not keep up with your mortgage repayments, your house could be repossessed.

10 Mortgage Advice Tips

Here are the top 10 tips on getting the best deal on your mortgage.

The mortgage market has been transformed over the past 12 months. The total number of products has fallen by more than 23,000, while those lenders prepared to lend more than 90 per cent of a property’s value has plummeted. No longer are multiples of five or six times’ income easily available, while borrowers with poor credit records are finding it much more difficult to get a loan.

But do not despair. “Although the market has changed substantially since the onset of the credit crunch, it is still possible to get a mortgage, and there remain thousands of deals out there,” says David Hollingworth of London & Country, the mortgage broker.

1. A large deposit goes a long way
“One of the biggest changes is that the keenest rates are now available only to those with a large deposit, typically of more than 25 per cent,” Hollingwoth says. “Most lenders now tier rates are those available up to 90 per cent will in most cases carry a significant premium, so the main message for any borrower keen to improve the choice of product available is to put down as much as possible.”

2. Deposits are important for remortgages, too.
Due to falls in house prices, you may find that when you come to remortgage, you have slipped into a different loan-to-value (LTV) band because the value of your property is lower. “If you have savings available, you could use them to reduce the LTV in order to get better mortgage rates,” says Melanie Bien of Savills Private Finance. “It is important not to commit funds if there is a chance you might need them again in the short term however, as on most mortgages you will not be able to draw down the money again.”

3. A clean credit record is key
The sub prime market has been worst affected by the credit crunch, and as a result, anyone who has a poor credit record will struggle to find competitive deals. “Rates are significantly higher, and those with serious credit problems will find products hard to come by,” Hollingworth says.

“Check your credit record through the various credit reference agencies and make sure that there is nothing adverse on your record that should not be there.” Register to vote – absence from the electoral roll is one factor which will damage your credit file.

4. Speak to a broker
If you are having problems finding a loan, talk to a mortgage broker. “If your case is complicated – perhaps you have a county court judgement against you or have missed payments in the past, if you are self employed or have a property of unusual construction – a mortgage broker will be able to help point you towards a lender who is equipped to deal with your situation,” Bien says.

5. If you crave security, go for a fixed rate…
“If you need certainty to help with budgeting, opt for a fixed rate,” Bien says. “Rates have fallen on fixes in recent weeks – although fixes are still not as competitively-priced as trackers in the majority of cases.”

6. Plan for the long term
“With it looking increasingly likely that it will take another couple of years for the market to recover, borrowers may be better placed to opt against short-term fixed rate mortgages,” says Jonathan Cornell of Hamptons Mortgages. “The rising costs of short-term fixed rate mortgages means that the average arrangement fee on a two-year deal is £1,168, with some as high as £2,000. Some long-term deals are priced more competitively – and homeowners can avoid the hassle of having to remortgage every two years.”

7. But if you can take a risk, trackers look best
“Any borrower who does not require the absolute security of a fixed rate mortgage would simply be crackers not to take a cracker at the moment,” says Drew Wotherspoon of Charcol, another broker. The reason for this is that, although inflation is high at the moment, and is set to rise further, it is forecast to all sharply as the economy slows. “As a result, it is highly probably that the bank base rate will fall sharply in 2009,” Wotherspoon says.

8. Pay attention to the SVR…
Borrowers are now spending longer on their lender’s standard variable (SVR) rate than they used to do, research from Nationwide shows. Unless you are moving seamlessly from fixed rate deal to fixed rate deal, the SVR becomes important – and there is significant variation between lenders: for example, Nationwide’s SVR is currently 6.49 per cent, while Halifax charges 7 per cent and Abbey 7.90 per cent.

9. …and to arrangement fees
While fixed rates have been coming down recently, a number of lenders have been raising arrangement fees at the same time in order to protect their margins. Moneyfacts reports that in the month to August 6, the average two-year fixed rate fell from 7.08 per cent to 6.9 per cent, however, at the same time the average arrangement fee rose by £100. “Borrowers should consider the overall combination of the headline rate, fee and the lender’s SVR,” says Martyn Dyson, head of mortgages at Nationwide.

10. Sometimes a higher fee is a better bet
If you are struggling to get a good rate, it might be worth paying a higher fee., “Some lenders offer a choice of paying a higher arrangement fee to get a lower mortgage rate,” says Ray Boulger of Charcol. “The fee is added to the mortgage – but in some cases it is better to have a slightly bigger mortgage than one with a higher rate that you cannot afford.”

Can I get a mortgage?

You've finally found that dream home that you have always been searching for, but you are afraid to apply for a mortgage because you have bad credit or less than perfect credit.

Before you give up entirely, there are many mortgage programs that are geared towards people just like you. Here's a short guide to finding the best one.

1. The first step in getting a home loan is to find out what your actual credit score is. This will help to protect you against lenders taking advantage of you because of your poor score. Some companies may try to charge a higher interest rate than the applicant's score actually warrants, so being prepared is very important. There are many services to help you find and manage your score, so take advantage of them.
   
   
2. Once you know your score, you can then begin to look around for the best mortgage program. Generally speaking, lending agencies categorize credit scores based upon a ranking system. The A- category is for those with the best credit; the D-category is for those with the worst credit history. But even if you fall into the last group, you should be able to find a mortgage scheme.
   
   
3. There are companies that will work with you, regardless of whether you have tax liens, judgements, charge-offs or collections. Many of these companies will probably assign you a higher interest rate than those with good credit, and perhaps even require you to put down a larger deposit on your home. On average, those with poor credit histories are only able to finance approximately 80% of the total asking price, so you will be required to put down the difference.
   
   
4. Even if you have a history of bad credit, or county court judgements levied against you, you should find a mortgage lender who will be sympathetic towards your individual situation.

Adverse Credit Remortgages Glossary

A useful glossary of terms for adverse credit mortgages and remortgages.

Adverse Credit
an impairment to an individuals credit file which can prevent them from obtaining standard credit products.

Bankrupt
a person who has been issued with a Bankruptcy Order.

Bankruptcy Order
an order issued by a court in which an individuals assets are ceased to pay off their creditors.

County Court Judgment (CCJ)
a judgment issued by a County Court in relation to monies owed by one party to another that can appear on a persons credit file if the debt is not settled.

Credit History
a file containing an individuals past and present borrowing and records of repayments made and missed.

Credit Rating
a score given to an individual based on their credit history that lenders will use to help decide whether to lend them money.

Credit Reference Agency
an agency that collects information on peoples credit histories which are used to derive their credit scores. Lenders utilise credit reference agencies when performing credit checks on individuals.

Default
a situation in which a borrower misses a payment on their loan.

Discharged Bankrupt
a person who has previously been issued with a Bankruptcy Order who is released from bankruptcy. A discharged bankrupt may applied for credit but will be severely limited regarding the products that are available to them.

Light Adverse
a credit file with a small number of impairments.

Heavy Adverse
a credit file with a large number of impairments.

Loan Arrears
missed payments on a loan which can lead to adverse credit.

Medium Adverse
a credit file with a medium level of impairments.

Mortgage Arrears
missed payments on a mortgage which can lead to adverse credit and possible repossession.

Repossession
the legal process by which a creditor takes possession of a debtors properly in lieu of the debt being repaid.