As the Bank of England becomes increasingly likely to increase interest rates, almost half of UK mortgage holders are unaware of their current interest rate, according to new reports.

More than a third were stunned to learn that if the base rate rises by just 1%, it could add £91 to the average UK variable mortgage payment.

With this in mind, a third of UK mortgage holders (31%) believe they would either have to make significant sacrifices or think they may struggle to make ends meet.

Two thirds of UK mortgage holders would prefer to be notified of a change to their mortgage rate via a printed letter – rising to three quarters of older borrowers.

People believe that a printed letter is most likely to prompt them into taking action and shopping around for a better mortgage deal.

Judith Donovan CBE, Chair of the Keep Me Posted campaign, the company behind the findings said: “There’s no doubt that at present, a large number of people stand to be affected significantly if the base rate rises, meaning many may be left struggling to afford their monthly mortgage payments. What was particularly shocking to us was the number of people that currently aren’t aware of their mortgage rate. It is also clear from our research that homeowners are more likely to react to any changes if notified via a posted letter. Companies should be aware that digital channels may not be suitable for all their customers and should be careful not to take a one size fits all approach.”

 

Six out of ten people who have moved up the property ladder in the past five years and taken out a bigger mortgage did not increase their life insurance cover.

A survey of 2039 adults by Sainsbury’s Bank Life Insurance revealed that four in ten did not think it was necessary to review their cover while alarmingly 37% said they could not afford to pay higher premiums.

The poll also revealed that 44% of homeowners who had a mortgage did not have any life insurance whatsoever..

Meanwhile, official figures revealed that UK house prices rose by almost 10% in the year to April 2014, with the average property now costing almost £260,000.

A spokesman for Sainsbury’s Bank Life Insurance, said: “Moving home can be an exciting but stressful experience and with such a long checklist of things to do, it appears that life insurance is often forgotten about.

“We would encourage anyone who is moving home or may have just moved to take some time to check their policy and the level of cover they have and make sure it’s suitable for their change in circumstances.”

 

Many cynics said peer to peer lending would never work in the UK; but with savings rates from banks and building societies stuck firmly in the doldrums for the foreseeable future there’s growing evidence that this new sector is starting to become very attractive to consumers.

With traditional savings rates having fallen by more than forty per cent in the last two years, returns on offer from the peer to peer providers are looking more tempting than ever.

Compared with mainstream banking, peer to peer may still in its formative years with Zopa, launching as the UK’s first peer-to-peer marketplace in 2005, but a continued lack of respect for the UK banking sector and rock bottom savings returns has seen the peer to peer market flourish.

Zopa remains the biggest player and to date having arranged more than £612 million in loans over the last eight years and now has over half a million members on its books. The projected return after any charges and defaults is currently up to 5.2%.

Another key player in the peer to peer sector and acting as the middle man for individual savers and borrowers is RateSetter.

Launched just under 4 years ago RateSetter may be considered a relative newcomer, but has already matched over £330 million for its lenders and borrowers, with around £250 million of this achieved in the last 18 months alone.

RateSetter currently offers a range of lending options (for savers), paying 3.5% fixed for a one year bond up to 6.1% fixed for a five year income bond.

It’s not surprising that they’re seeing a spike in business when you realise that the equivalent best buy savings bonds from the banks are paying just 1.85% (Kent Reliance) and 3.20% (Shawbrook Bank) respectively.

There is even a monthly access account paying 2.3% – and if you’re a little nervous or unsure if this is right for you, you can dip your toe in the water and try it out with a minimum deposit of just £10.

However, consumers shouldn’t see this alternative banking concept as a soft touch, as a strict credit scoring regime is absolutely vital to ensure defaults are kept to a minimum to give people confidence to continue to deposit their savings with the peer-to-peer companies.

RateSetter for example states that fewer than 15% of loan applications ware approved, so whilst it may offer a simpler and fairer way to borrow money, if you don’t have a top notch credit profile you’re going to have to find your finance elsewhere.

One of the main concerns with people depositing their cash with peer-to-peer providers is that although the returns far outweigh those paid by the banks, they don’t offer the cast iron guarantee to savers that bank customers enjoy under the Financial Services Compensation Scheme.

Even though tough credit scoring criteria is in place, there is still an element of risk, albeit very small, that you don’t have with a bank or building society.

As long as you fully appreciate and are comfortable with this, lower overheads of not having to run a nationwide network of branches, means you can obtain better returns on your cash in the peer-to-peer market.

Providers have their own methods of trying to mitigate the risk to depositors. RateSetter for example offers a ‘provision fund’ which is built up from borrower fees, and reimburses lenders in the case of late payment or default. This safety net has ensured that to date, every penny of capital and interest has been returned to every single Lender. Zopa now operates a similar model with its Safeguard feature.

Peer to peer is here to stay and as long as providers keep rates competitive and bad debt levels under control, the forthcoming regulation pencilled in for this spring means there’s every chance P2P will become an even bigger thorn in the side of the high street banks – isn’t it time to take a closer look?

 

One in three people in the UK admits to living it up in the first few days after payday, blowing an average of £250 in just 24 hours.

Clothing, food and alcohol are the most popular payday treats, with 55 per cent of women and 45 per cent of men going on to regret their splurges later in the month.

Not surprisingly over 60 per cent of Brits admit to running out of money before their next payday.

Seven out of ten say they try to save money from their wages, but a third admit having to withdraw it again when their bank balances gets low at the end of the month.

A spokesman for Quidco, which carried out the research, said: “When you work hard, it’s reasonable to feel entitled to having a little bit of what you like at the end of the month when your salary comes through as long as you don’t allow common sense to go out the window, leaving you on a strict budget when the payday euphoria wears off.”

He added: “A common mistake is deploying money saving tactics at the end of the month, when your bank account is dwindling. Keeping an eye on your spending can help make sure you are able to maintain the lifestyle you want throughout the month, not just in the magic few days post-payday.”

 

It’s been 12 months since the Current Account Switch Service was launched and the Payments Council has delivered its latest figures on the number of transactions.

Since its launch 1.1 million customers have ditched their existing bank and switched accounts.

This is an increase of 19% compared with the same period a year before, when 925,985 switches took place.

The switching process is becoming more popular, partly because customers say it has been a painless experience. Nine out of ten consumers who have switched felt that there was very little effort involved on their part, while the same number said it was quick and the process went without a hitch.

Awareness of the service has also increased, with 70% of the public now aware of it and 61% are confident about what the new service involves and how it works.

It seems to be working well, with the service having cut the time it takes to switch bank accounts to just seven working days or less, when previously customers would have been waiting for between two and for weeks.

A spokesman for the Payments Council commented: “The service was designed to make life easier for customers by removing barriers to switching, with the aim of boosting competition in the banking sector. It’s clear from reviewing its very first year that it’s made great ground – empowering customers with the ability to switch their bank account easily and quickly if they choose to do so.”

 

Despite a much improved economic situation in the UK, over a third of people feel that their finances have not improved in the last 12 months.

According to research by VoucherCodes.co.uk two out of three Brits find their ever increasing utility bills a source of financial stress as well as seeing their budgets stretched to cover the rising cost of food.

Three quarters have adopted money-saving techniques in the past 12 months, with women appearing to be the most financially savvy. While women were more likely to adapt their lifestyles to suit their budgets – 42 per cent of women changed their shopping habits to cheaper alternatives, compared to just 28 per cent of men.

The report revealed men were much more likely to take out additional finance to maintain their standards of living. Some 42 per cent of men said they had borrowed money compared to just 28 per cent of women.

Almost half of people have increased their credit card borrowing, while 30 per cent owe money to the bank and just under a quarter are repaying a loan company.

A spokesman for VoucherCodes, said: “As we head into the winter months it seems the summer season has left Brits feeling the pinch. It’s clear the debt problem isn’t going away any time soon, but there are lots of resources available with advice on everything from budgeting to switching utility providers to help householders get back in the black.”

Mortgage rates have been falling quite sharply with at least half a dozen lenders unveiling rate cuts and fee reductions in the last two months.

Halifax, Nationwide, Virgin, Woolwich and Skipton have all cut rates, while others including Santander and HSBC have done away with some of their fees.

Lenders are also throwing in extra freebies including free valuations and legal costs.

A spokesperson for mortgage broker London & Country put the rate cuts down to a combination of factors. The first is that ‘swap rates’ – borrowing costs banks factor in their fixed-rate mortgage pricing – have been falling.

Mortgage lenders are keen to stay competitive and attract new customers so they are passing on the reduction in costs with cheaper home loan deals.

The second reason is that lenders have now had almost six months to get to grips with new tougher lending criteria after the introduction of the Mortgage Market Review back in March and are now getting back to business as usual.

The final factor is that we’re getting in to the autumn, one of the busiest times in the property market so lenders are cutting their rates to woo new customers and meet the year end targets which run to the end of December.

Considering how important our homes and possessions are to us, it’s surprising that more people don’t put more consideration into their building and contents insurance. Could you afford to replace your home if it burned down? Insuring your home is so important that most mortgage providers won’t grant a mortgage without buildings insurance; however, it’s worth shopping around for policies, as your mortgage provider may not be the best insurance provider.

Buildings insurance will usually cover both the structure and the permanent fixtures such as plumbing, baths, toilets, doors and cupboards. You will need to check your policy to see if it also covers what are considered ‘outbuildings’ such as garages, garden sheds and the like. The policy may cover for damage from a number of causes, which may include fire, landslide, flood, falling trees, vehicles, earthquakes or lightning.

Equally important should be insuring your home’s contents, which are your possessions – your appliances, electronic goods, furniture and clothing. A surprising one in four households doesn’t carry contents insurance, though – many of them renters – leaving them liable for loss or damage due to burglary, smoke, fire or flood and water.

Some contents insurance policies may also cover you for legal liability – the loss you would suffer if someone injured themselves in your home due to your negligence or lack of upkeep of the property, and sued you for damages.

Building and contents insurance policies may be sold together, but it’s worth investigating the cost of separate policies to ensure you’re getting the best price for your coverage.

 

What does home insurance cost?

With both buildings and contents insurance you will have a choice between basing the cost of your premiums on the number of bedrooms in your house – a convenient, but potentially costly method – and working out the exact value of rebuilding your home and replacing its contents on the sum-insured method, which may be more accurate but is also more complicated and time-consuming.

Both methods carry the risk of over-insuring yourself and paying higher premiums; the sum-insured method also carries the risk of underestimating the value of your home and belongings, and therefore running the risk of being unable to replace everything should it be lost. If you underestimate the value of your belongings in order to save money on premiums you will lose out on any claim, so be as accurate as possible when estimating replacement values.

It’s important to work out the amount of buildings insurance you require based on what it will actually cost to rebuild your home, and not simply on the resale value, as these two figures may differ widely and you may be able to rebuild your home for much less than it would cost to buy in a strong real estate market. It is recommended that homeowners contact a chartered surveyor to assess the correct insurance replacement cost of a home.

Premiums on building insurance policies will vary widely from house to house, so don’t expect to get the same deal as your neighbour. Your postcode will be one of the first factors to determine your premiums, as some high-crime areas may be at greater risk of burglary. Buildings insurance may also be index-linked, which means premiums will rise in line with the Retail Price Index (RPI).

The style of your house will also be a consideration. Do you have a thatched roof, or similar uncommon construction? Insurance companies will often charge more for unusual features. Listed buildings will also be more costly. Lastly, as with all insurance policies, your previous claims history will also be taken into account.

Your postcode will also be a factor for your contents insurance, but the cost of premiums will vary even more widely due to your individual contents and how much they are worth. In addition, you will need to check whether you have indemnity cover or new-for-old cover. New-for-old insurance is likely to cost more, but it ensures that you are given the amount it costs to replace an item with a new one if it cannot be repaired. Indemnity cover takes into account the age of the item and wear and tear, and only gives a fraction of the new replacement cost.

You will also pay more for your insurance premiums if you wish to cover certain items which will not be kept in your home at all times, such as jewellery or a laptop computer.

Homeowners generally insure the contents of their homes with theft or disaster damage in mind. However, you’re probably more likely to damage or destroy an expensive item by accident, so accidental damage cover is a wise idea – it covers you for items that may be dropped and broken, scratched or otherwise damaged.

 

Exclusions

It is crucial to check the fine print of your building and contents insurance policies to see what is and is not covered, or you may suffer a nasty and expensive shock. The most common buildings insurance exclusions relate to damage from ordinary ageing and wear and tear; damage caused by your own neglect of the property, or by your pets; or damage you intentionally cause to the property.

Most insurance polices will also have limits on what you can claim for individual items, and for the total value of your contents, but you may be able to negotiate more coverage for higher premiums.

Homeowners who travel a great deal need to ensure that their home insurance policies cover them for extended periods away from the property. Many policies will not cover theft or damage if the property is left vacant for 30 days or more, but again, for higher premiums you may be able to arrange special cover.

 

Who offers home building and contents insurance?

There are a great many home insurance providers, so establish first what sort of coverage and policy you want before shopping around for quotes. Providers include esure, the Post Office, More Than, Lloyds TSB, Saga, Norwich Union, Zurich and the AA.

A.S.U. – Accident, sickness and unemployment insurance (sometimes referred to as A.S.R. – accident, sickness and redundancy insurance). This is an insurance policy which is taken out by the borrower and protects against the borrower being unable to work for the stated reasons. The policy will usually pay a percentage of the normal monthly mortgage repayment (plus insurance) if the borrower is unable to work due to accident/sickness or unemployment/redundancy. These payments will normally only be made for a limited period of time – typically 6/12 months or until the borrower returns to work. The terms of these policies and the cost vary considerably from company to company.

Administration Fee – This is a fee charged by some lenders which is not refundable if the mortgage application does not proceed. The Administration fee will often form part of the valuation fee but will be retained by the lender even if the valuation has not been carried out.

Annual Percentage Rate – This is meant to show the true cost of borrowing and adjusts the notional interest rate to take account of all the initial fees and ongoing costs to reflect the real cost of borrowing throughout the entire mortgage term. Unfortunately there is currently some disagreement over how this rate should be calculated and some distortions occur. Whilst this could be a good way to compare relative deals care should be taken to ensure that the rates being compared have been calculated on the same basis.

Annuity Mortgage – (See Repayment Mortgage)

Arrangement Fee – This is a fee charged by some lenders in order to access particular mortgage deals. Arrangement fees particularly apply if you are looking for a fixed rate or discounted rate mortgage and these may either be payable up front, added to the loan on completion, or deducted from the loan on completion (check with the chosen lender which situation applies).

Arrears – Contracted mortgage payment not made by the due date. Applicants who have arrears on a current mortgage may experience problems if attempting to arrange a new mortgage through the mainstream lenders. A number of lenders do, however, specialise in this area of the market and their details can be found in the arrears section of the Moneynet site (www.moneynet.co.uk).

Buy to Let – A term used to describe the purchase of a residential property for the sole purpose of letting the property to a tenant. Whilst the majority of lenders will not provide mortgage finance for this purpose a number do specialise in this niche area of the market. The details of these lenders and the terms on which they will grant a mortgage can be found in the Buy to Let section of the Moneynet site (www.moneynet.co.uk).

Capital and Interest Mortgage – (see Repayment Mortgage)

Capital Raising – Normally refers to a re-mortgage when additional funds are taken over and above the amount required to repay the existing mortgage debt which is then used for personal finance purposes.

Capped Rate – A capped rate is a mixture between a fixed rate and a variable rate. The interest rate is guaranteed not to rise above a set level within the capped rate period but if the normal variable mortgage rate is below the capped rate then the variable rate is charged. This gives the ‘best of both worlds’ as the interest rate can fall but will not rise above the capped rate. However, the level at which the cap is fixed is usually higher than for a fixed rate mortgage for a comparable period of time. Sometimes ‘Cap and Collar’ mortgages are offered and these impose a minimum payment rate (the collar) in addition to the maximum rate (the cap). The lender will normally impose early redemption penalties if the mortgage is redeemed within the first few years (see Redemption Penalties).

Cashback – This is the arrangement whereby a cash sum of money is repaid to the borrower at the start of the mortgage. The amount of the cashback will vary considerably from lender to lender with the highest amounts being paid where the borrower is willing to forego any fixed or discounted rate offers and pay the normal variable mortgage rate. Cashback deals are also available in conjunction with some fixed or discounted rates but the amount of the cashback will normally be reduced in these circumstances. If a large cashback is being considered then it could, in some circumstances, be liable to Capital Gains Tax (refer to the lender, your accountant or local tax office for clarification). The lender will normal impose early redemption penalties if the mortgage is redeemed within the first few years (see Redemption Penalties).

Centralised Lender – This refers to the group of lenders, other than high street banks and building societies, who operate without a branch network, normally from one location.

Conditional Insurance – This refers to insurance products which some lenders will impose as a condition of their mortgage offer. This could mean that the lender insists that accident, sickness and unemployment cover is taken out or that combined buildings and contents insurance is taken. If looking for a fixed or discounted product then these conditions should especially be watched for.

County Court Judgement (CCJ) – A judgement for debt recorded at a County Court. These judgements will be shown when the lender carries out a credit search. If the debt has been repaid, subsequent to the judgement being recorded, then the entry will be marked ‘satisfied’. The appearance of CCJ’s on the credit register will greatly reduce mortgage options and nearly all lenders will insist thatJudgements. However, there are some lenders who specialise in this market details of which can be found under the Arrears/CCJ section of the Moneynet site (www.moneynet.co.uk).

Discounted Rate – The lender agrees to give a fixed discount off the normal variable rate for a guaranteed period of time. The discounted rate will move up and down with the normal variable rate but the payment rate will retain the agreed differential below the variable rate for the agreed period of time. If a discounted rate is taken the lender will normally impose early redemption penalties if the mortgage is repaid within the first few years (see Redemption Penalties).

Endowment Mortgage – An interest only mortgage supported by an endowment policy. During the term of the mortgage only interest on the mortgage is paid to the lender. At the same time premiums are paid into an endowment policy which is designed to mature at the end of the mortgage term. The proceeds of the endowment policy are designed to repay the mortgage debt, although with a low cost endowment policy it is not guaranteed that the proceeds will be sufficient to repay the debt. In addition to providing the investment to repay the mortgage debt the endowment policy will also include life assurance which will repay the mortgage debt in the event of the death of the policyholder within the policy term.

Exchange of Contracts (NOT SCOTLAND) – This is the stage in the property transaction at which legally binding contracts are exchanged between the buyer and the seller. Once contracts are exchanged the vendor becomes legally obliged to sell and the purchaser to buy on the terms agreed.

Existing Liabilities – This term is used by lenders to define all other finance commitments apart from the existing mortgage. This will take into account such items as bank loans, HP, credit cards, maintenance payments (to ex-spouse) etc. Most lenders will take these items into account when assessing how much they are prepared to lend and will usually deduct 12 months payments from gross annual income before applying their normal income multipliers.

First Time Buyers (FTB or FTP) – lenders differ in their definition of a First Time Buyer. Some lenders will include in this someone who has owned a property before but has no property to sell (i.e. may be renting temporarily after selling) and other lenders will include joint borrowers where just one party is a FTB. Other lenders will take a more literal definition and only include someone who has never owned a property before.

Fixed Rate – The lender will fix the interest rate that they charge at a set level for a fixed period of time. There are normally a whole range of fixed rate products available from different lenders and these vary in terms from very short periods (3 – 6 months) up to the whole 25 year mortgage term. The lender will normally charge early redemption penalties if the mortgage is redeemed within the fixed rate period and often beyond the initial period (See Redemption Penalties).

Flexible Schemes – This is a term that describes a number of new mortgage schemes and is based on the fact that some of these lenders calculate the interest on the mortgage on a daily – rather than annual basis. This offers the lenders the opportunity to be more flexible with the management of the account than would otherwise be the case. That said, there is a wide range of lenders advertising that they are flexible in outlook. These will range from lenders who will offer you one account from which to base all your savings and borrowings. From this one account you will operate your mortgage, savings accounts, current account and any other borrowings. However, not all ‘Flexible Schemes’ are as flexible and this and some will simply offer payment holidays or an ability to overpay each month to either build up a fund to draw on at a later stage or to help redeem the mortgage early.

Freehold (NOT SCOTLAND) – This describes the tenure of a property where ownership of the property and land is held indefinitely. This compares with leasehold property where the property is held for a limited period of time.

Further Advance – This is an additional loan made by the existing mortgage lender and secured by the first charge on the property. The Further Advance can be used for a variety of purposes (subject to the lenders approval) such as home improvement, purchase of freehold or personal purposes, such as debt consolidation.

Guarantor – A guarantor is a person other than the borrower who guarantees the mortgage repayments. A Guarantor can sometimes be used to support a borrower who has insufficient income to qualify for a mortgage in their own right. The Guarantor will normally need to have sufficient income to support the new mortgage in its entirety after taking into account any existing mortgage and other commitments they have personally. The Guarantor becomes responsible for the whole mortgage repayment if the borrower defaults.

Home Buyers Report – A type of survey report which is more detailed than a Mortgage Valuation but not as in depth as a Full Structural Survey. A Home Buyers Report is often carried out by the proposed lenders surveyor and the report can then be used for the lender to replace the Mortgage Valuation in addition to acting as a detailed report for the borrower. A Home Buyers report may not be suitable for certain types of property where a Structural Survey may be more relevant. If in doubt talk to the surveyor you propose to use.

Income Multiplier – Income Multipliers are used by lenders as one calculation in determining how much they are prepared to lend on mortgage. The most common multiplier used is 3 times a single income or 2.5 times joint incomes, whichever gives the higher figure. More generous multipliers are available from some lenders and lenders will be more flexible if the Loan to Value is relatively low.

Insurance Guarantee premium – ( See Mortgage Indemnity Guarantee)

Initial Interest – This figure is usually shown on the mortgage completion statement and refers to the amount of interest charged from the date that the funds are drawn down to the first repayment date. This has the effect of increasing the first mortgage payment and the amount of the initial interest payable will depend on the time in the month when the mortgage is completed. For example, if the mortgage payment is due on the 1st of the month and the mortgage is completed on 18th June then the first monthly mortgage payment will become due on 1st August. That monthly payment will, however, include one months interest from 1st July – 1st August and also 13 days interest from 18th June – 30th June which represents the initial interest.

Interest Only Mortgage – Interest only mortgages have become increasingly popular in recent years. Interest only mortgages can be supported by an endowment policy, pension plan or Pep in which case they are normally referred to as an endowment, pension or Pep mortgage. An interest only mortgage may, however, be arranged without the support of any particular repayment vehicle. Many lenders will now accept payment of interest only on the basis that the borrower makes their own arrangements to repay the capital at or before the end of the mortgage term. This could be done in a number of ways such as inheritance, sale of the property or from the realisation of other assets.

Land Registry Fee – This is a fee charged by the Land Registry to record a change in the registered title of Registered Land. The change will normally be notified to the Land Registry by the solicitor acting in the house purchase (or re-mortgage) and as such the Land Registry fee will normally be payable to the solicitor and accounted for in his final account.

Leasehold (NOT SCOTLAND) – This is the tenure that applies to most flats and maisonettes in the UK (excluding Scotland). As opposed to freehold property the rights to the property are owned only for a fixed period of time, with the freehold being held by a third party. The lease outlines the responsibilities of the various lessees in a block and determines the arrangements to be adopted for such things as upkeep of the common areas and insurance of the property. Because these cross covenants are required to avoid disagreements and confusion between the lessees only leasehold flats and maisonettes are accepted as mortgage security. This should not be confused with the situation where the freehold is owned by all the lessees in a block and this will commonly be advertised as ‘share of freehold’. Providing individual leases exist for each lessee then this would normally be acceptable to mortgage lenders. If in any doubt always talk legal advice before proceeding.

Legal Completion – This refers to the time at which the legal ownership of the property changes hands. This date will usually be agreed upon at exchange of contracts. This will also be the date at which the mortgage becomes effective (sometimes the mortgage completion date may be a couple of days before this to ensure that the solicitor has funds on the due day).

LIBOR Linked Rate – LIBOR is the London Inter Bank Offered Rate and is the rate at which banks lend money to each other. LIBOR changes daily and a LIBOR linked mortgage will normally be adjusted every three months. LIBOR linked rates are usually quoted as X% above LIBOR.

Loan to Value (LTV) – The loan to value is expressed as a percentage and represents the relationship between the size of the mortgage and the value of the property. For example a mortgage of £30,000 on a property valued at £40,000 would be shown as 75% LTV. This is an important figure to look at when considering the various mortgage options as the higher the LTV required the fewer the options. The Moneynet mortgage search facility will exclude schemes where the LTV requested is too high.

Loan Consolidation – Sometimes referred to as debt consolidation, this simply represents the policy of borrowing on mortgage in order to repay other loans or debts. This can be achieved as part of a re-mortgage or by arranging a further advance from the existing lender.

Mortgage Indemnity Guarantee (MIG) – This is known under many different names which include the following; Higher Lending Charge, Indemnity Premium, Insurance Guarantee Premium, Additional Security Fee, Mortgage Guarantee premium, Mortgage Indemnity Premium amongst others. This is a fee that is payable if a ‘high percentage loan to value’ is required. The MIG fee is used by the lender to purchase insurance to cover them in the event that you default on the mortgage and they make a loss on possession and resale of the property. The policy has no benefit to the borrower and offers no protection – indeed if your property is repossessed and the lender claims on the Mortgage Indemnity Insurance then the insurance company that has paid out the claim to the mortgage lender can still pursue you, the borrower, for repayment of that amount. The actual terms of the MIG will vary considerably from lender to lender and if you are told that this will apply you should check the details. Many lenders will impose this additional fee if you wish to borrow more than 75% of the value of the property and the premium payable will be calculated as a percentage of the amount you wish to borrow over that figure. There are a handful of lenders that do not charge MIG premiums or who charge in a different way.

Mortgage Term – This is the number of years over which the mortgage is arranged. If a capital and interest mortgage is being considered then it is worth looking at shorter terms than the traditional 25 year mortgage as considerable interest savings can be made by reducing the mortgage term by even a couple of years.

Mortgage Valuation – This is the most basic form of survey and is the minimum required by lenders in order to ascertain the suitability of the property as security for their loan. Although the borrower will normally receive a copy of this report it should not be relied upon as a comprehensive report on the condition of the property. A more detailed report (either a Home Buyers Report or Structural Survey) should be commissioned when considering the purchase of a property.

Negative Equity – Appeared in the late 80’s as a result of the slump in property prices. This describes the situation where the value of the property has fallen below the outstanding mortgage debt. Some lenders have particular products and policies to assist people who are trapped by Negative Equity.

Net Monthly Payment – This figure will be shown on both the mortgage offer and mortgage completion statement and shows the actual amount of the mortgage payment after MIRAS tax relief has been taken into account.

Non-Status – Some lenders will offer non-status facilities which allow them to lend without proof of income and sometimes without proof of existing mortgage repayment record. The maximum Loan to Value on these schemes is normally 70% or below and a credit search will usually be carried out.

Part Endowment – This describes a mortgage where only part of it is covered by an endowment policy. The balance could be arranged on an interest only basis or more commonly on a capital and interest basis.

Permanent Health Insurance (PHI) – This is a type of insurance which will pay a proportion of normal income in the event that the policyholder is unable to work due to accident, sickness or disability. These policies are normally used to replace a percentage of full income rather than just the mortgage repayment but the level of cover can be selected up to certain maximum levels. This type of cover should not be confused with ASU/ASR policies which will normally only cover the mortgage payment for a limited period of time. PHI policies can be arranged to pay income until a return to work or normal retirement age.

Portable – This describes the ability to move a particular mortgage product from one property to another in the event of a property move. This is particularly important if a fixed, capped, cash back or discounted product is taken where early redemption penalties are charged. If the product is not ‘portable’ then a house move would involve the payment of early redemption penalties even if another mortgage was taken with the same lender. A portable mortgage means that the same scheme is transferred to the new mortgage for the remainder of the original term e.g. a 5 year fixed rate is taken which has redemption penalties within the first five years. If the borrower decides to move after two years then the same five year rate will apply to the new mortgage for the balance of the remaining three years. If the original product was not portable, however, then redemption penalties would be paid on redemption of the existing mortgage and a new product would have to be taken for the new mortgage.

Redemption Penalty – An additional charge made by the lender if the mortgage is repaid within a pre-agreed period of time. These have become increasingly common with the growth in fixed rate and heavily discounted products. They are generally imposed to stop borrowers hopping from one lender to another simply to take advantage of the latest heavy discount or cheap fixed rate. Normally expressed as a number of months interest within a set period of years i.e. 6 months interest if redeemed within the first seven years but may also be expressed as a percentage of the mortgage debt i.e. 5% of the mortgage if redeemed within the first seven years. Careful attention should be paid to these penalties as they vary considerably from lender to lender and the lower and shorter the penalty the more attractive the deal.

Regional Lenders – This refers mainly to the smaller local Building Societies who restrict their lending to within certain regional locations. This could also be applied to a larger number of lenders who will not lend in Scotland or Northern Ireland and if you are looking for a mortgage in either of these areas you should check at an early stage that the lender will lend in these areas.

Re-mortgage – This is the process by which a mortgage on a property is moved from one lender to another. The new mortgage is used to repay the existing lender and at the same time additional funds may be raised for other purposes. Re-mortgaging has become an increasingly popular way to take advantage of the competitive deals offered by lenders to attract new business. If a re-mortgage is being considered then careful attention should be paid to the costs associated with arranging the re-mortgage as well as the savings to be made on the monthly repayment (the costs can sometimes erode any savings to be made). A check should also be made with the existing lender to ensure that there are no early redemption charges.

Repayment Mortgage – Also called an Annuity mortgage or Capital and Interest mortgage. With this type of mortgage the monthly repayment includes an element of the capital sum borrowed in addition to the interest charged. In the early years of the mortgage the majority of the monthly repayment consists of interest with only a small part repaying the capital. However, as the debt gradually reduces the element of capital increases and the interest element reduces, so although the monthly repayment stays the same (assuming interest rate remain unaltered) the debt starts to reduce more quickly as the term of the mortgage progresses. On a 25 year term mortgage it would not be unusual to still owe over 50% of the original debt after the first 15 years. Providing the correct monthly repayments are made on their due dates this mortgage will guarantee to repay the total mortgage debt at the end of the mortgage term.

Retention – This relates to monies withheld by lenders until certain mortgage conditions are met. This will normally relate to repairs or improvements to the property that the lender is insisting on.

Self-Certification – Several lenders will allow borrowers to self certify their income and no further checks on income are made. This type of scheme is useful to the self-employed who may not have accounts available or any other person who has difficulty in proving their earned income. The lender will normally make checks on previous credit history and will require a clear credit search in addition to a good previous lender’s reference.

Self-employed – This will usually cover anyone who is not paid under PAYE. In addition, for mortgage purposes, most lenders will class controlling directors as self- employed or directors with more than a 20% shareholding. If this applies then the lender is likely to ask to see company accounts and to write to the companies external accountant for proof of income.

Stamp duty – This is a tax which is levied on the purchase of property. The tax is paid by purchasers and is currently levied at the following rates:

1% of property value £60000 – £250000
3% of property value £250001 – £500000
4% of property value £500001 and above.

The appropriate rate is paid on the whole purchase price and not just the excess applying to that band i.e. a purchase price of £300000 will attract £9000 stamp duty, being 3% 0f £300000.

Structural Survey – This is the most detailed type of survey report normally undertaken in connection with a House Purchase. If a Structural survey is opted for then the lender will also need to have a mortgage valuation carried out for their own purposes and the borrower will be responsible for both fees. An alternative may be a Home Buyers Report which will cover both the borrower and the lender but advice should be taken from a qualified surveyor who will be able to advise on individual properties and circumstances.

Term Assurance – This is life assurance that pays out the insured sum on the death of the policyholder providing it occurs within the policy term. This is a common method to protect the mortgage in the event of death and to ensure that the mortgage debt is repaid. The most common types of this insurance are Mortgage Protection or Level Term Assurance. Mortgage protection is normally used in connection with a capital and interest mortgage and the level of the insured cover reduces in line with the reduction in the mortgage debt. Level Term assurance is more likely to be used in connection with an interest only mortgage as the level of cover remains constant as does the mortgage debt. With Term Assurance cover there is no pay out if the policy holder survives the policy term and the policy simply lapses with no value. This factor makes this type of cover relatively inexpensive.

Variable Rate – This is the traditional way that mortgages were arranged before the concept of fixed rates. A variable rate will fluctuate up and down to reflect the true cost of borrowing. Some variable rates may be discounted for a period of time (see Discounted Rates).

1. What different repayment methods are available?

Make sure you understand the whole range of mortgages available. You should be told about capital and interest mortgages and interest only mortgages as well as the different repayment vehicles such as endowment policies, ISA’s and pension mortgages.

 

2. What is the interest rate that I will be charged and for how long does this rate apply?

This sounds obvious but you should make sure that you understand how long the initial interest rate will apply.

 

3. What will happen at the end of the initial incentive rate period?

 

If the interest rate on offer is below the normal variable rate of the lender then you should make sure you know what will happen when this incentive rate runs out. Some fixed rate mortgages give you the option to fix for a further period at the end of the initial fixed rate period whilst others will be conditional on you reverting to the normal variable rate.

 

4. What is the lenders normal variable rate?

Find out what the lender charges as their normal variable rate and compare this with other lenders. There is no point in taking out a mortgage with a competitive rate initially if you then find that you are paying over the odds later on.

 

5. How much will my monthly repayments be at the incentive rate and at the normal variable rate?

This again sounds an obvious question to ask but you would be surprised how many people do not ask the question ‘how much will the mortgage cost at the standard variable rate?’ Remember, no matter how cheap the mortgage is initially at some point you will have to pay at the normal rate so make sure you will be able to afford the mortgage when this happens. Furthermore, remember that the standard rate may be higher in two or three years time so make sure you leave yourself with some flexibility.

 

6. Are there any penalties for repaying the mortgage early?

Ask about early redemption penalties and be particularly wary if these extend beyond the term of the initial fixed, capped or discounted period. If there are no penalties after the initial incentive period then you will be free to move your mortgage at the end of that time and will therefore me able to take advantage of other incentives available. If you are tied into the lender at the end of the initial period then you will probably have no choice and be forced to accept the normal variable rate.

 

7. Will I have to pay a mortgage indemnity premium and if so how much will this be?

Mortgage indemnity premiums have already been covered in this book but it is important that you establish the position at the outset. Mortgage indemnity premiums have in the past been charged whenever a mortgage went above 75% of the value of the property. However, many lenders have now raised the threshold to 90% of the value so there can be quite large discrepancies from one lender to another.

 

8. Is there an arrangement fee to pay and if so will I get this back if my application does not proceed?

If there is an arrangement fee to pay find out how this is collected. Some lenders will ask you to pay the fee up front with the mortgage application whilst others will either add the fee to the mortgage debt or deduct it from the advance cheque when the mortgage completes. If the fee is payable up front ask if it will be refunded if the application does not proceed. Some lenders will retain the fee even if they decline your application so make sure that you understand the situation at the outset.

 

9. Is the mortgage portable to another property if I decide to move?

Find out what will happen if you decide to move to another property. This is particularly important if you are taking out a long term fixed, capped or discounted mortgage or if the redemption penalties last for a long period of time. Many lenders now make their mortgages portable which means that you can transfer the mortgage on the same terms and conditions to a different property if you decide to move.

 

10. Am I allowed to make partial repayments of capital or increase my monthly repayments if I wish to repay the mortgage early?

Ask what conditions will apply if you wish to pay off part of the mortgage or accelerate your repayments.

 

11. Are there any other conditions attached to the mortgage? Will I have to buy your insurance?

Many of the very attractive rates available are made less attractive by the imposition of compulsory insurance. It is always the case that the lender will insist that you take out buildings insurance to cover the property but many lenders will also insist that you take this policy through them. This means that you are denied the opportunity to shop around for the best quote. If this is the case with the mortgage you are being offered then get a quote from the lender and see how competitive they are. If the premiums are in excess of those you can obtain elsewhere then take this into account when assessing the attractiveness of the deal. This becomes even more important if the lender is insisting on buildings and contents insurance and sometimes they will even make it a condition of the mortgage that you take out their accident, sickness and redundancy cover.

 

12. Do you provide advice on mortgage products from the whole market or just a selection of lenders?

If you are talking to the lender directly then they will obviously only be providing advice on their own range of products. However, if you are talking to a broker you might assume that they are providing a complete overview of the entire market. This is not necessarily the case and the adviser may take on the status of an appointed agent of one lender or arrange mortgages from a selection of preferred lenders. Whatever, his or her status the Financial Services Act now imposes a requirement that you are told the status and if the adviser is using a selection of preferred lenders you should be given the details.

However, this is not always as straightforward as it might appear. The new rules state that in order for a broker to call himself ‘independent’ he must offer the customer the opportunity to pay a fee rather than receive commission. This means that he can call himself ‘independent’ even if he only sources his products from a selection of lenders providing that the selection is deemed to be a representative sample of the market. What this means is that he may not always have access to the very best products available in the market.

 

On the other hand a broker who sources his products from the market as a whole but who only works on a commission basis and does not offer the alternative of a fee paying service cannot describe himself as independent. It is important that you understand this distinction and ask the question ‘do you source your products from a panel of lenders or deal with every lender in the market?’