There are several types of mortgage available. The most common ones are described below:
This is a mortgage in which the capital borrowed is repaid gradually over the period of the loan. The capital is paid in monthly instalments together with an amount of interest. The amount of capital which is repaid gradually increases over the years while the amount of interest goes down. Provided you make all your repayments up to the end of the mortgage term, you are guaranteed to clear what you owe.
With this type of mortgage, you pay interest on the loan in monthly instalments to the lender. Instead of repaying the loan each month, you can opt to pay into a long-term investment or savings plan which should grow enough to clear the loan at the end of the mortgage term. However, if your investment doesn’t grow as planned or the property value falls, you will have an equity shortfall to fund at maturity. Opting for an interest-only mortgage whilst reducing servicing payments can therefore involve accepting a significant degree of risk.
There are three main types of interest-only mortgages. These are:
• an endowment mortgage. This mortgage is made up of two parts – the loan from the lender and an endowment policy taken out with an insurance company. You pay interest on the loan in monthly instalments to the lender but do not actually pay off any of the loan. The endowment policy is paid monthly to an insurance company. At the end of the mortgage term, the policy matures and produces a lump sum which should pay off the loan to the lender. In some circumstances, an endowment policy may produce an additional lump sum. However, there is also a risk that it will not be worth enough to pay off the loan at the end of the mortgage term. If you have been told by your endowment provider that your policy will not be enough to pay off your loan, you should seek independent financial advice. You can get information about dealing with endowment policies from the Financial Services Authority (FSA) at www.moneymadeclear.org.uk
• a pension mortgage. This mortgage is mainly for self-employed people.?? You could use a work or personal pension you’re already paying into, or you could start a new one through an independent financial adviser (IFA). The monthly payments are made up of interest payments on the loan and contributions to a pension scheme. When the borrower retires, there is a lump sum to pay off the loan and a pension.
• an ISA mortgage. With an ISA mortgage, you pay interest to the lender, and contributions to an Individual Savings Account (ISA) which should pay off the loan. However, this is not a particularly popular way of repaying a mortgage for very good reasons. Unless you’re an especially disciplined saver, who can afford to put away a sizeable sum each month and are lucky with the investment returns you achieve it’s probably best avoided.
With an Islamic mortgage, none of the monthly payments includes interest. Instead, the lender makes a charge for lending you the capital to buy your property which can be recovered in one of a number of different ways, for example, by charging you rent. Given the types of IM (In the UK, most Islamic mortgages are raised using the ijara, musharaka or murabaha models) add a contact / link.
Mortgages are available from a number of different sources. Some of the available options are:-
• building societies
• banks (mortgage / commercial banks)
• insurance companies. They only provide endowment mortgages (see above)
• large building companies might arrange mortgages on their own new-build homes
• finance houses
• specialised mortgage companies / brokers
For some groups of people, such as first-time buyers and key workers, it may also be possible to borrow some of the money you need to buy a home from other, government-backed sources. You will usually need to borrow the rest of the money from a main stream mortgage lender such as a bank or building society.
As well as standard mortgage deals, lenders might also offer deals which are especially designed for people who do not qualify for a standard mortgage.
This type of deal is known as a ‘sub prime’ or ‘adverse credit’ mortgage. They are aimed at people who have had financial difficulties or credit problems in the past. For example, you might have had a previous home repossessed, have a County Court Judgment (CCJ) or have been declared bankrupt.You might also have difficulty in proving that you have a regular or reliable income.
Sub-prime and adverse credit mortgages usually charge a higher rate of interest than standard mortgages. Lenders may also limit the amount of money they are prepared to lend you. Before taking out a sub-prime or adverse credit mortgage, you should get some independent financial advice.
If you’re thinking about taking out a mortgage you should make sure you look into all the different options available, and that you only borrow what you can afford to pay back. If you do not keep up the agreed repayments, the lender can take possession of the property.
The Financial Services Authority (FSA) has produced a helpful guide to mortgages called ‘No selling. No jargon. Just the facts about mortgages’. You can view the guide on the Moneymadeclear website at: www.moneymadeclear.org.uk.
If in doubt, you may want to consult an independent financial adviser. Blueprint’s independent financial advisors are First Action Finance. Visit their website at: www.firstaf.com or contact Matt Corbin on 0207 580 7770 or firstname.lastname@example.org.