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Things to consider when comparing different mortgages

Unfortunately the mortgage industry is thick with a jungle of jargon mortgage loans, reverse mortgage, refinance mortgage to name but a few... All of these phrases can be confusing.

The mortgage monkey will be able to help you through this veritable minefield so that you fully understand the process and the benefits to you. As our unique proposition states, we coach our clients to understand their mortgage.
 
There are various factors to be taken into account when comparing the thousands of different mortgages on the market today.

The main factors are:

Attitude
Rate Available
Affordability
Flexibility
Portability
Changes in circumstances
Early Repayment Charge
Flexibility of repayment term
Overall APR
Cost Repayment Vehicles
Term of mortgage / age of borrower

Attitude
Do you have any prejudices against or preferences toward the different types of mortgage available? There will be occasions where, for example, adverse publicity or the 'advice' of friends leads you to a decision which could be inappropriate for your needs. Many people have been impressed by the idea of seeing the debt reducing each year, or others might have had a previous bad experience with a particular type of mortgage.

Rate available
Mortgage Interest Rates will vary from lender to lender. Every lender will offer a rate on the market that they feel is competitive. How will you know which rate is best for you? Allow The mortgage monkey to take this hassle away for you!

 

Affordability
Affordability is always a major consideration. Clearly, the total monthly cost needs to be looked at, particularly with an interest only mortgage which will also have the additional cost of a capital repayment vehicle. Therefore attitude to future interest rate movements needs to be considered, as an increase in interest rates could make the loan unaffordable.

Click here to see how our MORTGAGE CALCULATOR works out how much you can expect to pay each month

Flexibility
In terms of monthly cost in times of financial hardship, the capital and interest mortgage offers flexibility. A lender will often be prepared to extend the loan term to keep repayments down, for example, at a time of increasing interest rates. An interest only loan does not offer such flexibility because the basic monthly mortgage cost is the same, irrespective of term, as the interest is always paid on the total capital. The amount will vary according to prevailing interest rates.

Portability
How often do you envisage moving house in the future? If regular moves are predicted (progressing up the 'housing ladder') then an interest only loan may be more beneficial; your capital repayment vehicle can be transferred to the new property and used towards paying off the next loan. A small top-up contract (ISA or endowment ) can usually be arranged to tie in with the existing contract to provide repayment funds at the end of the mortgage.

In the early years of a repayment mortgage, very little capital is repaid and a borrower who moves home usually has to effect a new mortgage over another 25 years to keep the loan affordable. However, the premiums on the capital repayment vehicle of the interest only loan will remain at their original level, and hopefully still be on target to repay the original loan at the end of the term.

Changes in circumstances
In respect of foreseeable changes in circumstances, one of the questions which may need to be addressed is whether you are likely to remain as residents in the UK or to emigrate. If the latter is a possibility then the capital and interest loan will probably prove to be more suitable. The long-term nature of endowment policies with their generally low surrender values in the early years makes them unsuitable. If perhaps a career break or planning to start a family are on the cards in the next few years, you might want to consider a mortgage that gives you some flexibility to work around that.

Early repayment charge
When a loan is redeemed, there may be an additional charge made by the lender, depending on the type of mortgage. If the loan is at a normal variable rate, it is still common not to make an early repayment charge. On the other hand, fixed rate loans usually have a three or even a six months' interest penalty if the loan is redeemed at any time during the fixed term. Also, variable loans issued at discounted rates almost invariably carry an early repayment charge. Generally, the longer the initial term of the fixed rate, the larger will be the early repayment charge. The penalty is a one-off fee charged to the borrower. Nowadays, it is common practice to waive any early repayment charge when an existing loan is transferred to the borrower's new property, especially where a fixed rate mortgage is involved. This retains the business for the lender and gives continuity to the borrower.

Flexibility of payment term
Flexibility of the repayment term is of little concern in the case of interest only mortgages, as it does not produce monthly cost savings. However, it is of particular concern when looking at capital and interest mortgages. For instance will you be charged a fee if the term is altered? What is the maximum term available? Is it restricted to your retirement age? Can the term be reduced if more rapid capital repayment is desired? If you get into financial trouble through working shorter hours or being temporarily laid-off, a sympathetic and flexible approach by the lender will be all-important in helping overcome such short-term difficulties.

Overall APR
Annual Percentage Rate (APR) is the total cost of borrowing, and takes into account the nominal rate of interest and whether interest is charged annually, monthly, quarterly, daily or on some other basis. The added costs and fees associated with arranging the loan are normally also built into the overall borrowing rate. The APR, therefore, is at a higher rate than the annual rate at which interest is actually charged on the loan. Looking at the APRs of different providers/products is a good way of providing a direct and fair comparison of costs, since the method of calculation is laid down in the Consumer Credit Act 1974. It is possible to compare the total amount payable by the end of the term. These are important comparisons if you are concerned about the total cost of the loan as well as the monthly outlay.

Cost of repayment vehicles for an interest only mortgage
Cost is almost always the major consideration at outset. Endowment policies range from the most expensive, full with-profits endowment, to low cost endowments. Full with-profits policies guarantee repayment of the loan in full plus the chance of a healthy tax-free payment on top. Low cost endowments provide only a basic sum assured guaranteed on death, with a hope of additional payment if bonus rates hold up. The growth rates at which providers can project future benefits are laid down, and reviewed regularly, by regulators. One of the important considerations to bear in mind in relation to a pension mortgage is that the premium always tends to be higher than ISA or endowment comparisons. This is because only 25% of the projected fund at retirement is allowed to be taken as cash to repay the mortgage. Thus, 75% of the premium goes towards the provision of the actual pension post-retirement. Whilst the actual overall proceeds are much higher than the alternatives, the cost along the way is correspondingly greater. Pension and ISA options carry with them the added cost of life assurance to cover the repayment of the mortgage on the death of the borrower.

Term of mortgage / age of borrower
The term of the loan and your age are particularly important considerations when looking at pension mortgages as a pension policy is unable to provide any capital to repay the loan until at least age 50. For instance a first time buyer aged 22 would end up with a term of at least 28 years if the pension option was chosen. Equally, an older borrower, looking to select the endowment option, would find it comparatively more expensive than the capital and interest loan because of the enhanced costs of the life cover related to the policy. Whichever method of repayment is selected, the shorter the term, the more expensive will be the monthly cost. Pension and ISA contributions look more attractive over longer terms as the tax incentives have a compounding effect on the investment returns in the fund and will, therefore, generally become more competitive than the endowment options.


Your home may be repossessed if you do not keep up repayments on your mortgage.
 
 
If we charge a fee for arranging a contract for you, the amount payable will be based on 0.35% of the value of the loan applied for, with a minimum of £500. In a small number of circumstances, it may be necessary for us to charge a higher fee. This will be agreed with you in writing prior to any chargeable work commencing.

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