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Repayment Mortgages
This is possibly the most generally recognised type of mortgage. The methodology is simple: repayments are made on a monthly basis and are inclusive of both the capital and interest elements. This type of mortgage is taken out for a specified period, which can be for any duration between five to thirty-five years, though more usually for around twenty-five years. There will also be a stipulation that life insurance is taken out to guarantee the full repayment of the mortgage in the event of the borrower’s death. Should payments continue to be made according to the terms of the contract, the mortgage will be fully redeemed at the end of the specified period and the ownership of the property will be assured. However, borrowers should be aware that during the early years, the repayments will be structured mainly towards repayment of the interest element of the loan and the capital will reduce only by a small proportion. The appeal of this type of mortgage is that it is totally transparent and should the borrower be content to allow it to run its full contractual course, then redemption will be automatic at the end of the fixed term of the life of the mortgage. Alternatively, should the borrower decide to sell the property within the earlier years of the contractual term, it is likely that very little of the capital element will have reduced. There may also be a charge made for early redemption of the mortgage.
Interest Only Mortgages
With this type of mortgage all repayments are taken up in paying only the interest element of the loan. This means that should the mortgage extend to the full term of the contract, then no part of the capital amount will be reduced and ownership of the property cannot therefore be completed by the borrower. This may be useful if the objective of the borrower is to limit repayment to an absolute minimum for an initial short period of time, allowing financial consolidation until more favourable circumstances provide the opportunity to change the mortgage option. For the speculator this type of mortgage may also be seen as a means of entering the property market at a time when property is rapidly appreciating in value, thus allowing them to offset the increased appreciation in equity against the outstanding capital of the loan. The borrower may then decide to sell and redeem the loan in full, possibly even with profit. However, if the intent is to own the property outright, the borrower must institute an alternative plan for repayment of the capital element. Such plans can include setting up a savings option, or instituting an ISA, TESSA, pension, endowment or mortgage plan.
Secured Loans
You can get secured loans for a wide range of amounts from about £10,000 to £100,000 depending on the value of your home, how much equity you have in your home and your own circumstances. Repayments are usually monthly and can be from anything for three years to twenty five years. You may be charged a penalty if you repay your loan earlier than agreed, and you should check each lender’s individual policy with regards to this. Lenders charge interest on the amount you borrow, which is referred to as the Annual Percentage Rate (A.P.R). The A.P.Rs quoted by the lender will usually be typical rates, and these act as a guide only as the exact rate offered will be on an individual basis based on the amount you want to borrow and your financial circumstances. By comparing the A.P.Rs of different loans, you should be able to get an idea of how competitive the lender is.
Often, secured loans are much easier to obtain than unsecured loans. This is because the lender has the added benefit of security, which provides protection if for some reason you can't repay the loan. This means that if you are self-employed, have recently changed jobs or have adverse credit you may find a secured loan easier to obtain. They are also useful for larger amounts or if you need a longer repayment period. But remember, a secured loan can mean that if you do not repay your debt you can lose your home.
What is LTV (Loan to Value)?
Loan to Value (LTV) is the term used to define the financial position of the borrower, after the available deposit has been offset against the total of the mortgage loan. In simple mathematical terms, the calculation is as follows: LTV = the total amount required by the borrower, divided by the actual price of the property x 100.
To use a comprehensible
example: Where the outright cost of the property is
£100,000, and the available deposit amounts to £10,000,
the LTV will be £90,000 or 90%. Primarily the LTV
calculation is a formula for assessing the risk factor
when lenders consider applications for mortgage finance.
The premise of this assessment is that the risk to the
lender increases proportionately as the amount of equity
(the actual cash value of the property, less the amount
of outstanding loan) decreases.
Often the risk factor of high LTV loans may be reduced
by an insistence on the part of the lender that
applicants take up mortgage insurance, thereby
protecting against defaulted payments or possible
repossession. However, the burden of paying extra costs
in insurance premiums will hardly be an attractive
option to the prospective borrower. Those borrowers on a
lower scale LTV (usually below 80%) are far more likely
to be offered lower or more favourable rates of
repayment, simply because of the lowered risk factor
they present.
Other considerations are also linked in to LTV when the
lenders are assessing mortgage applicants. These can
include poor credit scores, a history of late payments,
high debt-to-income comparisons and uncertified proof of
earnings. There is often some variation on LTV rules,
dependent on the lender, and for certain special or
linked deals the LTV may be set at an artificially low
level for a short time in order to appear more
attractive. But in general, high LTV advances, from
90%-100% LTV, are available only to borrowers who pass
the most stringent of credit checks.
Think carefully before securing other debts against your Home.
Your Home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
Confidential Finance Limited are appointed representatives of Premier Network Group which is authorised and regulated by the Financial Services Authority 451613.