Subsequent buyers guide.qxd 7/4/09 15:12 Page 8
8 | Guide for Buyers and Sellers
Flexible, offset and current tages of a variable-rate mortgage to get the best
account mortgages of both worlds. So, for example, with a capped
Although 25-year mortgages have become the rate of 5 per cent over two years, you have the
norm, it can make sense to pay off your mort- assurance that if the lender’s standard mortgage
gage as soon as possible. And some lenders now rate rises to 8 per cent, the rate of interest you
actively help you to do this and save you substan- pay will stay at 5 per cent. (Nor would you later
tial amounts of money. have to repay the difference between the two
To understand the advantages of making capi- rates.) But should the lender’s standard rate fall
tal repayments - or overpayments - on your to 3 per cent during that time the rate of interest
mortgage you have to remember how a mortgage you pay will fall with it.
works. Your mortgage debt is made up of the Many lenders put a collar on their capped
capital you borrowed from the lender to buy rates so that if rates drop really low, they don’t
your home and the interest the lender charges for have to pass the cuts on to their capped rate bor-
allowing you to borrow the money. The interest rowers.
is charged on the amount of capital you owe and Like a fixed-rate or discount, the cap and/or
therefore if you make capital repayments on top collar is only in place for a set period - generally
of your monthly mortgage repayments you save between one and five years. You can usually
money because you owe less. choose between having a very low capped rate
Some of the more flexible lenders have for a short period of time or a rate that is capped
launched mortgage schemes which allow you to at a slightly higher level but for a longer period.
make overpayments without penalising you for After the capped period is over, your mortgage is
doing so. Most will calculate the interest you owe likely to revert to the standard variable interest
on a daily basis so any overpayment is assigned rate.
to the mortgage immediately and the amount of Other considerations when taking out a
interest you owe reduces straight away. capped mortgage are the cost of arrangement
What's more, some lenders have gone even fees or if the capped rate is portable and will still
further along the flexible route and allow you to apply should you move home within the period
reclaim any extra money you have paid in. You of the capped-rate offer.
can reduce or increase the outstanding mortgage This type of mortgage is not as common as it
as your financial needs dictate. This is obviously was, overtaken by the tracker mortgage in terms
very good news if you need to get hold of some of popularity and features. However it does make
money urgently. a come back every so often.
Offset and current account mortgages (CAM)
allow you to run your mortgage alongside your
other finances. If you offset your savings and/or The costs
current account with your mortgage you only So, you understand your mortgage options, and
pay interest on your mortgage balance minus the have found the right mortgage to fit your needs.
money you have in your savings and/or current Now you are ready to go and look for the best
account. Therefore you don’t pay as much inter- mortgage. But wait - there are other factors you
est as you would normally. Depending on the need to be aware of before making that final
lender, you can use this flexibility to pay off your decision. The features of the mortgage should be order to ‘buy’ the mortgage. Some lenders call
mortgage early, take payment breaks or underpay considered, as well as the lender. It is all very well this a booking fee - although some lenders
if you need to. CAMs work like normal current seeing an advertised interest rate, thinking it is charge both an arrangement fee and a booking
accounts, with a chequebook and debit card. The low, and going to the lender to take up the offer. fee! These can vary from £500 to £10,000!
borrower’s salary is paid into the CAM. The There is far more to it than that. Do not make a This fee can often be added to the loan and it
main difference between the offset mortgage and decision on the interest rate alone - it can be mis- may be wise to say that you will do this as it is
CAM is that the offset loan will keep your sav- leading. non-refundable and so if, for some reason, you
ings separate from your mortgage whereas every- More and more lenders these days are charg- don’t get or use the mortgage you may still have
thing is combined with the CAM. ing various fees, such as arrangement fees, book- to pay it anyway. If you say you will add it to the
ing fees and early repayment fees, for their loan, you won’t pay it. You can, of course, then
Capped mortgages, particularly their fixed rate or dis- pay it off on completion.
The major disadvantage of the fixed-rate mort- counted offers. These can vary hugely, from £99
gage is that whilst it protects you against rising to £9999, so it is worth shopping around. Higher lending charge
interest rates, it also stops you taking advantage This is charged by some lenders where the mort-
of a fall in interest rates. This is where the capped Deposit gage required is more than 75 per cent of the
mortgage comes in. As the name suggests, this Remember that most lenders currently only offer value of the property. If you have a deposit of 10
type of mortgage provides a roof on the level to mortgages of up to 75-85 per cent (90 per cent at per cent or more it is unlikely that you will have
which the interest rate on your mortgage can the most, if you’re really lucky) of the value of to pay this, although it does vary. Some lenders
rise. But because your mortgage is capped rather the property, or its purchase price, whichever is don’t impose it and yet some lenders charge as
than fixed, your repayments can slide up and lower. Therefore you will need to save up a huge much as £1,500.
down below the level of the cap, depending on deposit before you buy. It basically covers the lender should you
what interest rates are doing generally. default on your mortgage and is to pay for the
In principle, you are combining the security of Arrangement fees additional risk involved. It is normally paid on
a fixed-rate mortgage with the speculative advan- This is the upfront fee charged by the lender in completion.
Homebuying The Complete Guide www.homebuying.co.uk
Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10