Key Provisions of Mortgage Loans
A mortgage is a loan against collateral you take out to buy a home or other property. Most banks and building societies offer mortgages, as well as specialist mortgage lending companies. The Financial Services Authority (FSA) regulates the way most mortgages are sold, but not interfere with second mortgage and a majority of buy-to-let mortgage options. The FSA regulations means the lenders must follow certain rules and standards when dealing with their mortgage customers.
You can get a mortgage direct from the lenders such as banks, building societies and specialist mortgage lenders, or you can use a mortgage broker. You can buy based on your own expertise or get advice and recommendation on a mortgage that suits your particular needs. You can repay your borrowed amount to the lender via two methods knows as ‘repayment’ and ‘interest only’.
With a repayment mortgage you make monthly repayments for an agreed period or term until you have paid back the loan and the interest. With an interest only mortgage you make monthly repayments for an agreed period but these will only cover the interest on your loan. For example, the endowment mortgages work in this way. Typically, you will be required to pay into another savings or investment plan designed to help you pay off the loan at the end of the term.
Some mortgages offer you options to vary your monthly payments, or to combine your mortgage account with savings and other income. Usually, these options are called flexible, current account and ‘offset’ mortgages. A flexible mortgage gives you some scope to change your monthly payments to suit your ability to pay. It’s also useful if you want to pay off your loan more quickly. Several flexible features are becoming common and they are not limited to mortgages with ‘flexible’ in their name. Here are some flexible features:
Overpayments – you can pay more than your normal monthly mortgage payment or pay off a lump sum, or both. Underpayments and payment holidays – you pay less than the normal monthly payment for a limited period such as six or twelve months. You may even be able to stop making payments altogether by getting a payment holiday. This could be useful in situations such as losing your job or taking time off to care for a child. Borrow extra – you can borrow extra without further approval from your lender, provided the total loan does not go above an overall limit.
You will also find a range of interest rates to choose from. For example, ‘variable’ and ‘tracker’ rates change in line with Bank of England rates, ‘fixed’ rates are fixed for a set number of years, and ‘capped’ rates have a variable interest rate with a ceiling so your payments won’t go above a set amount. A lender may require you to take out life insurance to pay off your mortgage should you die, known as Mortgage Protection Life cover. You can also get insurance to protect your income or just your mortgage payments if you become ill or disabled, or lose your job, known as Mortgage Payment Protection Insurance (MPPI).
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