Residential Mortgages

With over 100 lenders offering 1,000's of products the residential mortgage market is highly complex. When looking to find the most suitable residential mortgage the following have to be taken into consideration, there is a brief explanation on each but you can click on the headings for a dedicated page for each:

Booking Fee - This feature is not so common now but some lenders still ask for an upfront fee to book a particular product at a fixed rate or a certain rate against discounted against their own variable rate.

Valuation Fee - Despite lenders possibly using the same firm of surveyors they all vary in what they charge for a valuation fee due to the administration fee they add. Some lenders may offer a reduced or free valuation fee as an incentive.

Completion Fee - With most products there is a lenders completion fee that is added or deducted from the loan. Recently most lenders have given a choice of completion fee. A small completion fee with a slightly higher interest rate or a high completion fee with a lower interest rate. Completion fees were typically in the region of £499 but now some lenders are charging up to 3% of the loan size, so on a loan of say £500,000 the completion fee could be as high as £15,000!

Interest Rate - The interest rate charged is the first comparison but this has to be combined with the importance of the tie in period and whether you want the payments to be fixed or if you are happy for payments to go up and down in line with the variable product type.

Tie In Period - Although the term of the mortgage may be say 20 years, it is important to understand how long you are fixed to the mortgage or how long the discounted period is. It is also important to understand that once you have come to the end of the fixed or discounted period that you can then either refinance without penalty or whether the lender will offer you another incentivised product. Some schemes can look very attractive with very low fixed or discounted rates for a few years but you are then tied to the lender for further years at their higher standard variable rate. Refinancing away during this period can involve a large early repayment charge which can be a high as 7% of the loan.

Mortgage Term and Repayment Vehicle - The most straightforward mortgage is a capital repayment mortgage and most people assume a term of 25 years. It is important to be aware that the term can be longer with most lenders to reduce the monthly payment. It is however just as important to be aware that if you can afford to pay more, shortening the term can prove to cost little more and the savings can be immense. All lenders will allow you to take an interest only mortgage as long as you have some other form of repayment vehicle, this can be an endowment policy, investment portfolio, inheritance or other assets.

It is important to take into consideration that the term should be within your anticipated retirement age unless you have sufficient income beyond your retirement age from pensions and investments. If you are taking a capital repayment mortgage don't just assume a 35 year term is the norm and go for that. If 25 years fits within your retirement age and you can afford the payments, ask what the payments would be over 20 years. As an example based on £100,000 at an annual rate of 5.75% capital repayment the monthly payments would be as follows:

£584 over thirty years paying a total of £210,240
£630 over twenty five years paying a total of £189,000 (£21,000 saved)
£702 over twenty years paying a total of £168,480 (£42,000 saved)
£830 over fifteen years paying a total of £149,400 (£61,000 saved)

You could look at it the other way around and work out what you can afford or wish to pay and then see how many years capital repayment this calculates to be. The term does not have to be a round number, if 19 years is what that calculates to be then that is the most suitable term if it fits in with your retirement age.

Mortgage Portability - If you may be moving home during the tie in period make sure the mortgage allows for that. If you are moving to a larger home and will need a larger mortgage make sure you have the income multiples to qualify for the larger mortgage. If you may need to borrow to a higher loan to value when you move make sure the lender will allow this.

Life Insurance - It is important to consider life insurance especially if the mortgage is in joint names or if you are still supporting dependents. A level term policy is usually most suitable with interest only mortgages as the level of life cover does not taper down along the term of the mortgage. If taking a capital repayment mortgage a decreasing term is usually best as the cover will reduce in line with the decreasing size of the mortgage. Critical Illness cover can also be added to this policy.

Accident, Sickness & Unemployment Cover (ASU)- This is a short to medium term policy that will cover the mortgage payments if you have to take time off work due to an accident, sickness or unemployment. The premiums can vary depending on excess, deferment period before payments start and length of cover.

Mortgage Payment Protection - This is a longer term policy and usually starts after a few months. An ideally covered person will have all three policies so they are covered immediately on not being able to work, if they are potentially never able to work again and finally if they die.

These are the main areas only and it is important that you take advice from a mortgage adviser or mortgage broker.