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What is mortgage? : UK
A mortgage is a method of using property (real or personal) as
security for the payment of a debt.
The term mortgage
(from Law French, lit. death vow) refers to the legal device used in
securing the property, but it is also commonly used to refer to the
debt secured by the mortgage.
In most jurisdictions
mortgages are strongly associated with loans secured on real estate
rather than other property (such as ships) and in some cases only
land may be mortgaged. Arranging a mortgage is seen as the standard
method by which individuals or businesses can purchase residential
or commercial real estate without the need to pay the full value
immediately.
   
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What are the different mortgage
types?
Mortgage types (UK )
The UK mortgage market is one of
the most innovative and competitive in the world. Unlike other
countries there is no intervention in the market by the state or
state funded entities and virtually all borrowing is funded by
either mutual organisations (building societies and credit unions)
or proprietary lenders (typically banks). Since 1982, when the
market was substantially deregulated, there has been substantial
innovation and diversification of strategies employed by lenders to
attract borrowers. This has led to a wide range of mortgage
types.
As lenders derive their funds either from the
money markets or from deposits, most mortgages revert to a variable
rate, either the lenders standard variable rate or a tracker rate,
which will tend to be linked to the underlying Bank of England (BoE)
repo rate (or sometimes LIBOR). Initially they will tend to offer an
incentive deal to attract new borrowers. This may be:
* A
fixed rate; where the interest rate remains constant for a set
period; typically for 2, 3, 4, 5 or 10 years. Longer term fixed
rates (over 5 years) whilst available, tend to be more expensive and
therefore less popular than shorter term fixed rates.
* A
capped rate; where similar to a fixed rate, the interest rate cannot
rise above the cap but can vary beneath the cap. Sometimes there is
a collar associated with this type of rate which imposes a minimum
rate. Capped rate are often offered over periods similar to fixed
rates, e.g. 2, 3, 4 or 5 years.
* A discount rate; where
there is set margin reduction in the standard variable rate (e.g. a
2% discount) for a set period; typically 1 to 5 years. Sometimes the
discount is expressed as a margin over the base rate (e.g. BoE base
rate plus 0.5% for 2 years) and sometimes the rate is stepped (e.g.
3% in year 1, 2% in year 2, 1% in year three).
* A cashback
mortgage; where a lump sum is provided (typically) as a percentage
of the advance e.g. 5% of the loan.
To make matters more
confusing these rates are often combined: For example, 4.5% 2 year
fixed then a 3 year tracker at BoE rate plus 0.89%.
With
each incentive the lender may be offering a rate at less than the
market cost of the borrowing. Therefore, they typically impose a
penalty if the borrower repays the loan; this used to be called a
redemption penalty or tie-in, however since the onset of Financial
Services Authority regulation they are referred to as an early
repayment charge.
Self Cert Mortgage
(UK)
Mortgage lenders usually use salaries
declared on wage slips to work out a borrower's annual income and
will usually lend up to a fixed multiple of the borrower's annual
income. Self Certification Mortgages, informally known as "self
cert" mortgages, are available to employed and self employed people
who have a deposit to buy a house but lack the sufficient
documentation to prove their income.
This type of
mortgage can be benefical to people who have multiple sources of
income, whose salary is made up of commission or bonuses and for
people whose accounts may not show a true reflection of their
earnings. Self cert mortgages have two disadvantages: the interest
rates charged are usually higher than for normal mortgages and the
loan to value ratio is usually lower.
100% Mortgages
(UK)
Normally when a bank lends a customer money
they want to protect their money as much as possible, they do this
by asking the borrower to pay a certain percentage of the loan in
the form of a deposit.
100% mortgages are mortgages that
require no deposit (100% loan to value). These are sometimes offered
to first time buyers, but almost always carry a higher interest rate
on the loan.
UK mortgage process
UK
lenders usually charge a valuation fee, which pays for a chartered
surveyor to visit the property and ensure it is worth enough to
cover the mortgage amount. This is not a full survey so it may not
identify all the defects that a house buyer needs to know about.
Also, it does not usually form a contract between the surveyor and
the buyer, so the buyer has no right to sue if the survey fails to
detect a major problem. For an extra fee, the surveyor can usually
carry out a building survey or a (cheaper) "homebuyers survey" at
the same time.
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