Simple Guide to the Main UK Mortgage Features
Taking out a mortgage is a huge financial commitment and the ins and outs of the process can be complex for first time buyers. The following guide will clarify some of the main features to consider when shopping around so that choosing the mortgage most suitable to you is made easier
Flexible mortgage
Flexible mortgages offer the scope to alter your monthly repayments to suit your financial situation. They will also be very suited to you if you intend to pay off your loan sooner than the full term without being slammed by heavy penalty fees. Some of the features included in this type of mortgage include:
Overpayments
You can choose to pay more than your normal monthly mortgage fee to complete your loan repayment sooner, pay off a lump sum at any given time or both. Should you decide to pay off a lump sum, you will have the advantage of paying less interest each month since this interest is calculated on the total capital amount you owe. You will see the benefits from this mortgage option faster if your interest is calculated daily or monthly.
Underpayments and Payment Breaks
This allows you to you pay less than your normal monthly payment for a limited period, usually between six to twelve months. Some mortgage providers also allow you to stop making payments altogether for a period of time. This would be highly useful if the unforeseen happens such as the loss of a job, expensive but necessary house repairs or illness in the family.
Loan drawdown
This type of feature allows you to borrow extra money without further approval from your lender, provided your total loan does not exceed an overall limit. Alternatively you may be permitted to ‘borrow back’ against earlier overpayments if needed. This makes it a perfect option for self-employed people with a varying income.
Offset Mortgage
An offset mortgage means your main current account or savings account or both are linked to your mortgage. These accounts would usually, but not always, be held with your mortgage lender. What happens is that each month before calculating the interest due on your capital loan, the amount you owe on your mortgage is reduced by the amount in your accounts – thus, when your current account and savings balances go up, you’ll pay less on your mortgage and when they go down, you’ll pay more.
Current Account Mortgage
A current account mortgage is similar to an offset mortgage in that it offsets the balance of your savings against your mortgage. The difference is that instead of your mortgage and current account being separate amounts of money, they are usually combined into one account which means that your current account acts as a massive overdraft. This option will be a good choice if you like the idea of built-in flexibility to make overpayments or underpayment and have substantial savings to offset.
Cashback Mortgage
This type of mortgage is perfect if you’re looking for a large cashback payment since it often comes with an interest-rate deal. What this means is that your chosen lender will pay you a tidy sum soon after you take up the loan (this can amount to 3-5% of the amount you borrow for example). This will give you extra cash liquidity to finance certain expenses. The downside of this is that if you want to switch to another lender in the early years of your repayments, you’ll have to give back some or all of the cashback received. It also often comes with higher interest rate during the penalty period.
Conclusion
Explaining the main features available in mortgages will help you match your needs with the right product. An important tip when shopping around is to keep your eye on the APR figure as well as the interest rate as this will give you a clearer idea on what the overall cost will be. Also, bear in mind that attractive discounts and special deals offered by lenders can see a significant rate hike once the initial offer expires, so be sure to be clear on the long term fees.
About the Author: Sean Raston is an economics student and expert in mortgages.
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