The ‘House Buying Diagram’ is designed to give general information about the house buying process in a simplified form, and that it does not illustrate every eventuality or promote information on the timescales involved.
Today there are several thousand different mortgages schemes to choose from, so the chances are that there may be a solution to meet your needs. Mortgages for professionals is totally independent from all lenders and so is able to offer advice from the whole market. There are a number of schemes that are specifically marketed for professionals. Although many lenders do not have special mortgages for professionals they have set up departments that will offer special underwriting terms to professionals.
Fixed rate schemes fix your interest rate at a certain level for an agreed period of time and offer the most security for that period of time. After this period you would normally move on to the lender’s Standard Variable Rate (SVR) which can be much higher.
The advantage of a fixed rate is that you will know exactly how much your mortgage will cost during the fixed rate period, which helps with budgeting. Typical periods to fix for are 2, 3 or 5 years, although some lenders occasionally offer fixed rates for considerably longer periods.
If you take a fixed rate, you will not benefit from any fall in underlying rates during the fixed rate period. However, at times when the underlying rates have been low and future increases seem imminent, taking a fixed rate is a good way to protect yourself against short-term rates rises.
If you take a fixed rate you will nearly always have to pay a significant penalty to break out of the deal before the end of the fixed period. This is known as the Early Repayment Charge (ERC). Some fixed rates will be very low but you may find that you will suffer an ERC some years after the fixed rate when you have reverted to the lender’s SVR. You have to consider very carefully whether the short-term savings are worth the inevitable longer term cost of these versions of fixed rate schemes.
Standard Variable Rate (SVR) may go up as well as down leading to an increase or decrease in the monthly payment. Usually the rate does not have a set period after which it will increase and it is unlikely to feature any early repayment charges. A variable rate without any special discounts or being fixed mostly likely means that you have chosen the lender’s SVR. There is not usually any advantage to be had by doing this although you will not be tied to the lender in any way.
Variable rates can fall into two main categories – discounted rates and tracker rates for example, as it will depend upon the circumstances of the customer whether or not a discount or tracker rate would be suitable.
If you take a variable rate scheme then you should be looking for discounted variable rates or tracker rates.
Discounted variable rate schemes are simply where the lender agrees to discount their SVR by a certain amount for a certain period of time (typically 2 to 5years) before the deal reverts back to the full SVR leading to an increase in the monthly payment.
They also often, although not always, carry an ERC. These schemes can be attractive when compared to their fixed rate counterparts but will be subject to fluctuating interest rates. This makes them inherently riskier than fixed rates. They are often chosen when one perceives that interest rates are generally decreasing, although this situation can change leading to an increase in the monthly payment.
Tracker rates have become increasingly popular during the last 10 years. They normally track the progress of the Bank of England base rate (BBR). The lender will agree that your rate will be set at a certain percentage above or below the BBR for a set period of time. When the BBR changes your rate must change. They have become so popular because although lenders’ SVR’s broadly track the BBR they do not need to do so exactly. This has meant that oftentimes when the BBR has been reduced the lender does not follow suit. And yet when the BBR has been increased not only does the lender follow suit immediately but also takes the opportunity to increase the rate slightly more than expected.
These kinds of schemes also tend to carry an ERC, but perhaps less so than discounted variable and fixed rates.
These are the main types of interest rate schemes. The last few years have seen the proliferation of many versions of these offering different features and varying amounts of flexibility.
Perhaps one of the most significant recent innovations that will be of interest to professionals has been the introduction of off-set mortgages. A simple off-set arrangement will involve two accounts. The mortgage is one account in which a borrower must make a montly payment to the lender either based on repayment or interest only as with a standard mortgage. At the same time you set up a deposit account (nearly always with the same lender) which runs alongside the mortgage account. Any money you save in to the deposit account does not accrue interest, but goes towards reducing the mortgage capital more quickly, therefore potentially saving the borrower in terms of total interest repaid over the term. Withdrawing money from the deposit account will reduce this potential benefit.
These kinds of mortgage may prove very cost effective for self-employed individuals who usually keep large cash balances in their current account to pay for future tax bills.
A key advantage of these type of mortgages is that you can off-set all of the cash savings in the off-set account against the cost of the mortgage without actually committing all of your money to repaying the mortgage. This means that when you need some of your savings you can withdraw funds from your off-set deposit account as you would any account. But by doing so may mean that the term of the mortgage is extended and you may repay a greater amount of total interest over the term.
However you have to be careful. There are many versions of these kinds of scheme and like most things in life some are better than others. They are also very well marketed and it is easy to be drawn to their apparent benefits. You will very often find that a simpler fixed rate scheme, or a tracker rate will offer a cheaper rate than rates offered with off-set schemes. So it very much matters how much you use the off-set facility. This has to be looked in to very carefully before you decide that an off-set mortgage is for you.
The most important point to remember when considering your options is that there is no such thing as the best mortgage rate or scheme. There is only the best scheme that suits your circumstances and meets with your requirements.
There are two ways to structure your ‘main’ or ‘principle’ mortgage repayment:
This is where you make one monthly payment to your lender which consists of the interest cost and an amount to reduce the capital balance. During the early years of a repayment mortgage most of your monthly payment is used to pay the interest and a small amount reduces the mortgage size. During the later years this relation switches round so that during the last few years most of your monthly payment is used to reduce the capital balance until you have finally repaid the entire mortgage.
As long as you maintain the monthly payment using this structure you are guaranteed to repay the mortgage by the end of the agreed term.
This is the safest and lowest risk repayment structure.
A number of major lenders currently do not offer this option at all. Of those that do, their rules can be quite complex and strict.
This is where you only make interest payments each month and so at the end of the agreed term you will still owe exactly the same amount of money you borrowed, assuming that you have not increased the mortgage amount or made any lump sum payments to reduce balance.
Because you are not reducing the capital balance you will pay considerably more interest over the agreed term compared to the capital and interest repayment method.
The key advantage of this structure is that the monthly commitment will be lower than with the capital and interest structure.
However you will be left with a problem – you still owe the lender the full amount of the mortgage.
For this reason you need to consider carefully how you intend to repay the mortgage.
You could save money elsewhere and repay the mortgage in one lump sum at the end of the term. Typical savings for doing this include endowments, pensions and ISAs. These savings vehicles tend to be investment-based and so will involve degrees of risk that do not apply to the straightforward capital and interest structure.
If you intend using an investment vehicle to repay your mortgage then we would strongly advise you to take advice from a suitably qualified individual. Mortgages for Professionals advisers are not authorised to give this kind of advice but we may be able to refer you to independent specialists who are.
If you make no provision to repay the mortgage then you may have to sell the property. This is not necessarily a good position to be in if the property is your main home. However it may be considered a perfectly acceptable approach for buy-to-let properties. Indeed there may be some tax advantages to not reducing the mortgage. These need to be discussed with your accountant or tax advisor.
Where you decide when and how much you repay, you have to be very disciplined with your finances to make sure that you actually do repay the mortgage by the end of its term. This contrasts with the relative certainty offered by the repayment (capital and interest) method.