Arrange a Mortgage

Understanding the options

When it comes to a mortgage, most people have fairly basic needs – simplicity and a competitive rate of interest are often the key requirements.

Arrange a mortgage in principle first

Once you have an idea of how much you would need to borrow you might find it useful to contact Kemp & Kemp Private Finance on 01865 517 583 to discuss the type and size of the mortgage you would need. Ideally this should be done when you decide to look for a property as it can save a great deal of time later and will also secure an interest rate, especially in times of inflation in interest rates.

Basically there are two main types of mortgage – repayment and investment-linked. To give you some background, here are some of the latest mortgages available and the pros and cons associated with each.

Variable rate

Most mortgages have variable interest rate which moves up or down depending on the Bank of England's base rate. A potential issue with this type of mortgage is uncertainty – you could find yourself paying more and more if interest rates rise, however the opposite is also true.

Fixed rate

This type of mortgage guarantees that your interest rate will stay the same for a fixed period which can be as little as one year or as many as ten. The attraction is certainty: you know exactly what your mortgage payments will be right up until the end of your fixed rate term. The problem is, that if the Bank of England's base rate falls in the meantime, you could be paying over the odds and if it rises, you could be in for a nasty shock when your mortgage reverts to the variable rate. Always look to see what early redemption clauses there are.

Capped rate

The aim of this type of mortgage is to provide the best of both worlds. The rate you pay is 'capped' for a fixed period, setting the maximum amount you will have to pay, irrespective of how high rates rise. If interest rates fall, your rate will too.

Discounted rate

This offers you a reduction from the variable rate for a fixed period of time. This can help greatly in the early years but usually involves an increase in your payments when the discount expires, once again be careful of early redemption penalties.

Cashbacks

These do what they say – give you an amount of cash when you take out the mortgage to spend as you like. The drawback is that their interest rate is usually higher than average.

Trackers

The mortgage interest rate 'tracks' the Bank of England base rate at a slightly higher level. The advantage is you know you are always going to get a reasonably competitive rate of interest, but it won't be the lowest.

Flexible mortgages

These offer a welcome development in the mortgage arena. They are designed to give you greater control through the ability to make overpayments so you can pay off your mortgage early, reduce your outstanding capital and reduce your monthly interest payments, or in some cases, underpay or take payment holidays in times of hardship.

Some are linked to a current account allowing you to borrow money at mortgage rates, others allow you to keep the rest of your finances separate. The better ones charge interest on a daily basis rather than monthly or annually.

Paying back the capital

Repayment mortgages tend to be more flexible than interest-only types. They suit people who do not like risk and prefer to repay the capital as well as the interest on their loan right from the start.

On the other hand, paying your mortgage on an interest-only basis, coupled with a high performing investment vehicle, could be more beneficial in the long run. It all comes down to individual preferences and circumstances.

Endowments

Poor maturity values, high charges and inflexibility have earned endowments widespread criticism in the last few years. If you are looking for an alternative, there are many other repayment vehicles which are worth consideration. Here are some of the most popular:

ISAs

ISAs (Individual Savings Accounts) have replaced the PEP (Personal Equity Plan) as a tax-free saving scheme. By taking out an interest-only mortgage and paying a set amount each month into an ISA, the expectation is that by the end of the mortgage term the ISA fund should be more than enough to pay off the loan. Historically, stocks and shares have outperformed many other types of investment. This, coupled with the fact that the fund grows free of income and capital gains tax and can be cashed in early, makes the ISA route attractive to many people. The downside is that investing in the stockmarket is unpredictable. As the small print says, your investment can go down as well as up.

Pensions

The idea behind this type of mortgage is that as you make interest-only payments each month on your loan as well as paying a set amount into a personal pension. The premiums paid into the pension generate a tax-free lump sum, part of which is used at the end of the mortgage term to pay off the mortgage. The fact that the fund grows tax-free is an advantage, but it also means you will get a reduced pension as a result.

A mortgage that is right for one person won't necessarily be right for another. All sorts of factors will play a part, such as your other commitments, your personal circumstances, the mortgage term, and of course, personal preferences. So unless you are certain you know what you want, it is worthwhile seeking advice.

Contact Us

Please contact us to discuss your Private Finance needs:
Email: finance@kempandkemp.co.uk
Telephone: 01865 517583