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A Flexible or ‘lifestyle’ mortgage is designed to let you make extra repayments when you have extra money, and to reduce or even skip payments when necessary. Borrowers will normally have to build up a reserve through overpayments before being allowed to underpay or skip payments. The main benefit of flexible mortgages is that many schemes are offered on a Daily or Monthly Interest Calculation basis (sometimes referred to as ‘daily rest’ or ‘monthly rest’). Most UK lenders now charge interest on a daily or monthly rest rather than annually. It means that if you make over-payments on an annual rest you were not getting the benefit straight away because it could be a year before the capital was reduced by the over-payment. Whereas, on a mortgage nowadays where the interest is being calculated on a daily basis, any over-payment reduces the mortgage balance immediately, hence the borrower will be charged less interest from the next day. The flexible mortgage concept was imported from Australia so occasionally you may hear them referred to as ‘Aussie style mortgages’.
These are sometimes referred to as Current Account Mortgages. These mortgages take the benefits of the flexible mortgage and in addition makes use of current and/or savings accounts to offset the interest e.g. on a particular day a borrower has a mortgage balance of £150,000 and has £10,000 held in their current and/or savings account. The customer is charged mortgage interest on £140,,000.
Mortgage
£150,000
£150,000
Savings
10,000
10,000
Interest
charged on
£140,000
charged on
£140,000
£600 pa
Saved on
Mortgage Payments
Saved on
Mortgage Payments
Borrowers should note that when using the money held in their current and/or savings account to offset their mortgage, they will not receive interest on the credit balance held in the accounts.
The Lender, as an incentive, will offer a lump sum of cash once the mortgage has been taken out. The amount will vary from lender to lender and on the size of the mortgage. The amounts can range from a flat fee e.g. £200, to a percentage of the loan e.g. 3% of the loan.
Mortgage products aimed at the re-mortgage market tend to offer this benefit. To take advantage of the offer the mortgage applicant will need to use a firm of solicitors or licensed conveyancer nominated by the lender.
A free valuation requires no up-front payment from the mortgage applicant whereas a refund of valuation will only be made when and if the mortgage application completes.
A whole range of other benefits can be applied to mortgages including the significant benefits of no Higher Lending Charge and no Early Repayment Charge. See below for more information about these features.
This means the mortgage has to be held for a number of years as the lender locks you in and you are therefore penalized for paying off the mortgage early. Charges can be significant and are usually a percentage of the mortgage for example 2%. The period for which an Early Repayment Charge applies can vary usually it will match the period of the product but can go beyond this eg. a 5 year discount with a 7 year penalty. This is referred to as an overhang.
On this subject see ‘No Early Repayment Charge’ and ‘No Overhang’ below.
Selecting ‘No Early Repayment Charge’ means that the mortgage schemes on screen will allow you to repay the loan in full, at any time, without applying an early repayment charge.
Selecting the ‘No overhang’ option means that the mortgage product will enable you to repay the loan without penalty once the benefit period has ended.
Where the amount borrowed exceeds a specific percentage of the property’s value (set by the lender) you may be charged a Higher Lending Charge. The lender uses this fee to take out insurance to protect themselves only against any losses incurred if the property needs to be taken into possession because of serious arrears. Depending on the amount of loan and the Loan to value the Higher Lending Charge can be a significant cost e.g.
A £47,500 mortgage on a purchase price / valuation of £50,000 would result in a £750 charge on a typical charge of 7.5% on a normal lending limit of 75% loan to value.
It is extremely important to note that this charge acts as a form of insurance for the lender not the borrower. This means that the lender can claim part or all of its ‘losses’ incurred repossessing the property from the insurance company providing the cover. Note that even after repossession the former borrower will remain liable for any sums owing (shortfall between selling price and mortgage outstanding plus arrears, lenders legal costs and any other charges applied to the mortgage) and can be pursued by the insurance company for payment at a subsequent date.
The amount charged to conduct a valuation/survey of the property on behalf of the lender. The basic valuation does not represent a detailed inspection and is used purely for the lender to check that it is good enough security for the loan being provided. For peace of mind it may be appropriate to obtain a ‘Housebuyers Report’ or a ‘Full Structural Survey’. These are more detailed than a lender valuation and they are produced on behalf of the applicant. They are also more expensive than the lenders valuation.
A booking fee will normally be required with the application form and is paid to reserve funds on a mortgage product that has limited funds available e.g. a first-come, first-served fixed rate. Booking fees are often non-refundable, so if the mortgage applicant cancels the mortgage application before completion or the application doesn’t go ahead for some other reason the fee will not be refunded.
An arrangement fee is typically charged on completion of the mortgage and can be added to the loan.
It is necessary to have a solicitor or licensed conveyancer to act on behalf of the mortgage applicant and the lender in the house purchase or re-mortgage transaction.
Lenders will insist that the property is adequately insured, with a suitable Buildings Insurance Policy as a minimum. In addition, borrowers will need a Contents Policy that provides cover for the contents, such as carpets, TV’s, furniture etc. In the past some lenders have made their insurance compulsory this is now less common however a administration charge may be applied to keep or move your insurance elsewhere.
This is if a client has had poor credit history. Poor Credit history can include County Court Judgements (CCJ), Bankruptcy, Mortgage arrears or any late payments on credit arrangements.
This is when a borrower is behind in their mortgage repayments.
A Corporation, Firm or individual who, via a court proceeding, is relieved from paying all debts once assets have been surrendered to a court appointed trustee.
This is a ruling by a County Court against a person who has not satisfied their debt payments with their creditors. Once in place it will remain for the next seven years. If a person has a County Court Judgement against them it will have to be satisfied before they can get a mortgage. They will also find that the mortgages they can get will be at a higher interest rate.
Failure of an individual to make payments on a mortgage at the correct time or to not comply with the mortgage companies requirements.
Is a form of protection which means if you cannot follow your normal occupation due to illness or injury, the insurance company will pay your premiums so that you maintain your benefits under the policy. This usually integrates after a 26 week period.
The life insurance company guarantees to never increase your policy premiums.
You agree that the company can review your policy at set intervals.
Pays out the sum insured only in the event of death.
Pays out on the earlier of death or diagnosis of a critical illness.
This means you will receive your lump sum if you are diagnosed with a terminal illness and are not expected to live for more than 12 months.
This is a form of protection against inflation, if you include this benefit the benefits on the plan will increase each year in line with either inflation or another agreed factor to give you this protection.
If your policy is in trust in the event of a claim the money goes directly to the personal you nominate and does not need to form part of probate or your estate in the event of death. It will also help avoid your estate paying inheritance tax which could result in a 40% tax saving.
Commodore Finance Limited is an Appointed Representative of Personal Touch Financial Services Limited which is authorised and regulated by the Financial Services Authority
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
We do not normally charge for mortgage advice, however this will depend on your circumstances. If a fee is charged our typical fee is £99.
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