Features and Benefits

Features and Benefits Offered with Mortgages

Flexible / Lifestyle Mortgages

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. Until the arrival of flexible mortgages most, if not all, UK lenders were charging interest on an annual basis. This meant that borrowers making over-payments 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 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. Without going into detail to explain this feature the up-shot is that over-paying the mortgage on a monthly or regular basis, even by a relatively small amount, will reduce your mortgage term by years (hence saving payments).

Many flexible mortgages come without any Early Repayment Charge so the borrower is not ???locked-in??? to any particular lender. In addition the interest rate charged is often lower than the usual Standard Variable Rates charged by the other more "traditional" mortgage lenders.

The flexible mortgage concept was imported from Australia so occasionally you may hear them referred to as "Aussie style mortgages".

Offsetting

A flexible mortgage linked to a current and/or savings account held with the lender. These are sometimes referred to as Current Account Mortgages (CAM). These mortgages take the benefits of the flexible mortgage and use the funds held in the current and/or savings account to offset the interest.

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.

Some of the lenders in this sector are also incorporating credit cards and personal loans into the mix. For a borrower wanting one home for their finances this is an attractive option.

Cashback

Lenders may offer cashback as part of the terms of the mortgage deal. This can be very useful to use towards the other costs that are associated with a house purchase. Although cashback may appear an attractive feature when making your mortgage decision it is important to see what early repayment charges apply to the mortgage and what the true cost is over the term of your mortgage. Cashback is often offered on mortgages with extended tie-ins.

Early Repayment Charges

Most mortgage products charge early repayment charges if you pay off part or your entire mortgage during the period when you are on a lenders special interest rate, for example fixed, discount, tracker, etc. These charges normally apply until the interest rate on the initial mortgage deal expires and then reverts to the lenders standard variable rate. An example of this is a three year fixed rate which has early repayment charges until the end of three years.

Additionally some mortgage products have early repayment charges that apply for a period of time after any special interest rate expires. This means you will have a period were you will have to pay the lenders standard variable rate which may be a lot higher than the interest rate you were paying. These are known as mortgages with extended tie-ins. Mortgages with extended tie-ins may offer a low introductory rate but over a longer period they generally offer poor value for money due to the restrictions of the early repayment charges.

General Insurance

The lender will make it compulsory for you to have building insurance which protects your property in the event of damage, for example a fire. Some lenders will also insist that you buy your building insurance through them. This may not be the most competitive in the market however if you decide to buy it elsewhere the lender will usually charge you an administration fee for this. It is also recommended that you have Home Contents insurance to protect your possessions in and out of the home against fire and theft for example.

Interest Calculated

Interest can be calculated on a mortgage annually, quarterly, monthly or daily. In recent years most lenders have started to calculate interest on a daily basis which benefits the borrower. On an interest only mortgage how interest is calculated is less important as you are not reducing your outstanding mortgage balance. On a repayment basis it is in the borrower's best interests to have interest calculated daily as all payments made to reduce the outstanding balance will reduce the amount of interest you are charged. This is particularly important if you are making regular or lump sum overpayments.

Overpayments

Overpayments are payments made on a regular or lump sum basis which are over and above the normal payment schedule of the mortgage. They will have the affect of reducing your outstanding balance which can either shorten the term of your mortgage or reduce the interest calculated each month. To maximize the affect of overpayments the interest on the mortgage should be calculated on a daily basis. Lenders may restrict the level of any overpayments particularly on products with special interest rates.

Payment Holidays

Payment holidays are when the lender permits the borrower to take a short break from making a mortgage payment. Lenders may insist that any payment holidays are only permitted to the level of any previous overpayments. This is a feature which is usually only offered with flexible mortgages.

Portability

A mortgage which is portable can be transferred to another property should you move house.

This is particularly important if the mortgage you have chosen has early repayment charges as the lender would require these to be paid if the mortgage was not portable. Portability has greater importance if you choose a product with a special rate for a longer period.

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 to a percentage of the loan.

Costs Attached to Your Mortgage

In addition to your monthly payments there will be other costs particularly at the start of the mortgage. These may include:

Arrangement Fee

Most lenders charge an arrangement fee on any special products, that they offer. In recent years these fees have increased and should be considered when choosing your mortgage.

Most lenders allow this fee to be added to the loan amount.

Booking Fee

The booking fee is a fee the lender may charge you to secure mortgage funds. It normally applies to special offer loans, such as fixed or capped rates and is payable at application. It is often part of the arrangement fee.

Higher Lending Charge

Lenders may charge a higher lending charge depending on your loan to value (LTV). Loan to value is the amount of your mortgage expressed as a percentage of the property price.

In recent years lenders have increased the level of LTV on which they charge a higher lending charge. Traditionally a higher lending charge applied for LTV's over 75% however in recent years this has increased to 90% for most lenders. Lenders generally allow this fee to be added to the loan amount.

Valuation Administration Fee

A lender will require a valuation of the property as part of the mortgage process and will charge a valuation fee for this. The borrower may choose to organize a valuation using a third party at a lower cost. The lender may charge a valuation admin fee in this case.

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