The Debt Guide

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Secured loans

Secured loans need to be backed by some kind of security - usually your home. As a result you can borrow large amounts (up to £200,000) and will usually get lower interest rates than for unsecured loans. To apply for a secured loan quote, call us on 0800 092 6350 Quote :INsecured

Personal/unsecured loans

A personal loan generally allows you to borrow up to £15,000 (some lenders offer up to £25,000) for any purpose, and spread the payments over a long period. Besides the interest rate and monthly payments, when choosing a personal loan you should also consider borrowing limits, loan terms, loan protection insurance and which provider is best suited to you. To apply for a unsecured loan quote, call us on 0800 092 6350 Quote :INunsecured

Repayment

Your monthly repayments consist of repaying the capital amount borrowed together with accrued interest. On your mortgage statement, normally received annually, you will see that the outstanding balance decreases throughout the term.

Advantages of a repayment mortgage

At the end of the term, you are safe in the knowledge that the total amount of the debt has been repaid.
Overpayments and lump sum payments into your mortgage account can be made, reducing both the interest and capital amounts repayable.
Life assurance cover is not always necessary in taking out this type of mortgage.

Disadvantages of a repayment mortgage

There may be financial penalties for making lump sum/overpayments into your mortgage account. In the early years of a repayment mortgage the majority of the monthly repayment is interest rather than capital. For borrowers moving house regularly, this can result in little of the capital being paid off.
If you have no life assurance cover in place and die before the loan is repaid, the mortgage will still need to be repaid. This may result in the property having to be sold to repay the debt owed.

Interest only

With this type of mortgage, each mortgage payment is only used to pay off interest. At the same time, the borrower takes out an alternative ‘repayment vehicle’ (method of paying off the mortgage) such as an ISA, pension plan or endowment policy. More information on endowments (which in the 1980’s and 1990’s were extremely popular), ISAs and Pension plans is set out below. The most important fact about an interest only mortgage is that the monthly repayments do not repay any of the outstanding capital balance. As a consequence it is important that the payments are maintained into the repayment vehicle; otherwise it will not be possible to pay off the mortgage at the end of the term.

Endowment

This is the most common type of interest only mortgage which also provides life assurance cover and a fixed payment for investment. The fixed payments are based on the amount of the loan together with the mortgage term and are designed so that, at maturity, the amount invested and earnings are sufficient to pay off the mortgage. Much maligned in the press because of the poorer investment growth rates achieved in a low inflationary environment, this form of investment is less popular these days. Note there is no guarantee that, when the endowment matures and ‘pays out’, the balance will be sufficient to repay the mortgage.

Nonetheless millions of borrowers have one or more endowment policies and as a rule of thumb, these should not be cashed-in early and certainly not before seeking advice from a suitably qualified financial adviser. Customers cashing-in an endowment policy in the first few years after inception can receive less than the amount invested. Existing endowments can be used to support a new mortgage with any ‘additional lending’ over the value of the projected maturity balance being covered on a repayment basis or with an alternative repayment vehicle e.g. an ISA. It is also worth pointing out that, historically, the returns on endowment policies have been pretty good (provided they go full term).

Endowments provide life assurance so that in the event of death the mortgage is paid off.

ISA

The Individual Savings Account (ISA) is a tax free method of saving. Using an ISA as a repayment vehicle is growing in popularity but due to the ISAs complexity it is only for the financially sophisticated or borrowers taking advice from a suitably qualified financial adviser.

Pension Plan

Life assurance cover is provided and monthly payments are made into a pension fund. When the benefits are eventually taken, the mortgage is repaid using tax-free cash from the remainder of the fund. The plan holder can then draw a pension from the balance of the fund. This product, which tends to be used by the self employed, is only for those taking advice from a suitably qualified financial adviser.

Advantages of an interest only mortgage

If the proceeds of the plans exceed the amount required to repay the mortgage, then this is received as a cash lump sum by the borrower.
Some plans are tax-efficient.

Disadvantages of an interest only mortgage

If the proceeds of the repayment vehicle do not achieve the amount expected, then there will be a shortfall. The borrower remains liable for any shortfall on the mortgage hence the outstanding balance will need to be paid off from other resources. Regular checking of the policy fund itself by the borrower and the lender should minimise any risk. If the plan is not reaching its expected target, the borrower can increase payments into the policy or invest in another product to cover any anticipated shortfall.
Cashing in the plans early may result in financial penalties. These will be provided for in the initial agreement. In addition the lender has no way of tracking some of the more modern repayment vehicles, such as an ISA, which will result in some instances where a borrower lets an investment lapse forgetting or not realizing it is to be used to pay off the mortgage. This will result in situations where there is no method of paying off the mortgage and the lender will only become aware at the end of the mortgage term.

Fixed Rate Mortgage

With a fixed rate mortgage the amount you repay the lender each month can be at a fixed interest rate for a specified period of time, regardless of changes to interest rate in the market place. It is common for lenders to offer rates fixed for a period of 2 to 5 years, but shorter and longer periods can be found in the market. At the end of the fixed rate (or ‘benefit’) period the rate will normally convert to the lenders Standard Variable Rate (SVR).

It is normal for lenders to charge up-front fees in the form of booking and/or arrangement fees. In addition lenders frequently apply an Early Repayment Charge (ERC) for fixed rate mortgages. This acts as a ‘lock-in’ making an often heavy charge for borrowers paying off their mortgage early. Watch out, as the ERC can sometimes last longer than the fixed rate period e.g. a 3 year fixed rate with a 5 year ERC.

Capped Rate Mortgage

A capped rate mortgage is very similar to a fixed rate mortgage except that if the variable rate drops below the capped rate, the borrower will make payments based on the lower variable rate. However, should rates increase the payments will be ‘capped’ and will not rise over the capped rate. So as a rough ‘rule of thumb’ a capped rate is better to have than a fixed rate if all other factors are equal. Again, as with fixed rates, up-front charges and ‘lock-ins’ are common.

Tracker Rate Mortgage

This is a variable rate that is linked to the movement of a prevailing rate such as The Bank of England Base Rate or London Interbank Offered Rate (LIBOR). The pay rate will be a set percentage amount above the relevant base rate for a specified period of time. For example if the tracker mortgage is set at 1% above The Bank of England Base Rate for 5 years and the base rate is currently 4.75%, the pay rate will work out at 5.75%.

As their name suggests the rates of tracker mortgages change to follow ‘track’ changes in the base rate to which they are linked. So if the base rate increases by 1%, the pay rate will increase accordingly. Also if the base rate is reduced, borrowers will benefit from a lower pay rate.

Early Repayment Charge (sometimes referred to as a ‘redemption penalty’)

Given that the mortgage market is very competitive many mortgages are sold as ‘loss leaders’ i.e. the mortgage has to be held for a number of years before the lender breaks into profit. As a consequence lenders frequently ‘lock-in’ borrowers by applying Early Repayment Charges for those paying off the mortgage early. Charges can be significant e.g. 6 months interest or repayment of the amount of benefit received, be it cashback or reduced interest. The period for which an Early Repayment Charge applies can vary. Sometimes it will match the period of the discount/fix but often it can go beyond the benefit period e.g. a 5 year discount with a 7 year ERC. This is referred to as an overhang.

On this subject see ‘No Early Repayment Charge’ and ‘No Overhang’ below.

To apply for a mortgage quote, call us on 0800 092 6350 Quote : INmortgage

Adverse Credit

If a borrower has a history of poor credit usage then this is described as Adverse Credit. Poor Credit history can include County Court Judgements (CCJ), Bankruptcy, Mortgage arrears or any late payments on credit arrangements.

Arrears

This describes the amount the borrower is behind in their mortgage repayments schedule. The amount is usually measured in either pounds or months.

Bankrupt

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.

County Court Judgements (CCJ)

This is an adverse ruling by a County Court against a person who has not satisfied their debt payments with their creditors. Once the ruling has taken place it will be recorded against the person’s credit history and will appear every time a credit search is done 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.

Our requirements – Full written details and quotations are available on request. The mortgage must be secured by a first charge on the property. All loans are subject to a satisfactory appraisal of status, valuation, and financial standing, and are only available to persons aged 18 years and over. 100% Mortgages are only available to persons aged 21 or over. Full written details and quotations are available on request. All loans must be secured by a first charge on the property and are subject to appraisal of status, financial standing and valuation. Loans are only available to persons aged 18 or over. We act as brokers where our members are authorised and regulated by the Financial Services Authority.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENT ON YOUR MORTGAGE!