Mortgage Questions and Answers

Some of them charge you an up-front fee. Others make commissions from insurers for the endowments, life insurance and general insurances they arrange for you along with the mortgage. Some lenders also pay arrangement fees to mortgage brokers to encourage business.

What is the standard variable mortgage rate?

The standard variable rate is just that: the lender's standard rate. It goes up and down in line with economic conditions. The advantage of taking out a standard variable mortgage is that you are not tied in to the mortgage for any time and will not be charged redemption penalties if you sell up or remortgage.

What are discounted, capped and fixed-rate mortgages?

Many first time buyers don't want the uncertainty of the standard variable mortgage rate and choose an offer fixing their mortgage to a certain rate for a number of years. Other variations on this theme include the discounted mortgage option where mortgage lenders offer a discount off the standard variable rate. Some lenders also offer capped rate mortgages where your interest is guaranteed not to rise above a certain pre-set level.

What are cashbacks?

Cashbacks are lump-sum payouts by banks and building societies to borrowers as sweeteners to get their custom. A cashback, which is usually paid at the start of the mortgage, can be useful to pay for legal fees, stamp duty, moving costs, etc. But the lender will recoup the payout over the term of the loan and remortgaging can be difficult due to redemption penalties.

What repayment methods are there?

You have two choices: a repayment or an interest-only mortgage (which is usually tied to an endowment, pension or PEP to pay back the capital at the end of 20 or 25 years). If you choose a repayment mortgage your monthly payments will include both interest and a slice of the capital. Interest-only mortgages just pay the interest.

What's best for me? An endowment, PEP or pension to repay my interest-only mortgage?

This depends on your individual circumstances and you should seek independent advice. There are many pros and cons. Endowments, for example, are based on the stock market. There is no guarantee, on maturity, that they will yield sufficient funds to pay off your mortgage.

I keep reading about redemption penalties. What are they?

These will be charged if you cash in a fixed, discounted or capped-rate mortgage in the first few years. Redemption penalties are usually a few months' interest, which can run into thousands of pounds. Redemption penalties can also be charged if you try to pay off a portion of the loan early.

What are application and valuation fees?

These are fees many lenders use to sting borrowers with a few hundred extra pounds at the beginning of a mortgage. The application fee is a sum of money charged by the lender to consider your application and the valuation fee is usually the cost to the lender of having your house or flat valued before offering a mortgage.

What are mortgage indemnity guarantees (MIGs)?

These are fees, often around £1,000, demanded by lenders. They guarantee the lender against a loss if the property is repossessed. But they give the borrower no insurance cover whatsoever. MIGs are required by most lenders on loans of more than 75 per cent of the value of the home. Many lenders allow borrowers to add the MIG to the cost of the loan.

Unlike other insurance policies, the house buyer cannot shop around for a low-price MIG, because the MIG is a contract between the lender and the insurance company.

I've heard endowment policies are bad. Do I need one?

One man's meat is another man's poison. This depends on your own personal circumstances. Endowments are a combination of life assurance and savings. On maturity some endowments fall short of the amount required to pay off a mortgage. Others mature with sufficient to pay off the mortgage and have cash left over.

Do I need life insurance?

It is not mandatory but most people do take it out so that their mortgage is paid off if they die.

Must I buy the lender's buildings and contents insurance?

Not always, so check the fine print. If you are forced to take buildings and/or contents insurance it is often only for one or two years - after which time you can switch to a cheaper insurer.

I'm no longer happy with my mortgage, can I remortgage?

Yes and it can be easier than changing bank accounts. There is some legal work involved, but many mortgage brokers package the remortgage process. Beware if you've had a fixed, capped or discounted mortgage in the last five years. You may still be subject to redemption penalties.

I live in Scotland. Is there anything else I need to know?

The system is different. Buyers arrange a mortgage before looking for a property - which can be bought using one of two methods: the fixed price and offers over a certain figure. Once your price/bid has been accepted a solicitor carries out the necessary searches, missives are concluded making the contract binding. This is followed by the date of entry when you are free to collect the keys.