Choosing the right mortgage could be one of the toughest financial decisions you may ever have to make.
Whether you are purchasing a property or simply wish to refinance your existing mortgage to another lender to improve terms it is important to consider all the options open to you. From this position you can then select the most appropriate product which meets with your requirements.
Kingsway Mortgages Limited are fully independent mortgage and financial advisers. We are perfectly placed to discuss all aspects that are relevant for you to make the right decision and continue to review the market on your behalf.
As an easy guide we have outlined below the various types of mortgages and their definitions. To offer an initial summary:
Capital & Interest Repayment
Each month your repayment to the lender consists of the interest due based on the amount of the advance and interest rate payable, together with a proportion of capital. Therefore, during the term of the advance the proportion of capital repaid will increase and the interest due will reduce to ensure the mortgage is fully repaid. This offers a low risk method of repayment.
With this example the payment to the lender consists solely of interest. Consequently it is strongly recommended that there is a suitable investment plan in place to repay the outstanding mortgage at the end of the term. However, these investments can fluctuate in value and there could be insufficient funds available to repay your mortgage in the timescale originally chosen. On the other hand, if the returns are greater than the targeted initial growth rate then a surplus is available to either repay your mortgage early or to provide a useful surplus lump sum.
We have outlined below the main styles of mortgage products available to complement the above options:
The variable rate is determined by the individual provider and your payments to the lender can fluctuate in line with this payment rate. Generally, the lender does not charge early redemption penalties but this should be confirmed at the outset.
The payment you make to the lending institution is fixed for a specified period enabling you to budget during this term. At the conclusion of the fixed rate the interest charged generally reverts to the lender's standard variable rate. It is important that you are aware of any penalties that apply to the facility during, or after, the fixed term has ceased.
It would be worth reassessing the market approximately four months prior to expiry of the product to determine the best options available to you at this point.
The lender will offer a set discount below their variable rate for a specified period. Unlike fixed rates where you will know exactly the level of your payments the interest rate charged on a discounted variable scheme can fluctuate.
Imagine a combination of a variable rate and fixed rate. Your interest rate can fall and fluctuate but cannot exceed a pre determined capped rate. If interest rates rise beyond the capped rate your payment will not exceed this level during the term of the product. However, if interest rates fall you will benefit from this with no restriction. Some providers will offer a "cap & collar" mortgage where payment rates will fluctuate between an upper and lower limit.
Think of a mortgage where you can overpay and then should you wish to underpay, perhaps a mortgage which combines your mortgage, current account and savings in one pot. The savings over the longer term could be substantial. Your salary and savings are credited to your mortgage account which in turn reduces the amount of interest due. The lender is crediting your salary and savings to your mortgage immediately. Over the longer term there could be substantial savings with this style of mortgage.
Flexible mortgages can also offer automatic equity release and reserve accounts established at the outset of the loan.
The benefits of suitable protection are substantial, with life protection, income protection, critical illness cover, private medical assurance and buildings and contents cover being the most common.
You may have some or all of these classes of protection but are they currently structured adequately in line with your lifestyle and needs?
Whereas many people take life protection to repay their mortgage on death, few realise that the chances of suffering a critical illness or being unable to work due to long term ill health during the mortgage term are actually higher than death during the same period.
It is essential for a regular financial review to be undertaken to analyse and discuss these constantly changing key areas to offer you the opportunity to negate any financial shortfall.
Brief details on these points have been outlined below as a guide:
Life protection comes in a variety of formats but the principles are the same - to make a lump sum or income available on the death of the life assured. The most common association is in connection with mortgage finance offering sufficient protection to repay the mortgage in the event of death during the mortgage term. However, there are important applications for life protection other than securing the mortgage:
- To provide a lump sum, or income
Would the mortgage and any other commitments be repaid on death? Would there be sufficient financial resources available to offer suitable income for the family to maintain their lifestyle?
- Inheritance Tax Planning
Could there be an Inheritance Tax liability for your family? Who would be responsible for it? How would they pay it?
- Schools Fees Protection
Are you currently contributing towards schools fees planning? What would the financial implications be on death of the individual making this contribution?
With all of these areas the potential financial burden can be eased with suitable life protection where the class of cover, sum assured and term are all carefully selected but regularly monitored.
The most common types of life protection are as follows:
- Level Term Assurance
Providing protection where the level of cover remains constant throughout the term of the policy.
- Mortgage Protection
Most commonly associated with a Capital & Interest repayment mortgage where the level of cover reduces in line with the capital element of the advance.
- Whole of Life
As the name suggests, this policy does not have an end date and, subject to premiums being maintained and policy conditions, the sum assured will become payable. The policy does carry an investment value. The plan can be structured in one of two ways; either on a maximum basis where the benefits and premium are reviewed, typically after ten years, or balanced where the benefits are level but the policy carries a higher investment value.
- Convertible Term Assurance
Level term assurance but with the option to convert to Whole of Life or Endowment without further medical underwriting.
Critical Illness Cover
Whereas life protection will pay a lump sum or income on death what would happen should you develop a critical illness instead such as cancer, heart attack, or stroke? You may have to modify your lifestyle i.e be unable to work or forced to reduce the number of hours. Your home may need specialist equipment or you may need ongoing treatment. How would you cope financially and how long would your existing financial reserves last?
In this instance, would a one-off lump sum, or regular income, be of benefit to you?
Critical Illness cover is designed to bridge any potential financial shortfall where the possibility of surviving a serious illness is constantly increasing with ever improving medical treatment. It is available as a stand alone contract or coupled with life cover to provide an additional income or lump sum payment
The full title is Permanent Health Insurance, or more commonly abbreviated to PHI. The term 'Permanent' is given because once it has commenced, and the premiums and policy conditions maintained, the insurance company cannot terminate the plan until its specified end date. Therefore, the policy benefits can be paid out more than once assuming the deferred period has passed on each occasion. However, the policyholder can choose to cancel the plan at any stage.
Is your current income safeguarded should you be unable to work due to ill health. If so, for how long and what level of income would you receive? Whether you are employed or self employed adequate income protection is vital. The benefits can be paid by the insurer until you return to work or until the end date of the policy.
Private and Medical Cover
Would you and your family benefit from fast medical care if the need arose? There are a variety of plans available to fit your pocket based on the level of cover required.
Buildings and Content Cover
Have you in the past taken buildings and contents insurances via the lending institution who granted the mortgage? If so, you may have paid more than you need.
To offer you greater choice Kingsway Mortgages Limited can provide you with access to highly competitive insurance contracts from well established insurance companies for both buildings and contents cover. Individual Savings Accounts, Bonds, Unit or Investment Trusts. What's the difference? There are so many, which one is right for you? These are just a few of the questions we can help answer. Whether it's to fund for school fees, to repay your mortgage or as general savings vehicle, Kingsway Mortgages Limited is on hand to carefully consider and offer an unbiased selection of the most appropriate products to meet your needs. When did you last review your pension provision? Don't rely on the State to replace your income in retirement - it may not be enough.