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Mortgage Schemes

Introduction

The mortgage scheme sets out the conditions attached to each particular mortgage arrangement.  This will include details of early repayment charges, higher lending charges, arrangement fees, booking fees, length of time the scheme will run and many others.

The rate of interest used to calculate your mortgage payments and how it will change is probably the most important part of the mortgage scheme.  These fall into two main types, 

The mortgage scheme will run for a set period of time normally between 2 and 10 years of your mortgage term (the mortgage term is the total time you have taken your mortgage over say 25 years). After your mortgage scheme has finished the interest rate applied to your mortgage will normally revert to the lenders standard variable rate, which is often much higher than you could be paying.  

Variable rates have many different types. For more information on any of the following click on the scheme required.

Fixed Rate

This is fixed for the period of the scheme normally a period between 2 – 10 years of your mortgage term. However longer periods can be obtained.
The main features of a fixed rate scheme are:

  1. You pay the same each month for a set period
  2. There is no need to worry if interest rates go up  
  3. It will be easer to budget
  4. However
    1. There will normally be an arrangement fee
    2. Early repayment charges apply if you repay your mortgage during the deal period
    3. At the end of the scheme you may face a big increase to your mortgage payments if interest rates have risen a lot during your fixed rate deal
    4. If interest rates fall your monthly repayment will not reduce.

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Variable rates

Standard Variable rate

This the simplest method of charging money borrowed from a mortgage lender.

  1. There is normally no arrangement fee
  2. Early repayment charges do not normally apply
  3. You have a high degree of flexibility
  4. However
    1. You will normally pay a higher interest rate
    2. Your repayments will change as the lender changes their lending rate.

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Discounted rate

  1. The rate you pay will be discounted off the lenders Standard Variable rate for a set period of time
  2. There will often be some payment flexibility in the scheme
  3. However
    1. There will normally be an arrangement fee
    2. Early repayment charges will normally apply
    3. Your repayments will change as the lender changes their lending rate, although the discount will apply for the period of the deal.
    4. Normally the lower the interest rate you pay the higher the lenders fees to set up the mortgage.
    5. When the discount period ends the interest rate will normally revert to the lenders standard variable rate which is often substantially higher than the rate you have been paying accordingly there is likely to be an increase in your monthly payments.

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Base rate tracker

  1. The rate you pay will be linked to the Bank of England Base Rate plus or minus a fixed percentage for the period of the scheme so that your payments will only change when the Bank of England rate changes.
  2. There will often be some payment flexibility in the scheme.
  3. However
    1. There will normally be an arrangement fee
    2. Early repayment charges will normally apply
    3. Your repayments will change as the Bank of England change the Base rate.
    4. Normally the lower the interest rate you pay the higher the lenders fees to set up the mortgage.

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Capped and Collared

The cap can apply to any type of variable rate mortgage; it fixes the maximum rate a lender will charge, so that you can budget to that maximum.
The collar applies to the minimum rate the lender will charge on a variable rate scheme.  This is often seen on tracker mortgages.
Some schemes will have both a cap and a collar, where your payments will be based on the then current interest rate providing it is within the upper and lower limits; otherwise your payment will be based on the upper or lower rate.

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Flexible

There are many variations to flexible mortgages, many will allow:

  1. Overpayments
  2. Underpayments
  3. Payment holidays
  4. Additional borrowing
  5. Drawdown of overpayments
  6. Early repayments allowed without penalty

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Offset

Offset mortgages allow you to offset your current account or savings accounts against your mortgage. 
The balance on any current or savings accounts connected to the mortgage account do not receive interest, however the balance is offset against the mortgage account before interest is calculated.
The advantages are:

  1. You pay less interest. This is because interest is calculated each day on the balance of your mortgage account less the balance on your offset account.
  2. You save a potential tax liability on your savings used in the offset account
  3. Your mortgage payments remain the same each month however you will pay more off the capital balance and less interest each month reducing your mortgage term
  4. However
    1. The interest rate applied to your mortgage account is normally higher than other non offset mortgage accounts
    2. Not all lenders offer offset mortgages
    3. Different lenders can operate their offset accounts in different ways

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