Mortgage Products

ACLs Level of Service

Choosing a mortgage may be your most important financial commitment. We will offer advice and a recommendation as to which mortgage is suitable for you. When giving advice, we will take care to help you select a mortgage to fit your needs by asking for relevant information about your circumstances and objectives. Our advice will also depend on your particular requirements and on the market conditions at the time. The following information provides definitions of frequently used terms and will help to explain what types of mortgage are available, how interest is calculated, and types of payment option available. It also includes some general advice regarding the maintenance of your mortgage account.

• Mortgage Types
• Repayment Types
• Other

Mortgage Types

Fixed rate mortgage

The interest rate charged and monthly payment is fixed for a set period of time helping you to budget. During this period you will be protected from any increase in monthly payments caused by an increase in variable mortgage rates, but you would not benefit from any reduction in those rates. However, during the fixed rate period, you will know exactly how much your mortgage payments will be. After the fixed rate period, the rate charged will revert to a variable rate or, in some instances, it may be possible to opt for a new fixed rate on offer at that time. Early repayment penalties normally apply during the fixed rate period.

Capped rate mortgage

This is less common and is a variable rate mortgage with a specified maximum interest rate that can be charged for a set period. In other words, whilst your monthly payments will be affected by movements in the mortgage rate, you will know the maximum rate that could be charged during the set period and hence be protected from rates higher than the maximum limit. A collared rate denotes a specified minimum rate that will be charged for a set period. Therefore, a capped and collared mortgage will be a variable rate mortgage when the rate will be limited between a known minimum and known maximum for the specified period.

Discounted rate mortgage

This is a variable rate mortgage which allows a pre specified reduction in the mortgage rate charged for a set term. This differs from a deferred payment mortgage, when instead of allowing a discount in the interest rate charged, a reduced monthly payment is allowed for a specified period, with the shortfall being added to the mortgage debt.

Tracker mortgage

This is a variable rate mortgage where the interest rate charged is linked by a specified margin above or below a defined variable base rate normally Bank of England Base Rate or LIBOR (London Inter Bank Offer Rate) - for the term of the mortgage. If the Base Rate or LIBOR is increased, the amount of your monthly payment will increase. Conversely, when the Base Rate or LIBOR decreases, so does the amount of your monthly payment. A Tracker rate removes from the lender any discretion to change the rate unless there is a change in Base Rate or LIBOR Rate. Tracker rates can sometime be discounted for a set period in the early years.

LIBOR stands for London Inter Bank Offer Rate the interest rate charged between banks and reflects money market changes; it is therefore reviewed more frequently than Bank Base Rate although some lenders will not insist on increased monthly payments unless they feel that interest rate increases will materially affect repayment of the mortgage within the original term provided for.

Many mortgage products carry an early repayment charge particularly if fixed or discounted. This acts as a disincentive to borrowers who wish to take advantage of the extra benefit but move to another lender or repay prematurely all or part of their borrowing during the fixed or discounted period. Please refer to your mortgage offer letter to see if this applies.

At the end of any fixed, capped or discounted rate period, the mortgage will revert to a variable rate which could be the lenders Standard Variable Rate or a Base Rate Tracker. This may be higher than the rate you have been paying. In some cases, the lender may offer you a choice of rates. Please refer to your mortgage offer letter for details.

Some mortgage rates can be continued if you move house during the term of the offer rate and will normally be described as portable. Please refer to your mortgage offer letter to see if this applies.

Repayment Types

There are three ways in which you can repay your mortgage. The first two are capital and interest repayment (where the mortgage is normally referred to as a repayment mortgage), and interest only payable (where the mortgage is often referred to as an interest only mortgage). On some commercial mortgages it is possible to arrange combinations of both of these. One option is to repay half the debt on a repayment basis and half the debt on an interest only basis. Another commercial mortgage option could be to pay interest only for an initial period of years and repay the debt over the remaining term of years. The third option often available to residential and commercial mortgages is called a flexible mortgage.

With a repayment mortgage, your monthly payments cover the interest charged and also include an element of capital repayment. These monthly payments are planned so that the capital is gradually paid off over the mortgage term. You will therefore see your mortgage debt decreasing over a period of time. It should be noted that in the early years, most of each payment is used to cover the interest charged. As the mortgage debt decreases, a higher proportion of each monthly payment is used towards capital reduction. The lender is likely to insist that life cover be in place to cover the mortgage debt especially in those instances where the mortgage is secured on an owner run business.

With an interest only mortgage, your monthly payments only cover the interest charged and therefore the mortgage debt will remain at a constant level. You will need to make some provision to repay the whole capital at the end of the mortgage term. In some cases, the lender may insist that you have an investment plan that will pay out a lump sum when it matures to repay the mortgage debt. In addition, it is usual for the lender to insist that life cover be in place to cover the mortgage amount.

A flexible mortgage can be either a repayment mortgage or an interest only mortgage and allows the borrower a degree of flexibility over making payments. If a borrower wishes to pay additional amounts of capital over and above the normal capital and interest, or interest only instalment the amount of overpayment can be redrawn or used to reduce future instalments or allow a payment holiday until the overpayment is used up. Some mortgages provide an additional credit facility above the amount initially required which can be accessed by a cheque book or internet account and is a useful way of reducing the cost of other more expensive borrowing. A version of this type of mortgage is the Offset Mortgage which requires a current account and mortgage account to run in parallel. Any credit balance in the current account is set off against the outstanding balance on the mortgage account on a daily basis thus reducing the overall interest cost.

Higher Percentage Advance Charge

If your mortgage represents a high percentage of the price or valuation of your property (usually 75% or more) you may have to pay a high percentage lending fee formerly known as a Mortgage Indemnity.