Mortgage Repayments & Interest vs House Value

When you borrow from a bank or other financial institution in order to finance your home, your monthly repayments are calculated according to the amount that has to be covered, capital amount plus accumulated interest, within the repayment period, usually 30 years. Essentially the first 5 years of repayments only pays the equivalent of the interest amount and therefore you will find that after approximately 5 years of paying your home loan, you still owe the original amount borrowed. The years prior to this, you were simply paying off the equivalent of the interest accumulated throughout the repayment period. In some cases, your first 7 to 8 years of repayments would only cover the interest meaning it will take you even longer to reach a point where it is viable to sell your home at the approximate amount for which you purchased it initially.

House Price vs Mortgage Amount

When selling your home, especially if you are debt ridden and looking for a quick house  sale to put cash in your hand immediately, then the settlement value of your mortgage loan has to be taken into account. By settling your mortgage early, the amount to be paid is substantially lower than the total amount outstanding since the interest will be deducted from the remaining repayment period. However some financial institutions may add a penalty fee for settling your mortgage loan very early as they will be losing on the potential income that they would have derived from your mortgage repayments over the entire period. This has to be factored into your final selling price, irrespective of the valuation price or market related pricing. Your property may be valued at less than the outstanding settlement value which has occurred in recent times when property prices dropped. Furthermore the competitive property market at this time means that your valuation price may not be in line with the average selling price of similar properties.

Ownership of Mortgaged Property

Due to these considerations, your financial institution may not allow you to sell your home at the price that you feel is sufficient. Remember that your property is not yours and ownership rests with the financial institution that provided the mortgage until you completely pay off the loan amount. Therefore you may be unable to make decisions about selling your home at a price that you wish. Alternatively, you may be allowed to sell your home at a price that you choose but you will find that after settling the bank, you are left with very little cash in your hand, which may be insufficient to even fund your next move to another property. Essentially you lose on the years of repayments that you have made thus far, leaving you without cash or a home.

Before considering a house sale or even before you get a valuation price, it is important to first speak to the institution that has provided the mortgage to find out the exact costs and amounts due in settling your mortgage earlier. Even if you opt for a quick sale through professional buying agencies, you may find that the reduced purchase price will play against you in the long run and you will have little choice but to continue with your mortgage repayments and live within your home, even if you are in a tough financial position.

Finding the right type of mortgage and repayment method for you is crucial. This is an area where independent financial advice is essential.

Repayment Mortgage

Each repayment contains some capital and interest. In the early years, the monthly repayment is made up almost entirely of interest. There will be a gradual reduction in the amount of capital owing. This mortgage is guaranteed to be repaid in full so long as you make each repayment when it is due.

Standard variable rate mortgage

Lenders set a standard variable mortgage rate which will fluctuate in line with the market conditions. It can prove to be a suitable option for those whose immediate future is unplanned and who may not wish to commit to a product which includes a tie in period in the form of redemption penalties. But can be difficult to accurately budget for your mortgage payments.

Discounted variable rate mortgage

Discounted variable rate mortgages involve paying a set amount below the basic variable mortgage rate for a certain number of years.

After the discounted period the rate will revert to the standard variable rate. There will usually be a charge for early repayment.

Fixed rate mortgage

A fixed rate mortgage allows you to fix your monthly payments for a specified period of time. After the fixed rate term has expired, the interest rate will revert to the standard variable rate available at the time. It may be possible to fix again when the period ends. This mortgage allows easy budgeting because you know exactly how much your monthly payments will be.

Fixed rate mortgages will protect you against possible rises in variable rates but, if general rates fall below the level of the fixed rate then this could work out a more expensive option.

Flexible mortgages

Allows you to make additional or lump sum payments in excess of your scheduled monthly amount, enabling you to pay off your mortgage early. This reduces the amount of interest charged. In addition, you can choose to re-borrow the money at any time.

Capped rate mortgage

Somewhat like the fixed rate in that the maximum amount you pay is determined during the given capped period, however if interest rates come below your capped rate then your rate will reduce to that rate as appropriate.

Cash backs

The lender gives you either a percentage of the loan or a flat amount as a cash incentive. This is not added to the loan and does not attract interest, though it may be repayable if the loan is repaid before a given period of time. It is common for a cashback to be combined with other mortgage products such as fixed or discounted rates. Cash back appeals particularly to first time buyers, money can be used for legal fees, soft furnishings etc.

ISA (Individual savings account)

Throughout the period of the loan only the interest is paid off. At the end of the loan period the loan amount is still to be paid off. To pay this amount a separate endowment policy or other suitable strategy is created at the start of the loan period. The funds created by this are used to pay off the loan. If the investment has done better than expected then you will have the surplus funds. However, if the policy does not cover the loan amount you will have to cover the shortfall.

If you have any dependents it is a good idea to make sure that, in the event of you becoming seriously ill or dying, they can continue to live in your home.

Other charges

Valuation Fee: depending upon a) the lender b) the type of valuation/survey you require.

Lender’s Arrangement Fee: payable either in advance or on completion and is sometimes added to the loan

Legal Fees: Solicitor’s fees which may include the need to pay Stamp Duty, Local Searches, Conveyancing Costs and Land Registry Fees.

Stamp Duty: Effectively a purchase tax. Properties valued at over £60,000 attract a tax of 1%. Properties valued at over £250,000 are taxed at 3% and over £500,000 4%.

Higher Percentage Lending Fee: An insurance fee if the mortgage is more than a certain percentage of the value of the property. This is used to protect the lender and not you. If the lender claims on the insurance policy you will owe the insurer the amount paid out.

Buildings and Contents Insurance: All lenders require that you insure your property to the full cost of rebuilding it. You should also have the contents of your home insured in case of a burglary, fire etc.

Mortgage Payment Protection: This will help protect your mortgage and you in the event that you are unable to work through accident, sickness and/or involuntary unemployment.

You should always seek professional help before deciding on a mortgage.