set the scene, let’s first add a few more basic definitions: -
Better know as a loan secured on land or property, but more precisely it
is the actual legal deed setting out the lending terms.
A lender can force a sale if you breech the loan conditions.
A mortgage that replaces an existing mortgage without moving house.
A re-mortgage can be for a larger amount than the old mortgage.
It is always worth considering a re-mortgage from time to time to see if
you can obtain a better deal. See
the “Remortgage” spreadsheet.
% The LTV
is a ratio of the loan to the value of the property, expressed as a percentage.
A £90,000 mortgage secured on a £100,000 property represents an LTV of
90%. Most lenders limit the maximum
LTV to 95% but some will go to 100%, which means no deposit is required at all.
See Indemnity Policy.
The difference between the
sale value of the property and the total of the loan charges, ie mortgages.
This is usually the same as the deposit for a purchase.
Multiples Most lenders base the maximum
advance that they are prepared to offer on what they think you can afford.
A commonly used simple rule of thumb is a multiple of your gross annual
income. Typically, many lenders will consider a loan of up to three
times your gross annual income. If
you have a partner joining in the mortgage, their income can be taken into
account as well, although at a lower multiple.
an alternative to using the coarse income multiple measure, more lenders are now
using an affordability calculation. The
maximum loan they think you can afford depends on factors such as how many
children you have, what your spending habits are and so on.
Lenders apply different models so it is difficult to predict the outcome
of a mortgage application.
Policy The higher the LTV, the greater is the
risk to the lender of making a loss, since the equity is smaller.
Not only does smaller equity provide less cover, but also borrowers are
more likely to default, as there is less for them to lose.
Lenders set a maximum LTV, typically 75%, which they consider
“normal”. Any higher loan can
require a lump sum premium to pay for a mortgage indemnity guarantee policy (MIG),
which covers the excess lent over 75% in the event of a loss on a forced sale.
Most lenders will allow the premium to be added to the loan.
Some lenders now take the risk themselves, or alternatively pay the MIG premium themselves. In fairness, the higher LTV is undoubtedly more risky for the lender, and borrowers should not be surprised if lenders charge high LTV borrowers more, in one way or another.
Second Charge Several lenders can take a charge on your property. Any one of them has a legal right to sell the property if you have defaulted on their particular loan agreement. The first lender has the first charge. This means they have the first pick of the sale proceeds before any other lender. Lenders can have a 1st, 2nd or even 3rd or more charge on your property. From the lenders point of view a second or subsequent charge is less secure as the prior charge has control. After the 1st lender has taken its due, there may be insufficient money left for any later lender. As a consequence, interest rates are usually higher for 2nd or more charges. A property with no charges is referred as “unencumbered”.
The borrower. Note that the borrower still owns the property and not the
lender. Any equity belongs to the
owner, even if the lender forecloses – the lender can only take what it is
owed. The owner is
responsible for the upkeep of the property.
The lender can only force a sale through the Courts and only then if
there have been serious arrears or other breaches of the loan agreement.
The lender, who takes out the legal charge on your property, usually a
first charge but sometimes a second or third charge.
Most loan agreements insist
that you covenant to repay the loan regardless of any security deficiencies.
If your house sale, forced or otherwise, still leaves a shortfall, the
lender is still entitled to be repaid out of your income and any other assets
you may have.
Some lenders charge a fee if
a mortgage is redeemed (repaid or settled) earlier than contracted.
Most would waive this fee if the borrower stayed with that lender, and
took out another mortgage at the same time of at least the same amount.
The charge is justified when an initial discount is offered.
Lenders hope to recoup that discount over a period, and if you redeem
early, they rightfully would wish to charge you for the shortfall.
Redemption fees can also rightly apply when a fixed rate mortgage is
redeemed early to compensate the lender for having to break its fixed rate
contract with third parties.
Some lenders charge a redemption fee even after any special discount or fixed rate period has expired. This is often called a tied-in redemption fee. The Office of Fair Trading (OFT) felt that was unfair, because the lender could in theory increase the future variable rate to an unfair figure. Nevertheless, such tie-ins can still be valid if they mean a better IRR and, if you intend to stay with the lender in question, the fee is seldom charged anyway. The OFT assumes that all borrowers need protecting from unscrupulous lenders, although it would never be in a lender’s long term interests to exploit this situation – otherwise every variable rate borrower would be vulnerable at all times.
The legal right to hold land or property as the absolute outright
owner, free of payment or any other duty owed to another party. As a freeholder,
you can then offer to rent your land or property to parties with whom you'll
have a legal agreement.
Holding a 'leasehold' gives you the right of
possession, but not ownership, of a property for an agreed period of time.
Ultimately, ownership remains with the freeholder. The duration of the
right of possession is usually a fixed term granted by the lease.
The lease will set out details of rents and obligations such as repairs
etc. Leasehold is in direct contrast to freehold where ownership is absolute.
A person or company who rents
or leases property for a short period of time: also called the lessee (the
landlord is the lessor). During
that time tenants can occupy the property as if they were a temporary owner, in
exchange for paying a regular rent. The
terms and conditions are set out in a lease or rental agreement.
Most residential tenancies these days are shorthold and are for
terms of at least 6 months but not often more than 12 months. Most
landlords are now very much more flexible now the law is generally more
supportive of the rented sector.
One can also acquire a property (typically a flat in a block) on a long leasehold (say 100 years) and pay a modest ground rent to a landlord: this is virtually the same as owning the freehold. A long lease however often includes terms for the upkeep of the “common parts” such as gardens, staircases, lifts and so on.
Mortgage Interest Relief at Source – abolished since 6th
April 2000. Before that date,
successive governments have subsidised house purchase by allowing tax relief on
mortgage interest. MIRAS did not
change the relief, only the way it was collected:
borrowers paid a net figure to the lender and the lender reclaimed the
relief from the Inland Revenue. Before
MIRAS was introduced in the early 80s you had to claim the tax relief by an
adjustment to your PAYE code.
But governments have gradually eroded the relief (and how it is applied) over a long period, first restricting it to basic rate tax, then only on the first £25,000 loan (subsequently raised to £30,000) and then cutting the rate of relief down to 10% of the interest up to £30,000 and finally abolishing it.
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