Posted by admin On December 23rd 2020
A popular version of the flexible mortgage is the current account mortgage. Current account mortgages are a type of offset mortgage. They enable the borrower to carry out all of their personal financial transactions simply within a single account.
The account is able to accept salaries and other income, pay standing orders and direct debits, etc., in exactly the same way as a standard current account. The borrower will be provided with a debit card as per usual.
The combination of salary income and the calculation of interest on a daily basis considerably reduces the amount of interest payable and therefore also the term of the mortgage.
An alternative is the offset mortgage. These mortgages require the borrower to have savings or other accounts with the lender, and enables the interest payable on such accounts to be offset against the mortgage interest charged. For instance, if a borrower has an offset interest-only mortgage for £90,000 and £35,000 in a savings account with the lender, they can opt to waive payment of interest on their savings, enabling interest to be charged on a net loan of £55,000. This calculation is repeated on a daily basis.
Even the more complicated offset mortgages can enable the borrower to offset interest payable on various savings accounts against interest charged on their mortgage, and on any other loans they hold with the lender.
Cashback is an incentive offered by many lenders to their customers. A lump sum is paid to the borrower immediately on completion of their mortgage. This might take the form of a fixed amount or a percentage of the advance itself.
Generally, the lower the loan-to-value ratio (commonly abbreviated as LTV), the higher the cashback, as the risk of the lender losing money is reduced, and a lower LTV makes the borrower more attractive to the lender. For example, the cashback may be 3% of the advance for an LTV ratio of up to 80 per cent, and 2 per cent for a higher LTV ratio.
Some or all of the cashback would have to be repaid if the loan is repaid within a specified period.
Discounted rates and cash back may be used as loyalty bonuses or as a way of tempting clients away from competitors. Paying the borrower’s legal fees is another offer commonly made to encourage the borrower to switch to a different lender while incurring the minimum by way of costs.
Loan-to-Value (LTV) Ratio
The amount of the loan in relation to the value of the asset used for security is represented as a percentage. To give an example on a mortgage loan of £80,000 against a property valued at £100,000, the LTV is 80 percent.
Typically arranged by housing associations, shared-ownership schemes help people on lower incomes to become owner-occupiers, even if they cannot afford a standard mortgage by themselves.
Shared-ownership schemes enable a borrower to buy a percentage of the property and then pay rent on the remaining. For example, a borrower can purchase a 25% stake in a property, funded by a mortgage, with the option of buying further 25% in the future. As the homeowner increases their share in the property, the mortgage element increases and the rental element goes down.
This process of increasing the mortgage element is sometimes known as staircasing. Be aware that not all lenders offer mortgages for shared-ownership arrangements.