Types of Mortgages

Unfortunately in recent years mortgages have become increasingly complex and wrapped up in technical jargon. Borrowers now need to consider at least two things, the type of mortgage loan they want and how they are going to repay it. Have a look at your options below.

Types Of Mortgages: Here is the list of different types of mortgages that are available in UK markets.

Variable Rate Mortgage

Rates on these loans fluctuate in line with general interest rates but because they are at the lenders discretion they dont necessarily move as far, or as fast. Discounts are usually offered to new borrowers in the early years.

Tracker Mortgage

Rates on tracker loans are normally linked directly to movements in the Bank of England base rate. The link may be for a limited period rather than the life of the mortgage.

Cashback Mortgage

When these loans are granted, cash payments are given to borrowers to spend how they like. They are typically between 6 per cent and 8 per cent of the loan.

Fixed Rate Mortgage

Rates of interest on these loans are guaranteed not to change for a specified period, typically the first three to five years of the mortgage.

Capped Rate Mortgage

With this type of loan, the interest rate is guaranteed not to exceed a fixed level during the capped-rate period. The advantage is that it can go down if rates are cut.

Repayment Methods

Repayment Mortgage

Also known as capital and interest mortgages because part of the monthly payments gradually pays off the loan while the remainder covers the interest on the amount outstanding.

Offset Mortgage

These loans are taken out in conjunction with a current account or savings account. Regular mortgage repayments are required but at the same time the cash in the other accounts helps to reduce the loan, thereby saving interest. This can help to speed up repayment of the mortgage.

Interest Only Mortgage

As its name implies, the borrower pays the interest only on the loan during the mortgage term so the capital remains outstanding. Payments may also be made into a savings scheme, such as an Individual Savings Account, to repay the capital at the end of the term. Sometimes the loan is repaid out of the sale proceeds of the property.

Endowment Mortgage

This is where an interest-only loan is combined with a life assurance with-profits policy intended to pay out a sufficient sum to clear the mortgage at the end of the term. But endowment policy payouts are not guaranteed and many are currently expected to produce shortfalls.

Link to Previous article : How the Standard Compensation is calculated

How the Standard Compensation is calculated

The FSA document have a nice example of how the Standard Compensation is calculated in case of endowment policy.

Click on the image below to have a bigger view of the figure:

Link to Previous article : Time limits for mortgage endowment complaints

Complaint about a mortgage endowment policy - 2

I’ve surrendered my policy – can I still complain?

Yes, you may have a valid complaint and be due some redress – as long as you can show that you were not properly advised at the time of the sale and you lost out financially as a result.

Should I complain if:

_ My endowment policy finishes after I retire?
You may have a valid complaint if the adviser did not check that you were likely to be able to afford to carry on paying the premiums after you retired.

_ I was advised to cancel one endowment policy and take out another?
You may have a valid complaint. An endowment policy is a long-term investment that often gives a poor return if you cash it in early. You should usually avoid cashing in one policy and taking out another for the same purpose.

_ My endowment policy runs on after my mortgage loan is due to finish?
You may have a valid complaint. An endowment policy sold to repay a mortgage loan will not normally be suitable if it finishes after the date when the loan has to be repaid.

_ I was given a guarantee that the endowment policy would pay off my mortgage loan?
You are likely to have a valid complaint if you can show that you were told that the endowment policy was guaranteed to pay out enough to pay off your mortgage loan and that this was part of the legal contract between you and the firm. This is likely to be rare.

Will I be charged for making my complaint?

You will not be charged if you complain to the firm that sold you the policy.
If you need to refer your complaint to the Ombudsman, this service is also free.

Complaints management companies

Some companies offer to help consumers pursue their complaints with financial services firms and with the Ombudsman. In return, the consumer has to pay the company a fee, usually in the form of a fixed share of any compensation that is awarded for a successful complaint.

Some companies ask for a fee upfront, and you may still have to pay a fee if you decide not to use them. So make sure you understand what you may have to pay and when you would have to pay it.

A number of these companies are currently focusing on mortgage endowment complaints, where the ‘success fee’ you would have to give them can amount to hundreds or even thousands of pounds. This is money that you obviously won’t then be able to put towards paying off your mortgage. And using these companies does not necessarily increase the chances of your complaint succeeding or of your getting compensation.

Your own circumstances may mean that you would find it helpful to use one of these companies to handle the complaint for you.

But think carefully about the likely costs and benefits of this and do check the fees and conditions before you sign any contract.
From April 2007 complaints management companies operating in England and Wales must be authorised by the Department for Constitutional Affairs – see Useful Contacts .

What if I can’t trace the firm that sold me the endowment policy, or the firm has ceased trading?

If you bought your endowment policy through an independent financial adviser, your endowment company should have the details of who sold it to you. If you’re not sure the firm still exists, contact the FSA Consumer Helpline or use the Check our Register service – see Useful contacts .

If you cannot trace the firm because it has ceased trading, you can contact the Financial
Services Compensation Scheme (FSCS) – see
Useful contacts.

The FSCS is a ‘fund of last resort’ for consumers who have a claim against a firm that has been authorised by the FSA but is unable (or likely to be unable) to pay claims against it, often because it has ceased trading. But the FSCS is unlikely to be able to help you if the advice was given before 28 August 1988.

Link to Previous article : Complaint about a mortgage endowment policy - I

Home purchase plans and regulation – 2

A home purchase plan may be right for you if you want to buy your home in a way that does not involve paying interest and that a number of scholars of Islamic law consider acceptable. But you need to think about several things, some of which are listed below.

Islamic services

If it is important to you that the firm you use offers Islamic services, check that it does. Firms we regulate must give you a document called about our home purchase plan services. The document must tell you the names of the scholars who have checked that the firm’s services comply with Islamic law.
FSA regulates the financial services provided by a firm – FSA do not regulate its compliance with Islamic law. If you have any doubts about the Islamic nature of the product or services a firm is offering, you should speak to your imam or an independent Islamic scholar.

How much finance do I need?

Home purchase plans are a long-term commitment so think about how much you can afford. For example, what would happen if your circumstances changed and you lost your job or had to take a drop in income? Also you can't be sure that your rent won't go up in future. If you can't pay your rent, you'll be breaking the terms of the lease.

Shop around

There can be a big difference in what is available from different firms, so shop around to:
 -- get all the information available from firms about their individual services and products; and
 find out about different rental rates on offer – for example, standard, fixed and discount rates – and the total cost of each one.

Use the keyfacts document called about our home purchase plan services to compare the service being offered by different firms and the keyfacts financial information statement to compare the cost of the products on offer

Getting advice

Home purchase plans are complex products. Make sure you get advice from a specialist adviser to help you understand them.
Firms we regulate and their agents must follow the standards we set when giving you advice. They should only recommend those home purchase plans that are suitable for your personal circumstances, based on the information you give them.

What are the risks

■We require firms offering these products to protect your interests. However, there will be limits to what the firm can do, so it’s important to get independent legal advice to make sure your interests are properly protected. Take the time you need to make sure a home purchase plan is right for you.

■You need to remember that the firm, not you, owns the property, and that you won’t legally own your home until the end of the agreement – this can be anything up to
25 years.

■During this time, if the firm goes bust, or sells its part of the property to someone else, unless your interests have been properly protected you may risk losing your share of the property and your right to live there.

■Make sure that the lease giving you the right to live in the property has been properly registered with HM Land Registry or you may lose your right to live there.

■As with any method of buying a home, you need to think about whether or not you will be able to continue to make payments if your circumstances change.

Additional Costs

Two solicitors will be needed – one to act on behalf of the firm and one to act on your behalf. You will have to bear the costs of both.

Because the firm is the owner of the property, you may also pay more for a valuation and buildings insurance than you would with a mortgage.

Features not included

Because of the way they work, home purchase plans may lack some of the features of an interest-based mortgage.

For example:
■Overpayments normally allow you to pay for your home more quickly. When you take out a home purchase plan you can only make overpayments when the rent is reviewed, and this does not reduce the term but the amount you pay each month. This means you usually won’t benefit immediately from overpaying each month as you could with a mortgage.

■A further advance of money is often used to pay for things like home improvements. Unlike a mortgage, you may not get a further advance on an existing home purchase plan.

■Payment holidays allow you to stop making payments for a time. This may be useful if you were to lose your job or take time off to look after a child, for example. You can’t usually take a payment holiday with a home purchase plan.

Check the information from firms to see what features they offer.

Link to Previous article : Home purchase plans and regulation - 1

Home purchase plans and regulation

What are home purchase plans?

Home purchase plans help you buy your home in a way that doesn’t involve paying interest.
So they may be of special interest to Muslims who want to buy a home in a way a number of scholars of Islamic law consider acceptable.

What does regulation mean for you?

Firms we regulate must meet set standards. Among other things, this means that firms must:

■have staff with the necessary skills and knowledge;

■give you clear information about the services they provide –and

■only sell you products that suit your needs and circumstances.

And if things go wrong with a firm FSA regulate, you may have access to schemes that deal with complaints and possibly compensation.

Always check that the firm you’re dealing with is regulated by FSA.

■You won’t pay interest with a home purchase plan.

■Keyfacts documents contain important information that you should read.

■Protect yourself – only deal with firms regulated by the FSA.

Home purchase plans work in the following way:

Step 1: You find the property you want to buy and agree the purchase price with the seller.

Step 2: You pay the home purchase plan firm a contribution towards the purchase price.

Step 3: The firm buys the property in its name.

Step 4: You enter an agreement to buy the property from the firm at the end of a fixed period (known as ‘the term’) at the same price as the purchase price paid by the firm.

Step 5: At the same time you enter the agreement with the firm to buy the property, you also take out a lease with the firm allowing you to live in the property during that fixed period.

Step 6:
You make monthly payments to the firm. Each payment is made up of a rental payment and a payment towards the purchase price of the property.

Step 7:
Once you have made all the payments to the firm, the property is transferred into your name and
becomes legally yours.

Two types of home purchase plan are currently available – the ijara and the diminishing musharaka.

1. The ijara

Under the ijara, the monthly payments you make towards buying the property are held by the firm and used to buy your home at the end of the agreement.



2. The diminishing musharaka

Under the diminishing musharaka, each payment you make towards buying the property buys a slice of the firm’s share. So the firm’s share in the property gets smaller while your share increases. As your share in the property increases, so the rent you pay for the use of the firm’s share will get smaller.


Ask the firm for full details of their home purchase plans to make sure you understand how they work. You can then choose which is best for you.

Link to Previous article : Open Market Home Buy Scheme - 5

Open Market Home Buy Scheme - 5

Don’t forget

■ With Open Market HomeBuy, you get an equity loan from a mortgage lender and a HomeBuy Agent, as well as a standard mortgage loan.

■ You pay interest on the standard mortgage loan, and after five years on the lender’s equity loan too. You won’t ever pay interest on the HomeBuy Agent’s equity loan.

■ The amount you owe on the equity loans will increase if the value of your home increases. Over time, this could mean you owe much more than you originally borrowed. Think about how you would repay this.

■ Any money from the value of your home that you have to pay the mortgage lender and the HomeBuy Agent will mean you have less to put towards buying a new house if you want to move home.

■ Make sure you understand what you will owe if your home falls in value.

■ All the loans must be repaid before you get any money from the sale of your home.

■ If your home is worth less than the amount you owe, you usually won’t have to repay the HomeBuy Agent in full.

■ Whenever you repay one of the equity loans, you’ll have to pay for a valuation of your home.

Is this type of mortgage right for you?

■ There are many types of mortgage available and different ways to get onto the property ladder. Open Market HomeBuy gives you an extra option, but it’s important to consider all the choices available to you before you decide what’s right for you. Perhaps you could get a conventional mortgage by choosing a cheaper property, buying with a friend or building up a deposit. There are also other government housing schemes that your HomeBuy Agent can tell you about.

■ If you do decide to use the Open Market HomeBuy scheme, you’ll also have to decide which mortgage lender to borrow from. The about this mortgage document will help you compare different mortgages and choose the one that is best for you.

■ If you are unsure about all the different options available, consider getting some independent
financial advice. Your HomeBuy Agent may be able to give you details of a specialist adviser.

What is right for you will depend on your needs and circumstances. Before making a decision about an Open Market HomeBuy mortgage, you should make sure you have considered all the options open to you.

Useful FSA publications

0845 numbers will be charged at the local rate based on current charges from BT landlines.
Charges for calls from mobile phones and other networks may vary.
Available from FSA website:
www.fsa.gov.uk/consumer or on our Leafletline on: 0845 456 1555

■ Choosing a mortgage – taking the right steps

■ You can afford your mortgage now but what if...?

Work out what you can afford using our online mortgage calculator:

FSA mortgage calculator:
www.fsa.gov.uk/consumer

Other information

More information about the Open Market HomeBuy scheme, including eligibility and the application process can be found in the Housing Corporation leaflet, Have you heard about Open
Market HomeBuy? This is available from the Housing Corporation’s website at www.housingcorp.gov.uk

Link to Previous article : Open Market Home Buy Scheme - 4

Open Market Home Buy Scheme - 4

Repaying the equity loans

Because the amount you owe on the equity loans is based on the value of your home, when you repay them your property will have to be valued. You will have to pay for this valuation.

Repaying the mortgage lender

The mortgage lender’s equity loan will run for the same length of time as your standard mortgage loan – often known as ‘the term’. You will agree this with the mortgage lender when you take out the loans. At the end of this time, you must pay whatever you owe on the equity loan. The mortgage lender will often allow you to repay your loans earlier, but they may charge you a fee for this, known as an ‘early repayment charge’.

You may also have to repay the mortgage lender’s equity loan if you move home – check whether your lender will allow you to transfer the loan to a new property. The amount you owe on the equity loan will have gone up if the value of your home has increased.

Think about how you will repay this money.

Repaying the HomeBuy Agent

The HomeBuy Agent’s equity loan won’t have a fixed date for repayment. You repay the loan when you sell your home, or if you are no longer eligible for the scheme – for example, if you leave your qualifying employment. Your HomeBuy Agent will tell you more about how this could happen.

You can repay the HomeBuy Agent’s loan earlier if you wish, but remember that whenever you repay the loan, if the value of your home has increased you will need to give the HomeBuy Agent their share of the increase. You have to pay back the full amount of the loan and any increase in one go – you can’t pay it in stages.

Can I move to a new home without having to repay the loans?

When you sell your home, you will always have to repay the HomeBuy Agent’s loan, including the HomeBuy Agent’s share of any increase in the value of your current property. But you may be able to apply for another Open Market HomeBuy loan to buy a new home. Your HomeBuy Agent will be able to tell you if you are still eligible for the scheme.

And remember you may also have to repay the mortgage lender’s loans if you move home. This may mean paying early repayment charges. The about this mortgage document will give you this information. Bear in mind that you may have to repay the loans earlier than you planned – you may need to sell your home to move with your job for example.

Could I lose money with this scheme?

In some cases when house prices fall, you could owe more than the house is worth. This is known as ‘negative equity’. It would make it difficult for you to move. This is a risk with any mortgage.
Open Market HomeBuy gives you some protection against negative equity. If the money from the sale of the house won’t pay off all the loans, then you don’t have to pay the HomeBuy Agent their full share – just what is left over after everything you owe to the mortgage lender has been paid. But in these circumstances you won’t get any money from the sale – whatever money there is must go towards paying as much of the HomeBuy Agent’s loan as possible. All the loans secured against your home need to be paid off before you get any of the money from the sale – you are last in line. So any money you put down as a deposit could be at risk.

What if I want to switch to a different mortgage deal?

If you want to switch the standard mortgage loan to a different deal, you will have to pay back what you owe on the mortgage lender’s equity loan as well. That means paying back the standard mortgage loan, the original equity loan and the mortgage lender’s share of any increase in the value of your home. You will need to think about whether you can afford to do this. You may also need to pay an early repayment charge.

Link to Previous article : Open Market Home Buy Scheme - III

Open Market Home Buy Scheme - III

What would happen to the equity loans if the value of my home falls?

Different mortgage lenders deal with a fall in value differently, so it’s important to understand how any loan you apply for works.
With some mortgage lenders, the amount you owe will fall if the value of your home falls. Mortgage lenders who take this approach will share any fall in value, in the same way that they share any increase.

Example 2 – The mortgage lender shares any fall in value

Remember, Adam bought a house for £150,000 using an equity loan of £18,750 from his mortgage lender (12.5% of the property’s value).

Suppose the value of the house falls by 5% when he decides to sell his home. It is now worth £142,500. What does he owe the mortgage lender? Because his mortgage lender is sharing any fall, what Adam owes is based on the new value of the property. He originally borrowed 12.5% of the property’s value so he now owes 12.5% of £142,500, which is £17,812.50.

That’s £937.50 less than he originally borrowed.



Other mortgage lenders won’t share a fall in value, although they will take a share of any increase, so the amount you owe them on the equity loan will never fall below the amount you originally borrowed.

Example 3 – The mortgage lender doesn’t share any fall in value

If Adam’s equity loan from his lender worked like this, then if prices fall he will still owe the lender the amount he originally borrowed – in this case £18,750.

Link to Previous article : Open Market Home Buy Scheme - II

Open Market Home Buy Scheme – II

This is part II of the article: Open Market Home Buy Scheme - I. Please read the article from part I, before proceeding with this part.

The FSA document covers a very good example as below:

Example 1 – The value of your home increases

Adam buys a house for £150,000. He has a deposit of £3,750. In addition to a standard mortgage loan of £112,500, he takes out a £18,750 equity loan from the mortgage lender and another equity loan for £15,000 from the HomeBuy Agent.

■ The mortgage lender’s equity loan is 12.5% of the property’s value (£18,750 is 12.5% of £150,000).

■ The HomeBuy Agent’s equity loan is 10% of the property’s value (£15,000 is 10% of £150,000).

When Adam decides to sell his home, the value of his house has increased by 20% to £180,000. This is an increase of £30,000. So what would he owe on the mortgage lender’s equity loan and what would he owe on the HomeBuy Agent’s equity loan?


The mortgage lender’s equity loan

Adam originally borrowed 12.5% of the property’s value from his mortgage lender. So, in addition to the £18,750 he originally borrowed, he will also owe 12.5% of the £30,000 increase, which is £3,750.

So, on the mortgage lender’s equity loan, Adam now owes £18,750 plus £3,750, giving a total of £22,500.

The HomeBuy Agent’s equity loan

Adam originally borrowed 10% of the property’s value from the HomeBuy Agent. So, in addition to the £15,000 he originally borrowed, he will also owe 10% of the £30,000 increase, which is £3,000. So Adam now owes the HomeBuy Agent £15,000 plus £3,000, making a total of £18,000.

What happens to the equity loans if the value of my home increases?

The amount you finally repay to the mortgage lender and HomeBuy Agent on the equity loans will depend on the value of your home at the time you repay the loans. The share of any increase in value that you owe will be based on the percentage of your home’s value you originally borrowed.



Adam will also have to pay back the amount he borrowed on the standard mortgage loan from his mortgage lender, but this isn’t affected by changes in the value of his home.

Remember:
If you borrow under the scheme, part of any increase in the value of your home will belong to the mortgage lender and the HomeBuy Agent. This means that the amount you owe them both will increase if the value of your home increases. The more the value of your home goes up, the more money you’ll owe on your equity loans. This could mean a big increase in the amount you owe. You need to keep this in mind – think about what you owe and how you will repay it.

Link to Previous article: Open Market Home Buy Scheme - I

Mortgage Shortfall: can’t avoid mortgage shortfall?

Firstly, when your investment pays out at the end of the mortgage term, you should pay all the money into your mortgage to find out exactly how much you still owe the lender. You then need to look at how best to pay off the shortfall.

Talk to your lender as soon as possible. You may have a number of options available to you, some of which we list below.

■ Pay the shortfall from savings you have elsewhere.

■ Discuss a new repayment period with your lender to pay the shortfall. The quickest way may be to carry on with your previous monthly payment, although you may be able to agree a lower payment over a longer term. You should avoid extending the term beyond your retirement, unless you’re sure you can afford it.

In general, provided you keep up the new agreed monthly mortgage payments, you should not lose your home as a result of the shortfall.

■ You could sell your property to repay the mortgage, and buy a cheaper property so that you don’t need a mortgage.

■ If you have retired, or are about to retire, you could consider a lifetime mortgage. This is repaid from the proceeds of the sale of your home when you die or if you move out of it (perhaps into a care home) when the scheme will usually end.

But you should think very carefully about this as there are risks as well as benefits. The FSA factsheet Raising money from your home will tell you more about these and other options, but you should think about taking professional advice on this option.


FSA documents list a very good Example as below

Joe has come to the end of his mortgage term and the endowment company has paid him £35,000, but this is not enough to pay off his mortgage and he is left owing the mortgage lender £8,000. The interest rate on his mortgage is 4.4%. Joe could carry on with the monthly payment he has been making, which is £157.67. This would repay the remaining capital and interest in 4 years and 9 months, costing £8,987 in total, but the monthly amount is more than Joe wants to pay. Joe will retire in seven years. So he has agreed with his lender that he will repay the £8,000 over seven years and his monthly payment will be £110.66, which will cost him £9,295 in total.

Useful contacts

Call rates may vary

FSA Consumer Helpline

Tel: 0845 606 1234
Minicom/Textphone: 08457 300 104
Leafletline: 0845 456 1555
Website: www.fsa.gov.uk/consumer

To find a financial adviser
IFA Promotion

Tel: 0800 085 3250
Website: www.unbiased.co.uk
(for a list of four independent financial advisers local to your area)

Link to Previous article: Repaying your mortgage: Alternative available

Repaying your mortgage: Alternative available

Make changes to your existing investment or savings plan

If you want to make changes to your investment or savings plan, you should talk to your product provider or a financial adviser. They should be able to tell you if the changes below are possible on your particular investment.

Extend the term.


􀀗 You could check whether it is possible to rearrange the investment or savings plan over a longer term, and if you are able to do so, ask your lender to extend the mortgage term to match.

􀀗 Gives you more time to pay off the loan by making more payments into your policy if you can’t afford to increase your payments.

􀀗 You may face extra charges, and a tax liability, if you vary an endowment policy. So it may be
a good idea to take advice first.

􀀛 The growth of your investment or savings plan is still linked to the stockmarket, so there’s still
no guarantee it will reach its target amount.

􀀛 Not a good idea if it means taking your mortgage into retirement, unless you are sure you’ll be able to afford it.

􀀛 The longer the term of the loan, the more interest you’ll end up paying in total.


Top up your investment or savings plan by paying in more each month.

􀀗 You should ask your product provider if it is possible to do this and, if so, whether there are any charges. If there were high charges, it may make this option poor value for money.

􀀗 You may also face tax liabilities, so you may want to take advice.

􀀛 Your investment or savings plan is still linked to the stockmarket.

􀀛 You could be worse off than if you used the same monthly payments to reduce your mortgage.

􀀛 Under a personal pension only part of any increased savings can be taken in cash. And nothing can be taken before age 50 (rising to 55 by 2010).

Link to Previous article: Mortgage Endowment Policies

Mortgage endowment policies

If you think you have grounds for complaint about the sale of your endowment policy, but have not yet made a complaint, do it now – time may be running out. But remember – having a potential shortfall doesn’t necessarily mean you were missold your endowment policy.

If you get compensation from making a complaint about the sale of your endowment policy, you should consider using it to reduce the amount you owe on your mortgage.

What can I do now to make up a shortfall?

There are various ways to make up the gap. Some offer more certainty than others. The options available to you are to make changes to your mortgage, start an additional investment or savings plan, or to make changes to your existing investment or savings plan. These are explained below.

You may find that one of the options already matches your existing repayment arrangements. If so, consider the pros and cons of continuing or switching to an option that is better for you. Always take advice if you are not sure which option is right for you.


The figures in the examples that follow are for illustration only.

Example
Helen is 48 and has an interest-only mortgage of £50,000 linked to an investment. The mortgage has seven years left to run and the interest rate is 4.8%.
She asked her product provider to give her an up-to-date projection and this told her there is likely to be a shortfall of about £10,000.

Helen wanted to change £10,000 of her mortgage to a repayment method, but her payments would have increased from £200 a month to £302.97 a month and she didn’t think she could afford the increase. Helen talked to her lender, who told her that she could extend her mortgage term by five years as it will still be repaid by the time she retires, though extending the term does mean that she will pay more in total.

Her monthly payments will now be £252.96. When the investment pays out in seven years and she pays off most of the mortgage, her payments will reduce.


1. Make changes to your mortgage

Ask your lender to switch part of your mortgage – the amount of your projected shortfall – to a repayment method.

􀀗 Your current projected shortfall should be paid off by the end of the mortgage term.

􀀗 Should be fairly simple to arrange at low cost.

􀀗 Could be a flexible option – if the projected shortfall grows, you can switch more of your loan to a repayment method.

Ask your lender to convert your whole mortgage to a repayment method so that you repay all the capital by the end of the term.

􀀗 Your mortgage will be paid off at the end of the term if you keep up the payments.

􀀗 The longer your mortgage has to run, the smaller the increase in your monthly repayments will be.
􀀗 If you can afford it, you could continue with your investment or savings plan just for saving.
And some investment products include useful insurance cover such as life cover, or another
type of cover such as critical illness insurance.
􀀛If you were to cash in your investment you could lose out financially, and you may need to arrange other insurance cover.

So consider getting advice first if you are at all unsure.

If you want to convert your whole mortgage to a repayment method but are worried that you might not be able to afford higher payments talk to your lender. The increase in payments may not be as much as you think and your lender may be able to come up with a plan that can help you.

For example, a repayment mortgage of £50,000 and an interest rate of 4.75% with 15 years to run will cost you £388.41 a month. But in some cases you may be able to extend the term of your mortgage – a mortgage of £50,000 with 20 years to run and an interest rate of 4.75% would be £322.74 a month. This would limit the increase in the monthly payments, though it does mean that you would pay back more in total over the mortgage term. Think very carefully about extending the term if it would end after your retirement age.

Repay part of your mortgage early by paying off a lump sum, or by overpaying each month.

􀀗 This will reduce the amount you owe, and the amount you need your investment or savings plan to cover.
􀀗 It may be better value than saving up separately to pay off the shortfall in future.
􀀗 You should check whether your lender will make an early repayment charge if you overpay.
􀀗 You should also check when your lender will give you the benefit from extra payments – some do so only once a year.

Making changes to your mortgage is probably the lowest-risk option to make up a shortfall. Ask your lender if there will be any charges for making changes to your mortgage, and how much these will be.

2. Start an additional investment or savings plan

Use a cash savings account.

􀀗 The amount you get back does not depend on the performance of the stockmarket.

􀀗 May be a good option for the short term – for example, if you have to delay paying off a lump sum from your mortgage because of early repayment charges, or your mortgage is near the end of its term.

􀀗 Taxpayers can avoid paying tax on their interest by saving in a cash ISA. (But remember there are limits on how much you can pay into an ISA each year.)

In the long term, other options (such as overpaying on your mortgage payments) are likely to prove better value for money.

Use a stocks and shares ISA.

􀀗 Potentially a good way of saving over the longer term. Historically, stocks and shares have grown more than cash savings accounts which have interest added. (But remember there are limits on how much you can pay into an ISA each year).

􀀗 Currently a tax-efficient way of saving. However, not sure of the government policies in the future

􀀛This type of product is linked to the stock market, and the value of your investment could fall as well as rise. So there’s no guarantee that your investment will grow enough to make up a projected shortfall.

􀀛Stocks and shares ISAs are meant for investing in the long term, and generally may not be suitable if you only have a short time to build up a lump sum.

If you decide to start an investment or savings plan to make up a shortfall, it would be a good idea to take financial advice.

Link to Previous article: Pay your mortgage with investment/saving plan

Mortgage endowment policies

If you think you have grounds for complaint about the sale of your endowment policy, but have not yet made a complaint, do it now – time may be running out. But remember – having a potential shortfall doesn’t necessarily mean you were missold your endowment policy.

If you get compensation from making a complaint about the sale of your endowment policy, you should consider using it to reduce the amount you owe on your mortgage.

What can I do now to make up a shortfall?

There are various ways to make up the gap. Some offer more certainty than others. The options available to you are to make changes to your mortgage, start an additional investment or savings plan, or to make changes to your existing investment or savings plan. These are explained below.

You may find that one of the options already matches your existing repayment arrangements. If so, consider the pros and cons of continuing or switching to an option that is better for you. Always take advice if you are not sure which option is right for you.


The figures in the examples that follow are for illustration only.

Example
Helen is 48 and has an interest-only mortgage of £50,000 linked to an investment. The mortgage has seven years left to run and the interest rate is 4.8%.
She asked her product provider to give her an up-to-date projection and this told her there is likely to be a shortfall of about £10,000.

Helen wanted to change £10,000 of her mortgage to a repayment method, but her payments would have increased from £200 a month to £302.97 a month and she didn’t think she could afford the increase. Helen talked to her lender, who told her that she could extend her mortgage term by five years as it will still be repaid by the time she retires, though extending the term does mean that she will pay more in total.

Her monthly payments will now be £252.96. When the investment pays out in seven years and she pays off most of the mortgage, her payments will reduce.


1. Make changes to your mortgage

Ask your lender to switch part of your mortgage – the amount of your projected shortfall – to a repayment method.

􀀗 Your current projected shortfall should be paid off by the end of the mortgage term.

􀀗 Should be fairly simple to arrange at low cost.

􀀗 Could be a flexible option – if the projected shortfall grows, you can switch more of your loan to a repayment method.

Ask your lender to convert your whole mortgage to a repayment method so that you repay all the capital by the end of the term.

􀀗 Your mortgage will be paid off at the end of the term if you keep up the payments.

􀀗 The longer your mortgage has to run, the smaller the increase in your monthly repayments will be.
􀀗 If you can afford it, you could continue with your investment or savings plan just for saving.
And some investment products include useful insurance cover such as life cover, or another
type of cover such as critical illness insurance.
􀀛If you were to cash in your investment you could lose out financially, and you may need to arrange other insurance cover.

So consider getting advice first if you are at all unsure.

If you want to convert your whole mortgage to a repayment method but are worried that you might not be able to afford higher payments talk to your lender. The increase in payments may not be as much as you think and your lender may be able to come up with a plan that can help you.

For example, a repayment mortgage of £50,000 and an interest rate of 4.75% with 15 years to run will cost you £388.41 a month. But in some cases you may be able to extend the term of your mortgage – a mortgage of £50,000 with 20 years to run and an interest rate of 4.75% would be £322.74 a month. This would limit the increase in the monthly payments, though it does mean that you would pay back more in total over the mortgage term. Think very carefully about extending the term if it would end after your retirement age.

Repay part of your mortgage early by paying off a lump sum, or by overpaying each month.

􀀗 This will reduce the amount you owe, and the amount you need your investment or savings plan to cover.
􀀗 It may be better value than saving up separately to pay off the shortfall in future.
􀀗 You should check whether your lender will make an early repayment charge if you overpay.
􀀗 You should also check when your lender will give you the benefit from extra payments – some do so only once a year.

Making changes to your mortgage is probably the lowest-risk option to make up a shortfall. Ask your lender if there will be any charges for making changes to your mortgage, and how much these will be.

2. Start an additional investment or savings plan

Use a cash savings account.

􀀗 The amount you get back does not depend on the performance of the stockmarket.

􀀗 May be a good option for the short term – for example, if you have to delay paying off a lump sum from your mortgage because of early repayment charges, or your mortgage is near the end of its term.

􀀗 Taxpayers can avoid paying tax on their interest by saving in a cash ISA. (But remember there are limits on how much you can pay into an ISA each year.)

In the long term, other options (such as overpaying on your mortgage payments) are likely to prove better value for money.

Use a stocks and shares ISA.

􀀗 Potentially a good way of saving over the longer term. Historically, stocks and shares have grown more than cash savings accounts which have interest added. (But remember there are limits on how much you can pay into an ISA each year).

􀀗 Currently a tax-efficient way of saving. However, not sure of the government policies in the future

􀀛This type of product is linked to the stock market, and the value of your investment could fall as well as rise. So there’s no guarantee that your investment will grow enough to make up a projected shortfall.

􀀛Stocks and shares ISAs are meant for investing in the long term, and generally may not be suitable if you only have a short time to build up a lump sum.

If you decide to start an investment or savings plan to make up a shortfall, it would be a good idea to take financial advice.

Link to Previous article: Pay your mortgage with investment/saving plan

Pay your mortgage with investment/saving plan

If you have an interest-only mortgage, you may have taken out an endowment policy, Individual Savings Account (ISA), Personal Equity Plan (PEP) or personal pension to pay off the loan at the end of the mortgage period. This article from FSA explains what you can do if your investment or savings plan may not be on target to pay off your mortgage.

Interest-only mortgages

Unlike a repayment mortgage where your monthly payments gradually pay off the amount you borrowed (the capital) as well as the interest, with an interest only mortgage your monthly payments only cover the interest on the loan. They do not pay off any of the money you have borrowed. Money left owing at the end of the mortgage period (the term) is known as a shortfall.

You may have arranged to pay off the capital at the end of the term, by paying money into an investment or savings plan such as an endowment policy, Individual Savings Account (ISA), Personal Equity Plan (PEP), or you may have linked it to a personal pension. It is important to check your investment or savings plan regularly to see if it is on track to pay out its target amount.

If you haven’t made any arrangements to pay off the capital at the end of the term, you should think carefully about how you can do this and talk to your lender as soon as possible.

Do I need to take action?

If you think you may have a shortfall, you should consider taking action as soon as possible to make sure you can repay your mortgage. If you don’t think you can avoid a shortfall, there are options available to you.

How can I check if I have a shortfall for mortgage?

If you have an endowment policy, you should have received regular letters over the last few years telling you whether your policy is on track to repay your mortgage. These are called ‘re-projection letters’ and are marked ‘red’ if there is a high risk that the policy is not on track, ‘amber’ if there is a significant risk that the policy is not on track or ‘green’ if the policy is on track.

Endowment policies are linked to investments such as bonds and shares, which can vary in value. So make sure that you check each re-projection letter, even if the policy has so far been on track to repay the mortgage.

If you have an ISA or PEP you probably won’t get regular re-projection letters, but you can ask your product provider to give you an up-to-date projection of the value of your plan.

If you have a personal pension, your yearly statement won’t necessarily show you what your pension fund may grow to by the time you retire, so ask your product provider for an up-to-date projection of the fund. Remember that only part of a personal pension fund can be taken in cash to help pay off any loan.

Contact the provider if you are not sure where you stand on any of your investment or savings plans. You will need to continue to check the value right up to the time you repay your mortgage.
Never just cash in an investment or savings plan or stop paying in without taking professional advice – you could lose out financially.

Remember the following important points:

■ review your investment or savings plan regularly to see if it’s on track to repay your mortgage;

■ don’t delay – consider taking action now to make sure you will be able to pay off your mortgage – talk to your lender; and

■ if you can't avoid a shortfall, there are options available to you – talk to your lender.

Link to Previous article: Can’t repay your mortgage? What to do? -IV

Can’t repay your mortgage? What to do? -IV

This is part iv of the article Can’t repay your mortgage? What to do? -I. Please read the first part before proceeding with this one.


As a last resort, you could –

■ Sell your home

If you can’t afford your mortgage payments and you think this situation won’t change in the long term, you may wish to think about selling your home. However, before you do this, think carefully about where you will live. Your local council may say you have made yourself intentionally homeless and will not help you find somewhere to live.

If you live in Scotland, you may be eligible for the national Mortgage to Rent Scheme. The scheme may be able to arrange for you to sell your home to a social landlord and remain there
as a tenant. Advice agencies can give you more information about this scheme – see Useful contacts .

What if your lender takes you to court?

If you have taken all the possible steps mentioned above to get help, hopefully it won’t come to this. But if it does:

■ don’t ignore the paperwork you are sent – seek advice from any of the agencies
■ just because a lender starts court proceedings it doesn’t mean you will automatically lose your home. Make sure you get advice and make sure you attend the court hearing;
■ if you do have to go to court, a money adviser from one of the agencies can help you prepare your case and may be able to represent you.

Complaints

If you feel that your mortgage lender or insurance company is not dealing with your case fairly, ask them for a copy of their internal complaints procedure.
Consumer Helpline: 0845 606 1234

You can often get matters sorted out quickly and easily if you do this. But if you’re not happy with the answers, you can take the matter to the Financial Ombudsman Service – see Useful contacts below.

See also the FSA guide to making a complaint about financial services for useful tips – available from the FSA Consumer website at www.fsa.gov.uk/consumer or the FSA Consumer
Helpline on 0845 606 1234.

Useful contacts

Citizens Advice Bureaux (CAB)

Website: www.citizensadvice.org.uk

Citizens Advice Scotland (CAS)

Website: www.cas.org.uk

Northern Ireland Association of Citizens Advice Bureaux

Website: www.citizensadvice.co.uk
Look in the phone book for your local bureau, or on their website

National Debtline

Provides a free, confidential and independent phone service
Tel: 0808 808 4000 – freephone
Website: www.nationaldebtline.co.uk

Business Debtline

Free, confidential and independent advice for
self-employed people and small businesses
Tel: 0800 197 6026 – freephone
Website: www.birminghamsettlement.org.uk

Advice UK
All members provide free and confidential advice, but not all provide money advice. To find your nearest centre
Tel: 020 7407 4070

Money Advice Scotland

Tel: 0141 572 0237
Website: www.moneyadvicescotland.org.uk

Consumer Credit Counselling Service (CCCS)

CCCS offers a structured programme on how to
manage your money
Tel: 0800 138 1111 – freephone
March 2005

The Community Legal Service (CLS)

Aims to make it easier for the public to get legal help and advice – look on their website for details of agencies in your area
Website: www.clsdirect.org.uk

Credit Action

Provides information and guidance for people with debt or money worries
Tel: 0800 591 084 – freephone
Website: www.creditaction.com

Jobcentre Plus Office

Your local office can advise you if you are eligible
for any benefits.
Look in your phone book for details

Financial Ombudsman Service

If you are not satisfied with the way your mortgage
or insurance company has dealt with your complaint
Tel: 0845 080 1800. Call rates may vary
Website: www.financial-ombudsman.org.uk

Local Trading Standards Department

Also known as the Consumer Protection Department
Look in the phone book for your local office

Financial Services Authority (FSA)

Consumer Website: www.fsa.gov.uk/consumer
Consumer Helpline: 0845 606 1234. Call rates may vary
Minicom/textphone: 08457 300 104
(available 8.00am - 6.00pm Monday - Friday: call rates may vary)

Link to Previous article: Can’t repay your mortgage? What to do? -III

Can’t repay your mortgage? What to do? -III

Should you use a fee-charging debt management company?

You may see adverts for companies that will handle your debts for a fee. Be wary of claims that your debts will disappear – and remember that because you have to pay a fee, you are likely to end up paying off your debt for longer. Rather than paying a fee you could use one of the many organizations that will give free advice.

What can you do to pay off your mortgage arrears?

You could think about any of the following:

■ Start repaying arrears as soon as you can

It’s important to do this because arrears can often lead to extra charges that will increase the total amount you owe. Although paying off your arrears quickly could mean you have less spending money for a while, it is cheaper in the long run.

■ Make extra payments

You can arrange to pay your arrears by paying more each month than the standard monthly mortgage payment. But make sure you can realistically afford the extra. Even if your mortgage lender is unhappy with what you offer, pay the extra anyway. Explain why you can only afford this amount – there may be circumstances such as illness or a drop in income that your mortgage lender is not aware of.

■ Add the arrears to your mortgage

You could ask your mortgage lender to consider ‘capitalising’ your arrears. This means adding
them to your total mortgage balance, spreading the arrears over the remaining period of your mortgage.

Your monthly payment will then increase to take account of this. Your mortgage lender is unlikely to agree to this if you have previously failed to stick to revised repayment arrangements, or if your house is worth less than the balance of your mortgage including the arrears.

■ Extend your mortgage period

Most mortgages are normally repayable over 25 years. If you have a repayment mortgage and have been paying it for several years, you could ask your mortgage lender to extend the term back to 25 years again. This would reduce your monthly payments BUT you would be making them for longer – perhaps into your retirement.
This is more difficult to arrange with interest only mortgages that are connected to an endowment policy, PEP or ISA.

■ Ask to delay paying off your arrears

If you can now manage to meet your monthly payments, but can’t afford to pay anything towards the arrears, you could ask your mortgage lender not to demand payment towards your arrears for a period of time.

■ Changes you can consider if you have an interest-only mortgage

■ If you have an interest-only mortgage linked (for example) to an endowment policy and can’t afford both the mortgage and the endowment policy payments, you could ask the endowment company whether you can have a payment holiday. You will have to arrange with them how to make up the backlog of payments once you restart your policy.

■ If you have an endowment policy that has been running for several years, it may have built up a reasonable sum of money that you could use to pay off your arrears. This would mean cashing in the policy to take the money, or selling the policy. If you did this, then you would have to change to a repayment mortgage to make sure that the money you borrowed would be repaid. Before you do this, you will need to speak to both your mortgage lender and the endowment company. Cashing in an endowment policy early may result in the value of your policy being considerably reduced. You should think carefully before deciding to do this and askyour endowment provider for a cash-in value.

Link to Previous article: Can’t repay your mortgage? What to do? -II

Can’t repay your mortgage? What to do?

What should you do?

■ Do something now – the problem won't go away

The sooner you contact your mortgage lender to discuss your difficulties, the better. They need to
know if there are specific reasons why you cannot make the payments.

■ Contact your mortgage lender for help

All mortgage firms regulated by the FSA have to take into account their customers’ circumstances and treat them fairly. If you are in arrears, your lender will have a set procedure for dealing with your case. Contact them to find out if they can help you.

■ Get advice

It may be a good idea to get some free and independent advice. Various advice agencies specialise in this area and can help you plan how to solve your problem.

■ Do a personal budget

(advice agencies may be able to help you with this – see Useful contacts ). This is a list of your income and spending and will help you see where your money is going and plan your future spending.

Use this plan so that you pay all your essential spending commitments such as the mortgage, utility bills (gas, electric, water), insurances, council tax and housekeeping first.

■ Pay what you can

Even if you cannot pay the full monthly payments, continue to pay what you can afford. Your mortgage lender is more likely to be sympathetic if you can show you are willing to make an effort to pay something – this may significantly increase your chances of keeping your home.

■ Consider changing the way you repay your mortgage

If you have a repayment mortgage and your difficulties are short term, you could ask your mortgage lender to accept interest-only payments for a time. This means you will not be paying anything off the capital amount. You will then need to catch up on your payments towards the capital at a later date.

■ Tell your mortgage lender what you are doing

Your mortgage lender will be better able to respond to your difficulties if they understand the action you are taking.

Link to Previous article: Can you afford a mortgage or Loan