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    Mortgage in the UK

    Mortgage types

    The UK mortgage market is one of the most innovative and competitive in the world. Unlike other countries there is no intervention in the market by the state or state funded entities and virtually all borrowing is funded by either mutual organisations (building societies and credit unions) or proprietary lenders (typically banks). Since 1982, when the market was substantially deregulated, there has been substantial innovation and diversification of strategies employed by lenders to attract borrowers. This has lead to a wide range of mortgage types.

    As lenders derive their funds either from the money markets or from deposits, most mortgages revert to a variable rate, either the lenders standard variable rate or a tracker rate, which will tend to be linked to the underlying Bank of England (BoE) repo rate (or sometimes LIBOR). Initially they will tend to offer an incentive deal to attract new borrowers.

    This may be:

    • A fixed rate; where the interest rate remains constant for a set period; typically for 2, 3, 4, 5 or 10 years. Longer term fixed rates (over 5 years) whilst available, tend to be more expensive and therefore less popular than shorter term fixed rates.
    • A discount rate; where there is set margin reduction in the standard variable rate (e.g. a 2% discount) for a set period; typically 1 to 5 years. Sometimes the discount is expressed as a margin over the base rate (e.g. BoE base rate plus 0.5% for 2 years) and sometimes the rate is stepped (e.g. 3% in year 1, 2% in year 2, 1% in year three).
    • A cashback mortgage where a lump sum is provided (typically) as a percentage of the advance e.g. 5% of the loan.
    • A capped rate; where similar to a fixed rate, the interest rate cannot rise above the cap but can vary beneath the cap. Sometimes there is a collar associated with this type of rate which imposes a minimum rate. Capped rate are often offered over periods similar to fixed rates, e.g. 2, 3, 4 or 5 years.

    To make matters more confusing these rates are often combined: For example, 4.5% 2 year fixed then a 3 year tracker at BOE rate plus 0.89%.
    With each incentive the lender may be offering a rate at less than the market cost of the borrowing. Therefore, they typically impose a penalty if the borrower repays the loan; this used to be called a redemption penalty or tie-in, however since the onset of Financial Services Authority regulation they are referred to as an early repayment charge.

    Self Cert Mortgage

    The high street banks usually use salaries declared on wage slips to work out your annual income and they usually lend you a multiple of your annual income (usually 3.5). Self Certification Mortgage better known as "self cert mortgages", are mortgages that are available to self employed people that have a deposit to buy a house but lack the sufficient documentation to prove their income. Self cert mortgages have a two disadvantages one of which is that the interest rates are usually higher than they normally are and the second is that they may only finance 75% loan to value of a property (this can go up to 85% or 90% subject to status and individual lenders).

    100% Mortgages

    Normally when a bank lends a customer money they want to protect their money as much as possible, they do this by asking the borrower to pay a certain percentage of the loan in the form of a deposit. 100% mortgages are mortgages that require no deposit (100% loan to value).

    UK Mortgage Process

    UK lenders usually charge a valuation fee, which pays for a chartered surveyor to visit the property and ensure it is worth enough to cover the mortgage amount. This is not a full survey so it may not identify all the defects that a house buyer needs to know about. Also, it does not usually form a contract between the surveyor and the buyer, so the buyer has no right to sue if the survey fails to detect a major problem. For an extra fee, the surveyor can usually carry out a building survey or a (cheaper) "homebuyers survey" at the same time.


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