Your Mortgage Product Explained

These notes are intended to provide an explanation to the borrower for the various types of products contained within the Key Facts Illustration (KFI). If you still have any queries after reading these notes, please contact Michael McNulty on 01204 705110 and I will provide further assistance.

Please note; in order for any mortgage lender to attract new business, incentives are offered to either draw you away from your present lender or attract new borrowers. All interest rates quoted on your illustration are genuine reductions from the lender’s variable rate and will not be clawed back or repaid in some other way at a later date.
However in some cases if you have been offered a special rate for a fixed period of time, there may be redemption penalties to pay. This would apply if you attempted to redeem some, or all, of your mortgage or loan or switch to another lender within the special rate redemption period. These penalties in some cases will go beyond the special rate scheme period. In all cases once the scheme rate and benefits have ended you will revert to the current lenders variable rate. In some cases the lender will offer further inducements.

Discounted Rate - the mortgage interest rate will be lower than the current normal variable rate for a given period, usually defined by a fixed percentage reduction to the lender's normal variable rate e.g. 2.00% below variable rate for 2 years. If the lender’s variable rate rises or falls, the borrower will pay the new rate but maintain the 2% discount.
Capped Rate - the mortgage or loan interest rate will not exceed the specified interest rate quoted during the defined capped rate period, however borrowers will benefit if the interest rate falls below the capped interest rate.
Fixed Rate - a loan where the monthly payments will remain the same for the prescribed period and the rate payable will not change during that period regardless of changes in the lender's standard variable rate.
Variable Rate - Is the interest rate that the lender is currently charging to its own borrowers who are not enjoying any special benefits. This will vary over the term of the loan, normally in line with the general cost of borrowing.
LIBOR-linked – London Inter Bank Offer Rate. A mortgage linked to LIBOR will be charged at a given margin over the Interbank rate (typically 1 to 1.5%) and is likely to be reset quarterly. LIBOR rates tend to be more volatile than ordinary mortgages as the rate payable will change almost every quarter. They offer the customer the opportunity to pay a rate closer to the true cost of money. In a low interest rate environment they are likely to result in lower overall payments but will be more expensive in periods of higher interest rates.
The relationship of LIBOR to the Standard Variable Base Rate (SVR) can give an indication of the possible future direction of base rates. If LIBOR is significantly above the Standard Variable Base Rate it indicates that the money market believes interest rates are about to increase. If it is significantly below, the reverse is true. The key LIBOR rate is the 3-month LIBOR, however rates are also quoted for one, six and twelve month periods.
Base Rate Tracker – A mortgage where the interest rate payable is linked to the Bank of England Base Rate during the scheme period. This is usually lower than the lender’s Standard Variable Base Rate. Normally the interest rate payable is calculated using the Bank of England base rate plus the lenders own loading. This will vary over the term of the loan as the Bank of England base rate changes. The Bank of England base rate is reviewed at specified intervals.
Survey Fee- this is normally paid by the applicant(s) to the lender at the time the mortgage or loan application form is submitted. The fee is paid to the Surveyor who carries out the valuation of the property. If the application does not proceed to valuation for any reason, this fee is normally returned to the applicant(s), by the lender (or lender’s packager), less an administration fee. This administration fee is non-refundable under all circumstances.
Self Certification- a mortgage or loan, where the borrower signs a statement of his or her income and the lender makes fewer checks than normal on the accuracy of this statement.
Shared Ownership- a method of purchasing a property in partnership with a Housing Association. The borrower purchases part of the property and rents the remainder from the Housing Association. The arrangement is designed for people who could not otherwise become homeowners. The minimum purchase amount is usually 25% with the remainder available to be purchased in blocks of 25%.
Self-Build - a property, the construction of which is controlled by the borrower. A surveyor will normally inspect the standard of the work at defined stages.
Loans on Self-Build properties will normally be advanced in stage payments and are subject to strict limits on loan to value. A qualified architect will need to be involved and lenders will frequently look for the builder to have NHBC or Foundation 15 guarantees.
Interest-Only- a loan for which only monthly payments of interest are paid during the term of the loan. The balance of the loan (the capital) would remain outstanding during the interest only period and would require to be redeemed later. This would be either by larger payments of capital and interest or as a lump sum at the end of the mortgage term from some other source such as an existing investment or pension arrangement.