Warning:THE MORTGAGED PROPERTY (WHICH MAY BE YOUR HOME) MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
Understanding the different types of mortgage
There are two basic types of mortgage:
Capital & Interest (also known as a repayment mortgage).
With this type of mortgage, the balance of the loan reduces with each repayment, because part of the capital is repaid in addition to the interest payable. If you make each monthly payment in full and on time, the loan will be repaid in full at the end of your chosen term. Your monthly mortgage payments are calculated to cover the interest and a proportion of the outstanding balance (capital) plus any insurance premiums for cover arranged as part of your mortgage.
Interest Only (including Endowment mortgages).
With this type of mortgage you’ll only repay the interest charged on your loan, plus any insurance premiums for cover arranged as part of your mortgage. This is because your monthly payment to us only covers the interest on the amount you have borrowed and (if applicable) any accrued interest. You may want to consider making additional payments from time to time, to reduce the mortgage balance.
At the end of your mortgage term you’ll still owe the full amount borrowed on an interest only basis and you will be required to repay this and (if applicable) any accrued interest at that time. You need to have a clearly understood and credible repayment strategy in place to repay the mortgage.
It is possible to split a mortgage between the above two types. This is referred to as a Part & Part mortgage. This means that you repay part of the mortgage balance on a Capital & Interest basis and the other part on an Interest Only basis.
Repaying Your Interest Only Mortgage
If you have an interest only or part interest only mortgage, it is your responsibility to ensure that you have sufficient funds to repay the amount borrowed on an interest only basis and (where applicable) any accrued interest at the end of the term. This could be by using a savings or investment product, such as an endowment, a pension or an ISA, or a combination of these, or the sale of the mortgaged property or any other property. However, if you intend to sell the mortgaged property and this is your main residence, you must ensure that it is likely to provide you with enough funds to repay your mortgage and allow you to buy another cheaper property.
If you've not made any arrangements to pay off the capital at the end of the term, you should make arrangements now. You should contact us, or an independent financial adviser, as soon as possible.
Whichever option you choose, you must review your plans regularly to make sure your repayment strategy is on track to repay the mortgage on or before the end of the mortgage term and make changes if necessary. If you have an endowment policy, your provider will tell you whether the policy is on target. If you have another type of investment, you will not automatically receive information about whether it is on target to repay the mortgage. You may be able to get further information by asking your investment provider. If you have a potential shortfall, you have a number of choices to consider depending on your individual circumstances. The Money Advice Service guide “Dealing with your mortgage shortfall” is available by visiting www.moneyadviceservice.org.uk or by calling 0300 500 5000. This guide provides more information on your options and why you need to act now.
We can't advise you on the suitability of any particular repayment strategy. If you have any questions regarding the suitability of a repayment strategy, we recommend you speak to an independent financial adviser. We may be able to help you with information about the options explained in the Money Advice Service guide mentioned above, such as switching all or part of your mortgage to a Capital & Interest repayment method. If you have a repayment strategy which will continue beyond your retirement date, it is important that you ensure you’ll be able to continue to meet your regular payments once you've retired.
Please note that if you have an interest only or part interest only mortgage your mortgage payments do not include the costs of any savings plan or other investment you may have arranged to repay the amount you borrowed. It is important to check regularly that your savings plan or other investment is on track to repay your mortgage at the end of the mortgage term.
Your mortgage will operate on one of the above repayment types, or a combination of both. Please check the details to ensure that your mortgage continues to meet your own needs. In all cases, it is important that you consider how the mortgage will be repaid if you pass away or how payments will be maintained in the event of you having a critical illness. If you don’t have adequate arrangements in place to protect your mortgage in these circumstances, it is important that you consider your financial protection requirements. One of our team will be happy to help you consider your options if required. Life and Critical Illness Cover is provided by our protection partner, Legal & General, who offer a ‘restricted advice’ service, which means they can only offer products and services from Legal & General and selected fund managers.
How your mortgage operates
Your mortgage statement will show whether the interest on your mortgage is calculated on an annual or daily basis. It will also show whether your monthly mortgage payments will be reviewed and calculated as part of the Annual Review Scheme or the Non-Annual Review Scheme.
This is where interest is calculated on your mortgage balance on the last day of the previous calendar year. Your mortgage payments must be made monthly, but the new balance will only be calculated once, at the end of each year. If the interest on your mortgage is calculated annually, your monthly mortgage payments will not reduce the balance on which interest is charged until the end of each year.
This is where interest is calculated on your mortgage balance at the end of each day. The interest is charged to your account daily, increasing the mortgage balance by the amount of interest. Your mortgage payments must be made monthly and will be credited to your mortgage to reduce the balance on which interest is charged, from the day when the payment was credited. If the interest on your mortgage is calculated daily, making your mortgage payments as early as possible in the month will reduce the balance and the amount of interest charged
Annual Review Scheme
If your mortgage operates on the Annual Review Scheme, your monthly mortgage payment is reviewed and recalculated once a year, regardless of the number of changes to your mortgage interest rate, which may for example be due to changes in the Bank of England base rate.
In January each year, we take account of any changes to your mortgage interest rate over the previous year and the amount you owe on your mortgage, to work out your new monthly mortgage payment for the year ahead. Your new payment takes effect from March 2016 and is confirmed in your annual mortgage statement. Your monthly mortgage payment will usually stay the same until we recalculate it next year.
If you are on our Annual Review Scheme you can switch to our Non-Annual Review Scheme at any time by contacting us on 03450 540 911.
If your mortgage operates on the Non-Annual Review Scheme, your monthly mortgage payment will be adjusted whenever there is a change to your mortgage interest rate. Whenever your mortgage interest rate changes we’ll write to you and tell you about the new interest rate, your new monthly mortgage payment and when this will take effect.