Mortgages

If you are borrowing money by way of a mortgage loan, it is important that you understand what your liability will be: you will be personally responsible for repaying the full amount of the loan, plus any interest, charges, penalties, expenses, etc.

If you do not pay all this, you can be sued for the debt, bankrupted, or blacklisted for future credit.

Your liability is not restricted to the value of the security (house, life cover, etc) taken by the lender, and you cannot cancel your liability by “handing the keys back” to the lender. Any shortfall between the proceeds of selling the house or surrendering the life policy will still be due from you as a personal debt.

Some mortgages are “all monies charges”, under which the amount secured is not simply the original loan plus expenses, but all money you might owe at any time in the future. If you are borrowing money jointly with someone else, the mortgage will make all borrowers jointly and individually liable for the full debt. In the case of an all monies charge, this could make you liable to repay your co-borrower’s other debts, not just the joint debt!

All mortgages will require the borrower(s) to –

• repay the mortgage as per the terms of the offer – which may be “on demand” as for a bank loan. This may involve arranging some form of investment to provide capital funds at the end of the term
• make monthly interest payments (and possibly capital repayments as well)
• keep the mortgaged property in good repair and fully insured
• comply with all legal obligations relating to the property
• stop any third party acquiring any rights over the property

Some mortgages will impose additional requirements, particularly in the cases of business premises. For instance

• a mortgage of a public house will require the borrower to maintain and renew the liquor licence
• a mortgage of a residential care home will require the borrower to maintain the registration and provide copy inspection reports to the lender
• a mortgage of any business premises is likely to require the borrower to supply annual accounts (and possibly more frequent management accounts) to the lender

All mortgages will also give the lender wide-ranging powers to protect its position if the borrower defaults:

• Rights to evict the borrower, and sell the property to reduce or repay the debt
• Rights to appoint a receiver to manage the property (especially in the case of business premises to keep the business going in the hope of arranging a sale as a going concern)
• Rights to sell any of the borrower’s belongings that are left behind

If any sale fails to clear the whole debt, the borrower(s) will still be personally liable to pay off any shortfall.

In assessing the cost of a particular mortgage package, there are three main stages to consider: getting in, servicing and getting out –

1. Getting in There are various expenses involved in taking out a new mortgage loan – and the lender usually expects the borrower to pay these, even though they are usually for the lender’s benefit. These expenses include the lender’s valuation fee, my fee for dealing with the legal aspects, various out-of-pocket expenses (search and registration fees, for instance) I incur during that process, perhaps a mortgage indemnity insurance premium, and perhaps an arrangement fee. All these expenses are one-off expenses, and some lenders contribute towards some of the expense (for instance, by means of “cashback offers”).
2. Servicing Even if your mortgage loan will initially be at a fixed or discounted interest rate, bear in mind that, sooner or later, in most cases the interest payable by you will be decided by reference to the lender’s normal rate for similar loans. This rate will vary upwards and downwards depending largely on general economic conditions, so your monthly payments will increase or reduce accordingly If your lender insists on you arranging house insurance through them, the premium is likely to be higher than could be obtained by arranging your insurance direct If you take out life cover in relation to the mortgage, there is usually no guaranteed endowment sum (as opposed to death benefit): you might need to pay higher premiums to maintain the original level of benefit.
3. Getting out Many lenders impose penalties if you redeem your mortgage, especially if you have taken advantage of a fixed or discounted interest rate or a cashback offer. Sometimes these penalties are fixed sums, but usually they are a number of months’ interest, usually at the rate in force when you want to redeem. They might apply only while a fixed or discounted interest rate is in force, or for a certain period, or (rarely) for the whole period of the loan Also, more and more lenders charge an administration charge (which can be quite high) to deal with the paperwork on a redemption.

Many mortgage lenders recommend that their borrowers take out some form of mortgage protection insurance in connection with their loan. It is important to be aware of the different types of insurance cover, and to check their limitations.

Life cover

This is usually in the form of a “decreasing term assurance policy”, which runs for the length of the expected mortgage term, and under which the sum insured reduces in line with the expected reduction in the capital of the mortgage debt. There is little point in taking out such cover if you already have sufficient other life cover or if you do not have any dependants. Please also bear in mind that the reducing sum insured will fall short of the actual debt if you get behind with your repayments or take out extra borrowing.

Income cover

These policies pay a sum of money each month, designed to cover your mortgage instalments if your income stops. Each policy is different, but most policies only cover redundancy (so are useless to the self-employed, shareholder directors in private companies, and people on fixed term contracts). Normally, you must have been continuously employed for a minimum qualifying period before taking out the policy, you cannot make a claim for a further minimum period, the first payment is delayed until a month after your income ceases, and they will only pay out a limited amount for a limited period.

Other points to watch are:

• such policies rarely cover voluntary redundancy or dismissal for misconduct;
• you cannot normally claim for pre-existing medical conditions, stress-related illness or alcohol abuse;
• you must usually continue to pay the premiums while claiming under the policy;
• you cannot increase the payout if mortgage rates rise;
• finally, though the government has said the benefits from these policies will not be taxable, there is no settled law on this point yet, and the benefits will be taken into account when assessing eligibility for income support.

On the other hand, in view of the very restricted help available from the state to pay your mortgage if you lose your income, it is sensible to consider taking out repayment cover. Just be aware that there are many restrictions, and make sure you know what these are.