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What is a mortgage?
The word mortgage literally translated from old French, means
'dead pledge'. Today it is universally understood to mean
a loan secured against property.
When you take out a mortgage with a lender, you enter into
an agreement, through the signing of contracts,to give the
lender a first charge over your property. This means that
the lender must be paid back first if the property is sold.
If you breach the terms and conditions of a mortgage contract,
for example, by not repaying to lender, the lender is entitled
under the deed of mortgage to make an application to the courts.
This may result in the re-possession and sale of the property
in order to pay off the debt, however, this course of action
is normally only taken as a last resort.
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Where can I get a mortgage?
You can obtain a mortgage from a number of sources including
banks, building societies and mortgage brokers. Banks and building
societies tend to sell their own mortgages, while mortgage brokers
tend to sell mortgages on behalf of banks and building societies
and can often shop around on your behalf to get you the best
deal.
You can apply for a mortgage by visiting a mortgage provider
such as one of those mentioned above and discussing it with
them. They will usually have specialised staff to help you
through the process. Alternatively, it is now possible to
apply for a mortgage by visiting an online mortgage provider
on the internet.
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What are the main types of mortgage?
Repayment Mortgage
The most straightforward form of mortgage repayment with capital
and interest paid off monthly from day one. It works just like
an ordinary personal loan except over a longer term. In the
early years, you repay mostly interest, with a smaller proportion
of the payment being made against the loan. Over time, however,
this ratio changes with the proportion of capital repayment
increasing and interest reducing until the loan is paid off.
Advantages
It is simple, straightforward and easy to understand. Unlike
with other mortgages, there is no risk associated with investing
in the stock market. You are guaranteed to have the loan repaid
at the end of the term provided all payments are met.
Disadvantages
Unlike with other mortgages, repayment loans do not give you
the opportunity to benefit from a rising stock market. Also,
when moving house, people usually take out a 25 year repayment
mortgage each time to help keep monthly costs down. This extends
the period for repaying the debt.
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Endowment Mortgage
Your monthly repayments only cover the interest on the amount
you have borrowed. You must also take out an endowment policy
with a Life Assurance Company to which you make separate payments.
In theory, at the end of the term of the loan the proceeds of
the life assurance policy should be sufficient to clear the
principal amount borrowed. It is important to note that there
is no guarantee that all life assurance policies will clear
the principal amount owing at the end of the term of the loan.
With an endowment mortgage it is advised that you contact your
life assurance company from time to time to monitor its performance
throughout the term of the loan.
Advantages
The policy is very flexible and can be maintained if you move
house or change mortgage provider. Endowments can include
some kind of life and critical illness cover, and can be cheaper
than buying such cover separately. If the underlying investments
perform well, you may get more than is needed to pay off the
loan.
Disadvantages
If the stock market is under performing your policy may not
make enough money to cover the loan at the end of the term.
In order to ensure that the mortgage loan is repaid in full
at the end of the agreed term you must ensure that the amount
you pay into the policy is sufficient to ensure a return on
your investment that will cover the remainder of the loan.
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Pension Mortgage
This type of mortgage is usually offered to individuals who
are self-employed. You make monthly repayments of interest
on the loan to the lender. Additionally, you make contributions
to a personal pension, which will provide a tax-free lump
sum and taxed regular income upon retirement. Most, if not
all, of the lump sum is used to clear your mortgage loan at
that date.
Advantages
Pension contributions qualify for tax relief, which
will increase the value of every €1 you contribute.
Disadvantages
Using your lump sum to clear the mortgage may leave
you with inadequate income in retirement. Also, the lump sum
is payable upon retirement, so your loan term may be more
than 25 years. Poor investment performance may adversely affect
the amount of the tax-free lump sum, leaving insufficient
funds available to repay the loan at the end of the agreed
term.
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How do I repay my mortgage?
There are two main methods of repaying your mortgage. You can
choose to pay either a Fixed Interest Rate or a Variable Interest
Rate. In addition, your mortgage provider may offer a variety
of more specialised mortgages such as Discount Rate, Split Interest,
Capped, Deferred, Index Linked.
Fixed Interest Rate Loans such as this fix your monthly interest
payments at a specified level for an agreed period of time
such as 1, 3, 5 or 10 years. When the fixed-rate period has
ended, your monthly payments change to match your mortgage
provider's standard variable rate.
Advantages
You know exactly what your mortgage will cost you in the early
years. This helps with household budgeting. It also protects
against increases in the base interest rate over the fixed
term of the mortgage.
Disadvantages
These loans can sometimes carry early redemption penalties,
which may persist long after the fixed term is over. Can be
poor value for money if the base interest rate is significantly
lower than your fixed rate over the fixed term.
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Variable Interest Rate
This is the simplest form of loan. The interest rate is set
according to the lender's standard variable rate. With a variable
interest rate mortgage your interest payments are likely to
rise or fall every time there is a change in the European Central
Bank base rate.
Advantages
There are generally no penalties for early redemption
on these loans.
Disadvantages
Interest rate movements can be very unpredictable. This makes
it difficult to plan your finances into the future, and the
costs of your mortgage may increase rapidly if interest rates
go up. Also, lenders do not always pass on the full change
in the base rate. This can sometimes be to your advantage,
but often not.
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Discount Rate
This type of loan helps reduce your expenses in the early years
of the mortgage by setting your interest rate at a few points
below the lender's standard variable rate. Your interest payments
may still fluctuate, but the differential between your rate
and the lender's standard variable rate remains constant.
Advantages
The discount reduces the initial cost of the mortgage repayments,
freeing up money for other expenses, such as new furniture,
when you need it most.
Disadvantages
When the discount period comes to an end, the loan shifts
back to the standard variable rate. This could mean a big
jump in what you pay. There may be early redemption penalties,
which will reduce their benefit if you move house early on.
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Capped Rate
A capped rate loan has a fixed ceiling on the interest rate
for a period of time, above which your rate will not go. However,
if the base ratefalls, your rate can still fall with it.
Advantages
You are protected from interest rate increases, but can still
take advantage of interestrate decreases.
Disadvantages
It can be more expensive than fixed rate or discount rate
mortgages and application fees may further add to the cost
of your loan.
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Split Interest
An agreed proportion of your mortgage is at a fixed rate
and the remainder at a variablerate. If interest rates decrease,
repayments on the variable part of your mortgage fall also,
and if interest rates increase, only the variable payment is
affected.
Advantages
Security of knowing only the variable proportion of your mortgage
is affected by interest rate movement.
Disadvantages
Can represent poor value for money if the base interest
rate is significantly lower than your fixed rate over the
fixed term.
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Deferred Start
You make no repayments at all during the first one, two or three
months of your mortgage.The payments that you miss are spread
over the remaining term of your mortgage.
Advantages
Frees up money when you most need it, that as, when you are
moving into your new house.
Disadvantages
A deferred start mortgage may only be offered to first time
buyers and generally only with repayment mortgages. Future
monthly payments will be slightly higher.
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Index Linked
If you increase your repayments by a set percentage, even
as little as 1%, you can clear your mortgage early. You decide
the percentage, and you can change it or go back to the standard
repayment whenever you want.
Advantages
No penalties associated with clearing your mortgage early.
Disadvantages
This option is generally only available with variable
rate repayment mortgages. A number of factors will determine
which mortgage suits you best. These include the term of the
loan, your age and health, your risk profile, your need for
flexibility and what, if any, investments you hold. New flexible
mortgage products are coming onto the market all the time.
Discuss with your mortgage advisor or provider which one is
most appropriate for your circumstances.
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How much money can I borrow?
Generally speaking, you can borrow up to 90% - 92% of the
purchase price of the house. The other 8% - 10% of the purchase
price of the house is usually paid up front by the buyer as
a deposit.
The amount your mortgage provider will lend you is based on
multiples of your salary. While each lender will have its
own formula for calculating how much it will lend you, a general
rule of thumb is around 3.7 times your gross annual salary.
If you are buying with a partner, loan entitlement will be
approximately 3.7 times your combined income.
NOTE: Each lender will calculate how much it will lend
you according to its own criteria.
You may be allowed to borrow more if someone, such as a parent,
is prepared to act as guarantor to the loan.
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Home Contents Insurance
It is also advisable to arrange insurance for the contents of
you property to guard against the risk of theft or damage. You
may also wish to insure against the temporary or permanent loss
of income. This will ensure that mortgage repayments are met
if you are faced with a period of involuntary employment, sickness
or have an accident.
You may be required to take out Life Assurance to enable your mortgage to be
paid in the event of your death during the term of the loan.
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Redemption Penalties
This is a financial penalty impose by the lender on Fixed Rate
mortgatges only if you wish to repay the mortgage or remortgage
within the period of the discount or fix. These penalties can
vary greatly from lender to lender, but the usual penalty is
a payment to the lender of three months' worth of interest.
What grants, tax-relief's and benefits are on offer to me?
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Mortgage Interest Relief
Owner-Occupiers and First-time Buyers:
Budget 2003 sees an increase in mortgage interest relief
for first-time buyers of new and second-hand homes. Mortgage
interest relief will be available to first-time buyers on an
increased amount of mortgage interest of €4,000 (an increase
of €3,175 on 2002) for single buyers and €8,000 (an increase
of €1,650) for couples.
Tax relief is available for mortgage interest paid, subject
to certain limits. For the tax year ending 31 December 2002,
the maximum available relief for a single person who is not
a first time buyer is €2,540 and for a married or widowed person,
€5,080. Where it is their first purchase, these figures are
increased to €3,175 for a single person and €6,350 for married
couples or a widower. These increased limits apply for the first
five years, thereafter the amounts fall back to €2,540 and €5,080
respectively.
The relief given is always at the standard rate which is 20%
for the tax year 2002. Where the interest actually paid in a
tax year is below the limits quoted above, the relief is restricted
to the actual interest paid.
From 1 January 2002, mortgage interest relief is granted at
source. This means that the relief will now be granted by the
bank / lending institute involved and will no longer be included
in your tax free allowance certificate or your annual income
tax return. Thus, an individual's monthly mortgage payments
should be reduced by the tax relief available. However, the
onus is on the taxpayer to contact their bank / lending institute
to ensure that they have all relevant particulars of the borrower
so as to enable them to reduce their mortgage by the relevant
sum.
For the tax year to 31 December 2002, a married couple who are
first time buyers will get mortgage interest relief equating
to a maximum tax saving of €105.83 (€52.92 for a single person)
per month, assuming the annual interest paid by the couple exceeds
€5,080.
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Investors:
With respect to investors, interest relief on monies borrowed
to purchase or improve rented residential properties has been
restored by the Minister for Finance in the recent Budget and
will apply from 1 January 2002 and can be set off against rental
income for the same period. This relief had originally been
withdrawn following the 1998 "Bacon Report". Rent a room scheme
The "Rent A Room Scheme" was introduced by the Finance Act 2001.
Its main aim was to increase the availability of rented residential
accommodation and permitted a person to let a room (or rooms)
in their principal private residence, with gross annual rental
income of up to €7,620 being exempt from tax. Room rentals coming
within the scope of this scheme will not trigger a clawback
of any stamp duty relief, nor will it affect full entitlement
to Capital Gains Tax principle private residence relief (in
the event of a subsequent disposal of the property) nor full
entitlement to mortgage interest relief.
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