Standing Mortgage
A standing mortgage is where no arrangements are made at the outset for the repayment
of the loan. Obviously, at the end of the term the borrower still has to repay the
loan. Lenders are not giving out loan finance indefinitely. If a specific investment
vehicle has not been arranged to provide funds for this purpose, the borrower will
have to repay the loan by some other means. If the capital is not repaid, the lender
can repossess the property and sell it to recover as much of the debt as possible.
For a variety of reasons, mortgage lenders can be relatively unconcerned about the
borrower's ability to repay the loan. This can be the case for:
- People with a sizeable inheritance, trust fund or extensive other assets.
- Pensioners who have bought a new home. They may require a small mortgage as much
of their other assets are locked up, but there is enough excess in their estate
to more than cover the loan once they die and the property is sold.
- Buy to let investors. Some property speculators aim purely for capital growth in
the value of the property. The mortgage loan would be repaid on the sale of the
property. The smaller monthly repayments that arise from the use of an interest-only
mortgage mean it is easier to ensure that rental income covers interest charges.
Not all lenders will allow the use of a standing mortgage in this way. It can be
quite a risky strategy. As the well-known saying goes - the value of all investments
can go down as well as up - a large drop in the price of houses could result in
the borrower not being able to repay the loan.
There are three other types of mortgage that can occasionally be found in the UK:
Low Start Mortgages
This is like a repayment mortgage, but with a difference. In the introductory period,
only interest is paid back to the lender and not any of the capital outstanding.
After this period, the repayments start in earnest. The total amount of interest
and repayments over the life of the year are higher than with a normal repayment
mortgage, but this sacrifice can be worth it if you need to severely restrict your
outgoings during the low start period.
Deferred Interest Mortgages
Interest is not paid during the discount period. When the discount period is over,
the accumulated interest is added to the original loan. Some lenders add this interest
to the total of your loan to give a new loan figure and new interest payments. Others
calculate your interest payments on the original loan as normal and then spread
the repayment of the deferred interest over a set period of time. The latter method
is better for you, as adding the deferred interest to the loan means you end up
paying interest on the deferred interest!
Equity Linked Mortgages
Similar to the method used by housing associations except it is the lender who takes
a stake directly and not the housing association. The lender takes ownership of
a stake in the equity of the property. This means that they lend you less than the
full amount that is required to buy the home. Interest is only charged on the amount
that they lend you and not on the full value of the property. When you sell the
property, the lender receives payment in proportion to the amount of equity that
they own, and therefore benefits from any increase in the price of the property.