Study hard to avoid confusion

Two weeks ago I highlighted some of the topics and terms in the syllabuses of the mortgage advice qualifications where there is potential for confusion in the minds of candidates. The same theme is continued in this week&#39s column, with a focus on equity share mortgages, shared ownership mortgages, redemption fees and redemption interest.

The equity share mortgage was developed in the 1980s and enables a borrower to trade a lower repayment on a mortgage in return for the lender taking an equity stake in the property. A typical scheme would operate in the following way. The lender advances a proportion of the loan e.g. 75% at the normal rate of interest. The remainder is charged at a lower rate of interest or at a zero rate. Consequently, the total repayment is lower than in a conventional loan. In return for the subsidised rate, the lender takes an equity stake in the property which would be realised on sale. Given the rising house prices today such mortgages are rare.

Shared ownership mortgages, on the other hand, combine a rental element with owner occupation. These mortgages were introduced in the early 1980s and were developed extensively by housing associations in collaboration with local authorities and private mortgage lenders.

Shared ownership enables the borrower to buy a stake in a property and to rent the remainder. For example, the borrower could buy a 25% stake in a property, funded by a mortgage, with the option of purchasing additional 25% shares. This process of increasing one&#39s share is sometimes referred to as staircasing. The proportion of the property which is not purchased is rented. As the borrower increases his share in the property, the mortgage element increases and the rented element decreases. Sometimes it is also possible to sell back additional shares to the housing provider, usually a housing association. This is called reverse staircasing. Indeed, some mortgage rescue schemes operate by enabling owner-occupiers with serious payment difficulties to sell a share in their property to a housing association.

The shared ownership mortgage enables those who are on relatively low incomes to become owner-occupiers, even though they are unable to afford a conventional mortgage. There is a market nowadays in which properties subject to such mortgages can be bought and sold.

Turning now to redemption fees and redemption interest, it should be noted that this is of particular importance when considering the calculation of the total charge for credit (TCC) on a loan, from which the annual percentage rate can then be calculated. The Consumer Credit Act 1974 regulates lenders with respect to publishing rates of interest on lending products. The APR is an industry-wide method of comparing interest rates and charges for credit between lenders so consumers can make an informed decision on the price implications of products. However, as mortgage products become more sophisticated, the value of the APR as a means of comparing the true cost of borrowing has diminished.

The TCC is an amount in pounds and pence. This figure is used to calculate the APR which is expressed as a rate of interest. In calculating the TCC, a range of costs are included such as arrangement and administration fees, valuation fees and expenses, mortgage indemnity guarantee premiums and redemption fees. The latter relates to the fees and expenses that must be paid on redemption of the mortgage at the end of the term. These would include, for example, the deed sealing or vacating fee.

Redemption interest, on the other hand, refers to the interest charge that must be paid on early redemption or part redemption of a mortgage loan during the term and usually during the period of a special deal such as a fixed or discounted rate. Whether such an interest charge is actually paid depends on whether early redemption or a part redemption is made. Consequently it is not taken into account when calculating the TCC.