The Basics - Loan, Mortgage, Remortgage, Secured
Want to know about mortgages? You'll find everything you need to know right here.
Let's Begin With Mortgages & Making The Right Choice
In simple terms, a mortgage is a large loan secured against your home, usually for a standard term of 25 years.
When taking out a mortgage, you can traditionally borrow at least three times your annual income, although your lender may be willing to give you and your partner more depending on your circumstances and income.
Although the term is generally 25 years, it can vary with each lender.
You will almost always need a deposit of some sort and the more you can put down the better. That said, most lenders will offer a mortgage to 95% of the property value, and some will even provide 100% mortgages.
But bear in mind, this makes you more of a risk and a lender is unlikely to hand over large sums of cash without taking precautions or asking for insurance.
Remember that a mortgage is a secured loan, which means that the lender could take your home away if you do not keep up with payments.
There are two main ways you can repay your home loan, either through a Repayment scheme or an Interest Only scheme.
Repayment: This means that you pay back the capital and the interest of your mortgage on a monthly basis. If you can afford to make monthly payments on the capital, which is the lump sum you borrowed in the first place, this is the best way to go.
TIP: This provides certainty of capital repayment and is not dependant on investment return.
Interest Only: This means you pay off the interest on your mortgage, but not the actual lump sum or capital you owe.
Meanwhile, you also pay cash into another investment policy, such as an ISA or a pension. You then pay off the mortgage at the end of the term with the money you have built up in the investment policy.
When price houses are high, an interest only mortgage may be the only affordable option for people who are just starting out.
TIP: You are taking a risk with an interest only mortgage. On the one hand, your investment could really pay off and you could end up with some cash left over once the mortgage is paid. But on the other, your fund could fall short, leaving you with an outstanding debt and no way of paying it off.
TIP: ISA or pension backed policies are attractive as they are tax efficient. But they are often quite complicated, so you need to know your stuff or get some advice.
TIP: Some customers may have opted for an endowment mortgage in the past, which is a life assurance policy popular in the 1980s. People are advised to steer clear of these nowadays as many homeowners may experience shortfalls.
TIP: Do not fall behind on payments into an investment scheme. It is up to you, not your lender, to make sure these meet expectations.
Embrace the choice!
Okay, so seeing all those deals out there may be a little daunting. But why not look at the other side of the coin? What you need to remember is that choice is good. More deals means more competition, which can only be better for you, the customer. There is a massive market out there, ranging from mortgage products with fixed repayments to others that move up or down in line with the Bank of England Base Rate (BEBR), which changes in line with Government targets on inflation. Think about the type of mortgage that you want and search for the best deal.
Here is a quick guide to the different types of mortgages:
Variable: A variable rate will move up and down with interest rate changes. Lenders will usually change their Standard Variable Rate (SVR) in line with the BEBR.
TIP: A mortgage lender’s SVR is relatively high, which usually comes into play once an offer period is over and may signal time to move to another deal!
Fixed: If you want or need your monthly payments to stay at a fixed rate for a set period of time, usually 2 years, then this is the way to go. If the BEBR seems to be on the increase, a fixed rate could save you money as it will not be affected. However, if rates drop, a fixed rate will stay the same and you will miss out on savings from the lower interest rate. These types of mortgage are fixed for a short period, and usually revert to the lender’s SVR.
TIP: Some lenders offer long-term fixed rates. Some people may feel more comfortable knowing that their rate will stay the same for up to 20 years. But if rates were to drop to an all-time low, you would miss out and there are usually Early Repayment Charges (ERC) that tie you in.
Discount: These mortgages offer a discount off the lender’s SVR. Although the initial rate may look good, remember this is variable and could go up and down with the SVR, which will in turn move in line with the BEBR. So, while your rate could drop, it could well rise. After the discount period, you will also revert to the SVR or other standard rate.
TIP: With variable discounts, your rate and your monthly repayments could rise or fall.
Capped: A capped mortgage offers a variable rate with a fixed element. While your interest may move up or down with the base rate, it will not go above a set, capped rate. This means your repayments will be kept down.
TIP: Make sure you do not confuse the initial pay rate with the capped rate.
Tracker: These products simply track the BEBR. A tracker will usually offer a unit rate above the BEBR and move up and down in accordance.
TIP: If you are looking for consistency, this may not be the way to go. But on the other hand, it could mean your rate and your monthly repayments could drop.
Please, bear in mind that any variable rates, discounts or trackers, will mean fluctuations in your monthly repayments. Also remember that some fixed and discount mortgages may offer really attractive, low rates at first, but these are unlikely to last. Make sure you know how long these last for and what the ‘revert to’ rate is. While your initial payments may be very low, these could shoot up shortly after the original term ends. These mortgages are also likely to carry a tie-in or ERC to stop you switching to another lender or product straight away. Also look out for the Annual Percentage Rate (APR), which lenders are obliged to give and which shows the interest rate plus any other charges.