Need-to-know facts about mortgages
What is a mortgage?
A mortgage is a loan given specifically to buy a property. The property you buy is used as security against the loan while you repay it.
How does a mortgage work?
You borrow a sum of money to buy a property over a set number of years (usually 25-35 years) and you make monthly payments to pay off the interest or both the interest and loan.
What are the basic types of mortgage?
There are two basic types of UK mortgage depending on how you repay the loan – a repayment mortgage and an interest-only mortgage, although you can have a combination of the two.
With a repayment mortgage your monthly payments repay the capital and the interest. With an interest-only mortgage your monthly repayments just pay the interest, and you will have to find other means of repaying the capital at the end of the mortgage.
What are the advantages and disadvantages of a repayment mortgage?
With a repayment mortgage you are paying off both the interest and some of the capital each month, which means you are guaranteed to have paid off the whole loan by the end of the term. Therefore, repayment mortgages are usually considered a low risk option.
With a repayment mortgage you can also make lump sum payments and overpayments to reduce the interest and the capital you owe. However, your monthly payments will be higher than they would be with an interest-only mortgage and there may be fees for overpaying your mortgage.
What are the advantages and disadvantages of an interest-only mortgage?
With an interest-only mortgage your monthly payments only pay off the interest and are lower than if you have a repayment mortgage. However, you will need some other way to repay the capital you borrowed – typically this is done by paying into a savings plan or investment.
What types of mortgage deals are available?
There are plenty of different types of mortgage – the most popular are variable rate, fixed rate and tracker mortgage deals.
- Variable rate mortgages
This is a mortgage where you pay the variable or standard variable interest rate (SVR) of the mortgage lender. Each lender has its own standard variable rate which will be higher than the Bank of England’s base rate but will roughly track it, going up and down when the bank changes its rate. Lenders’ variable rates can differ widely.
- Fixed rate mortgages
With a fixed rate mortgage the interest rate is fixed for a period of time – usually two, three or five years - which is good if you want to know exactly how much you will have to budget for. However, if interest rates drop during the term of the deal your mortgage could be more expensive than others.
- Tracker mortgages
With a tracker mortgage the interest rate follows, or tracks, the Bank of England’s base rate and is usually set at percentage above it for a period of time or for the lifetime of the mortgage.
What do I need to consider when choosing a mortgage?
The main things to think about are:
- the amount you can afford to borrow;
- how long you want to borrow it for (the term);
- whether you want a repayment or interest-only mortgage (or a combination of the two);
- the type and period of interest deal (fixed, variable, tracker);
- the economic climate – think about whether interest rates are likely to go up or down.
You might also want flexibility with your home mortgage so that you can pay off lump sums if you come into money or, if you run into temporary problems, so that you can take a payment holiday.
What first-time buyer mortgages are available?
Sometimes mortgage lenders will offer special deals for first-time buyers, such as mortgages aimed at recent graduates and key workers in the public sector (such as teachers and nurses). Some lenders will also help with legal and valuation fees and waive their arrangement fees.
You could also consider a shared ownership scheme as a way of getting onto the first rung of the housing ladder.
As a first-time buyer you will need a good deposit and a good credit score to get a mortgage loan. It is a good idea to check your credit report before you apply for your mortgage.
What are the mortgage options if I want to buy-to-let?
You can get special buy-to-let mortgages which are usually interest-only – the idea being that you use the rental income to cover the interest payments and pay off the capital when you sell the property.
You will need a bigger deposit than for an ordinary mortgage and usually the lender will insist the rent you receive is 125% or more of the mortgage costs.
What deals are available for remortgaging?
If you’re thinking of remortgaging you should first check what it will cost you to change lenders – for example, if you’re on a fixed-rate deal you may have to pay a penalty charge of a few months. You may also have to pay legal and valuation fees, although some lenders will refund this, and an arrangement fee.
What are my mortgage options if I have a bad credit record?
The credit crisis has meant that it is more difficult now for people with debts or a bad credit record to get mortgages. Whether you can get a mortgage loan or not will depend on your individual circumstances, how large a deposit you have and how bad your credit problems were.
You are also likely to be charged a higher interest rate. If you have a bad credit record then it’s best to get advice from a specialist mortgage adviser.
It’s a good idea to check your credit report before you apply for a mortgage.
What fees or other costs are involved in taking out a UK mortgage?
When you take out a mortgage you have to pay legal fees, a mortgage valuation fee, and most lenders charge an arrangement or booking fee to secure the mortgage.
If you have a fixed rate mortgage you will have to pay an early repayment penalty, of several months’ interest, if you want to end it before the set time. Also, some lenders charge exit fees if you want to switch to another lender or pay off your mortgage.
Changing mortgage lenders without moving house and using the proceeds from the new mortgage to repay the old one.