MORTGAGES MADE EASY
Over our years of experience we have learned that while most people understand the idea of a mortgage, they are often overwhelmed by the complexity of the different products and terms. Fortunately, knowing the basics will make things easier to understand.
What is a mortgage?
In simple terms, a mortgage is a loan taken out when you want to buy a property which is secured against that property. If you don’t keep up with the repayments under the terms of the loan, the lender could repossess your house and sell it to pay off your loan.
So, choosing the most appropriate mortgage for your needs is vital. All mortgages run for a certain amount of time – the usual term is 25 years, but this can be shorter or longer depending on your circumstances.
Can you get a mortgage?
Your ability to get a mortgage depends on the checks lenders will carry out to work out whether you’ll be able to afford the repayments for the amount you are borrowing.
These checks are based on a few different factors, which will give a numerical score known as a credit score. They include:
Information held on you by credit referencing agencies.
Any business you may have carried out with the lender previously.
Lenders are looking for a high credit rating as that represents the lowest risk for them. This score coupled with an affordability assessment will determine whether they will lend the required amount.
To help you plan, here’s what you’ll need to provide:
Proof of earnings in the form of payslips and bank statements . If you have more than one job, you’ll have to do this for all of them.
If you’re self-employed you will need to provide a minimum of 2 years accounts or SA302’s/online tax calculations and supporting tax year overviews.
Proof of other sources of income, such as shares, pensions and bonuses.
Details of your spending – this means the amount you spend on essentials (food, council tax, bills), quality of living (clothes, personal items, entertainment) and any credit cards, loans or finance agreements you already have.
Proof of deposit.
Choosing your mortgage
Some of the most important things to look at when choosing a mortgage are the repayment method, the different types of mortgage available, the interest rate you’ll be charged and the total amount you’ll need to repay.
You are looking for the repayment method that will work best for you.
Interest Only Mortgage
These mortgages are now only available if you are able to meet very strict criteria and are less likely to be offered by lenders. With an interest only mortgage, you only pay the interest charged on your loan, so you’re not actually reducing the loan itself. At the end of the mortgage term you would still owe the original amount you borrowed.
Your monthly payments pay off the interest you owe as well as reducing the capital (the amount you owe) that is outstanding. This means that each month you’re paying off a small part of your mortgage so, provided that you maintain the required repayments, you will owe nothing at the end of the term.
Type of Product
There are thousands of different mortgage deals but they broadly fall into two categories – variable rate and fixed rate.
Many buyers favour fixed-rate mortgages because they allow them to budget with certainty. With a fixed rate, you know exactly how much you will have to pay out each month, so you don’t need to worry about fluctuations in interest rates.
It’s important to think about how long you want to lock yourself into a mortgage for. Most lenders will charge you a penalty – known as an early repayment charge (ERC) – if you need to get out of the deal before the end of the fixed term.
The interest rates on fixed rates tend to be slightly higher than those on the best variable rate deals because you are paying for the security and peace of mind. Remember, variable rates can change so if the Bank of England puts interest rates up, variable rates will rise while a fixed rate will remain the same.
If you choose a fixed rate mortgage, your monthly payment will stay the same for a set period – usually 2, 3 or 5 years. You know the exact amount you’ll need to pay every month, which makes budgeting easier, and your payment will stay the same even if other interest rates increase. On the other hand, this means you don’t benefit if interest rates fall and you may need to pay an early repayment charge, or other charges, should you want to make changes. At the end of the fixed rate period, your lender will usually change your interest rate to their SVR.
Standard Variable Rate (SVR)
This is the lender’s default rate for mortgages. The interest rate changes depending on market rates, such as the Bank of England rate (their rate for lending to other financial institutions). This means repayments can go up and down. It’s not usually the most competitive rate available so it is usually wise to look at another product with the same lender or someone new.
This is where the interest rate is linked to market rates like the Bank of England’s base rate. These can offer lower starting rates than a fixed rate mortgage but your payments could rise (or fall) in line with interest rates.
This is where the savings in your main current and/or savings account are linked to your mortgage debt with the same lender. As the account balance goes up, your mortgage interest payments come down and vice versa. Remember you don’t earn interest on your savings in the linked accounts. If you don’t have much saved in those linked accounts to offset the mortgage with, it may not be worth it as the interest rates can be higher than those on other mortgage products.
Some mortgages start with an initial interest rate that is lower for a set period. Your payments will be less to start off with and then they will rise. You must be confident that you can afford the repayments when the discount ends.