Friday July 6, 2018
So you have decided to buy a house. You start to think about getting a mortgage arranged. That’s when you realise there is a lot of finance related jargon and many hoops that you need to jump through. The whole process can be very daunting. So for the next few weeks we are publishing a Beginners Guide on what you need to know when buying a home.
How a mortgage works.
First things first, the basics. A mortgage is a loan from a bank or building society against the property you buy. You will need to put a deposit down. If the lender accepts you for a mortgage it will stump up the rest, charging you interest as you repay the debt over time. Check out our web page here.
You make monthly payments to the lender. They take into account the rate of interest being charged and the cost of repaying the debt over a defined period. This is usually 25 to 30 years. Lenders will expect you to keep up with your repayments each month. If you fall behind there is the risk of repossession. This means the lender taking the property off you and selling it to try and recoup its money.
Mortgages come in different types and within those categories the rate will usually be governed by how much you are borrowing against the property’s value. This is known as loan-to-value. So if you put down a deposit of 25 per cent of a property’s purchase price, the mortgage makes up the other 75 per cent. You will be borrowing at 75 per cent loan-to-value.
Types of mortgages
While mortgages typically last for 25 years, you are almost certain not to pay the same rate of interest over that whole period. Instead a mortgage starts with a discounted period of perhaps two or five years when you pay a defined rate. At the end of the discounted period your mortgage will switch to something known as a standard variable rate, a rate that can move up or down as determined by the lender, which is usually higher.
In the vast majority of cases, the standard variable rate is set by the lender and can be increased or decreased at any point regardless of what the Bank of England base rate is. It is usually higher than the initial fixed rate you were paying, so for example your mortgage may be fixed for five years at 4 per cent and after that you would then move to an standard variable rate (SVR) currently set at 4.99 per cent.
Of course, by the time your five-year fixed rate ends, that SVR could have changed. This means that it is wise to shop around for a remortgage when you come to the end of a deal.
Repaying your mortgage
The two ways of paying your mortgage are repaying the capital and interest, known as a repayment mortgage, and an interest-only mortgage where you just pay the interest.
With a repayment mortgage you pay off the amount of money that you have borrowed and the interest charged on it. By the end your debt will be cleared and you own the property outright. With interest-only mortgages you only pay interest rather than repaying your debt. The amount you borrowed on the mortgage does not go down and at the end you still owe all the money.
Lenders have now mostly put a stop to this interest only products. A few will consider it but will want to see evidence of a concrete plan to repay the loan at the end.
Fixed rate V tracker mortgages –
The two main types of mortgage deal are either a fixed rate or tracker rate. A fixed rate mortgage provides a defined rate of interest over a given period. For example, your mortgage is fixed at 4 per cent for the first five years. You will know what you will be paying each month over the fixed rate term, after that things will change. You can either move to the lender’s standard variable rate, or find a new mortgage deal to move to. When your fixed rate is due to end call us so that we can shop around to find you the best deal.
Tracker mortgages are linked to the Bank of England base rate and are set at a certain margin above it. For example, a tracker at base rate plus 2.5 per cent would currently charge interest at 3 per cent, while the base rate is at 0.5 per cent. If the base rate moves up, then the mortgage interest rate will also move up in line.Trackers tend to have lower rates of interest than fixed rate mortgages. The cost can quickly escalate if the base rate goes up.
Next week learn about how mortgage rates work and why fees do matter, how much you can borrow and new regulations affecting mortgages. If any of this is confusing just email us or call – we would be delighted to help explain.