Mortgages - What you need to know.
Buying a property is the largest expense that many people incur during their lifetime. Due to the amount of money involved, the majority of people take out a mortgage to fund the purchase of their property. A mortgage is a loan that is secured against your property, during the life of your mortgage you will pay your lender both capital (the amount that you borrowed), along with interest on the loan.
When deciding to take out a mortgage, you will find that there are many different types of mortgage product available, and many different terms to familiarise yourself with. In this guide, we will explain how to go about getting a mortgage, the types of mortgage available, and some of the jargon that you will hear along the way.
Arranging a Mortgage
about applying for a mortgage. You can apply for a mortgage either directly through a lender such as a high street bank or building society, or alternatively, you could visit a mortgage broker. A mortgage broker will compare a number of different mortgage products across the market and advise you on the best option for your needs.
Before agreeing to provide you with a mortgage, your lender will assess whether you meet the relevant criteria. A mortgage lender will base their decision on the following:
- Your employment status and proof of regular earnings
- Your credit rating and your credit history
- The amount that you wish to borrow and the length of the mortgage term
- Your deposit
- Affordability – your salary compared with your outgoings and how this affects your ability to repay the mortgage
Types of Mortgage
To find the right mortgage to suit your needs, it is essential to look at your individual circumstances and your purpose for taking out the mortgage.
As well as choosing the right type of mortgage product, you will also need to think about the length of the mortgage. The length of the mortgage is known as the term. The longer the term of the mortgage, the more time you have to pay it off. Most mortgages are 20 to 25 years in length.
First Time Buyer Mortgage
You will typically be considered a first-time buyer if you have never owned a residential property. As a first time buyer, you will be required to provide a deposit for your mortgage. Lenders typically look for first-time buyers to have a 5% to 10% deposit, the higher your deposit, the lower your mortgage repayments will be each month. There are many products designed specifically for first-time buyers, so your mortgage broker will be able to guide you through these.
A cashback mortgage will provide you with a lump sum when you take out your mortgage. The amount of cashback you receive varies but could be between £500 to £1,000. Before taking out a cashback mortgage, it is wise to check that the mortgage itself won’t cost you more in the long run than one that does not offer cashback.
Changing your mortgage product without moving home is known as remortgaging. When you remortgage, you will take out a new mortgage deal. You can choose to stick with the same lender or to shop around to see if you can secure a better deal with a different lender.
Are you planning to build your own home? If so, you may require a specialist self-build mortgage. Self-build mortgages work in a different way to a standard mortgage; this is because there is no physical property to secure your loan against.
Instead of releasing the funds when a house sale completes, lenders of self-build mortgages release the funds gradually at certain stages of the build. Due to the higher level of risk involved, self-build mortgages often have higher rates of interest.
A second charge mortgage is also often known as a second mortgage. A second charge mortgage means that you are taking out a second secured loan against your property in addition to your original mortgage. A second mortgage essentially means that you are borrowing money against the equity that you currently have in your home. If your home is worth £200,000 and you have £150,000 left on your mortgage, you will be able to borrow a maximum of £50,000.
Offset mortgage products enable you to offset your savings against your mortgage. This means that your savings will help to reduce the amount of interest payable on your mortgage. To get an offset mortgage product, you will need to hold a savings account and a mortgage with the same lender.
Your choice of mortgage rate will impact on the cost of your monthly mortgage payments along with the length of time that you can expect to pay a certain amount for your monthly repayments. It is essential to carefully consider which mortgage rate is the best option for your circumstances.
A fixed-rate mortgage is a useful option if you like the certainty of knowing exactly how much your mortgage will cost each month. A fixed-rate mortgage means that you will have a fixed rate of interest to pay each month for the length of the deal. Fixed-rate mortgage deals can run from anything from 12 months to 10 years.
Tracker mortgage deals track the Bank of England base rate. This means that your mortgage interest rate will fluctuate in line with the base rate. Tracker mortgage deals are available for terms starting from one year right through to the lifetime of the mortgage.
Standard Variable Rate
The standard variable rate, also known as an SVR, is the rate that your mortgage will revert to once your tracker or fixed-rate mortgage deal comes to an end. The standard variable rate is usually a lot higher than a tracker or fixed-rate deal, so you will typically end up paying more each month as a result.