What is a Mortgage?
A mortgage is basically a loan which is secured against your home. In return for a loan to help buy your home as part of your mortgage agreement you agree to repay the loan and any interest over a set term. If for any reason you are unable to make repayments the mortgage company have the right to reposess your home to recover their money.
Mortgages are offered by banks, building societies and specialist lenders who will on the whole be regulated by the Financial Services Authority (FSA). This is also the case of mortgage brokers who advise on mortgages. You should check that the mortgage company or adviser you are dealing with is registered on the FSA website as this will provide you with a route to make a complaint if things go wrong.
As a mortgage is for most people the largest financial transaction they will make it is important that the following factors are considered:
How Much Can You Borrow?
It is very important that when considering a mortgage you work out how much you can afford. While there is a greater onus on mortgage lenders to lend responsibly you will also need to consider what level of borrowing is appropriate for your circumstances. Many mortgage deals have initial periods where preferential terms are offered and borrowing costs are lower than normal - when this discounted period ends make sure you can afford any reasonable increase that may kick in. In assessing affordability lenders will take into account your income and outgoings and your current employment history. In calculating disposable income your total income will be taken into account less other debts you may have and living expenses. The lender considering your mortgage application will have their own method of assessing affordability but it makes sense to do your own budgeting calculations to ensure the monthly repayment requirement is well within your budget.
In calculating how much you can borrow the lender will apply a maximum amount you can borrow called the loan to value of the property (LTV). E.g. If you are a first time buyer the lender may stipulate a LTV of 95% which means they are prperpared to lend up to 95% of the value of the property (this will be assessed by the mortgage company's own appointed surveyor). In this scenario the first time buyer would be required to put down at least 5% towards the property purchase. The mortgage rate deals offered by a lender will be affected by the level of deposit that can be put down. Generally speaking the higher the deposit that can be put down the better the mortgage rate can be achieved.
Types of Mortgage
You can choose to repay your mortgage in different ways:
Repayment Mortgage - With a repayment mortgage you pay off each month a proportion of interest and capital against the loan. At the end of the mortgage term your mortage is paid off. the advantage of this is the knowledge that your mortgage will be repaid at the mortgage end of term. The main drawback is that this type of mortgage is more expensive and in the early years as most of the repayment is interest there is little reduction in the mortgage owed.
Interest Only Mortgage - With an interest only mortgage you only pay off interest every month and so monthly repayments are lower. With this type of deal you have the flexibility of how you repay the mortgage off at the term end. If you wait until the term end to repay the mortgage the overall cost of borrowing will be higher compared to a repayment mortgage where capital is being repaid gradually over the term and therefore the interest in relation to the debt reduces.
Some lenders may not offer an interest only mortgage option depending on your circumstances and the mortgage you require.
Buying a property can be an expensiver exercise and it is important that you are aware of all the costs that come into play when buying your home. The costs relating to your mortgage will be set out clearly by the lender in what is known as the "Keyfacts" document provided to you. These costs may include:
- Arrangement Fee - Charged by the lender to cover the administration costs of processing your mortgage. This will vary from deal to deal. You normally have the option of adding this fee to your mortgage but this will increase your cost of borrowing over the mortgage term.
- Mortgage broker Fee - If you have used a mortgage broker to help arrange your mortgage for you then a fee may be charged which will be outlined in your keyfacts document.
- Mortgage Account Fee - Applied by the lender at outset when you first take out your mortgage to cover the set up and termination costs of your mortgage.
- Valuation Fee - Charged by the lender to value your property in assessing the value for mortgage purposes.
- Re-inspection fees - If a lender has required you to make agreed repairs to the property a re-inspection may be required
- Higher lending charge - If you are borrowing a high loan to value the lender may decide they wish to insure the possibility that you may need to sell your home and this results in a loss.
- Early redemption charges - If you pay off part or all of your mortgage earlier than expected the lender may charge you a fee - this will be covered in your keyfacts document.
- Mortgage exit fee - Paid to your lender when you repay your mortgage.
- Insurance costs - as part of your mortgage you may be encouraged to take out insurance either by a broker or the lender to cover buildings insurance and other optional insurance such as mortgage life insurance.
Top Ten Mortgage Tips for 2013
1. If you are unsure of your mortgage options seek mortgage advice from a FSA regulated independent mortgage broker.
2. Maximise the deposit you can put down on your property to benefit from the most competitve mortgage interest deals.
3. Read the Lender Mortgage keyfacts document carefully to understand the costs being applied by the lender.
4. Ensure that you are comfortable that mortgage repayments (whether repayment or interest only) fall within your budget.
5. Remember that mortgage discounts are temporary and borrowing rates may go up when the discount period ends.
6. If you are remortgaging ask your current lender what deal they can offer you as well as shopping around.
7. If you lender's valuation of your property is too low ask them to reconsider and provide supporting evidence from the sale price of other properties in your area.
8. For interest only mortgages ensure that you plan carefully how to pay off your mortgage and check at regular intervals that your repayment strategy is on track.
9. At the time of writing interest rates are at record lows. While borrowing is cheap now this situation may change so factor in a rise in interest rates into your budgeting calculations. Use our mortgage calculator to see how much you would pay on different levels of interest on a fixed loan amount.
10. Consider mortgage unemployment insurance in the event that you lose your job. This may provide useful breathing space in covering mortgage repayments while you look for a new job.