What is a mortgage?
A mortgage is a loan you take out from a mortgage lender to pay for a property. If you don't pay back the loan as
agreed the lender can take possession of the property and sell it to repay the loan.
The loan is divided into the capital (the amount of money you borrow to buy your property) and the interest
(the amount the mortgage lender charges for lending you the money).
There are really only two basic types of mortgage – repayment and interest only.
The repayment method means that the mortgage will be paid off by the end of its term. Each monthly payment
to your lender includes interest on the loan and a repayment on some of the capital. This means your monthly
payments will be higher, but there is no chance of a shortfall at the end of the mortgage term.
The interest only method means you only pay the lender interest during the term, and you then pay the outstanding
amount back at the end of the mortgage period. This is done using an "investment vehicle", any money made by which
should be used to pay off the loan. Although the monthly payments may be less, you could be left with a surplus
or a shortfall.
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Paying interest on your mortgage
The most significant thing about any mortgage is the interest rate. The lower the interest rate the less money
you have to pay back over the mortgage term.
There are 3 ways you can pay interest on your mortgage:
- Variable rate
Where the interest rate can go up or down.
- Fixed rate
Where the repayments are fixed for a set period.
- Capped rate
Where a maximum payment is specified for a set period.
With a variable rate mortgage the interest rate can go up or down. This means that the interest rate can
stay the same for years, or could change on numerous occasions over the period of a few months. In general,
the interest charged by the lender will mirror the Bank of England Base rate. Each mortgage lenders has its
own variable interest rate set slightly higher than the base rate.
With a fixed rate mortgage you are guaranteed that your monthly payments won’t go any higher than a set value
for a set period. This period can be anything from 6 months to 25 years. This can be a good option if you are
trying to stick to a tight budget.
Capped rate mortgages are supposed to offer the best of both variable and fixed rate deals. You agree to have a
limit - a cap - on the maximum amount of interest you will pay over a particular period of time while allowing
it to fall if the variable rate drops.
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Which type of mortgage?
One of the most daunting aspects of choosing a mortgage is sorting through the many types of mortgage currently
available. Remember, there are really only two basic types of mortgage - repayment and interest only. It's the
variations on these which make things seem so complicated.
To make life easier, start by deciding which types of mortgage you definitely don't want. This process will help
you create a shortlist of mortgages to consider. Once you have decided which type of mortgage you want, always shop
around for the best deal on offer.
It is important when comparing mortgage deals to get "like for like" quotes from the lenders. The most reliable
comparison will be in the APR. Also, look for any application fees, valuation costs, etc. that may be added on.
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Calculating what you can borrow
A single borrower can normally borrow around 3.5 times their annual salary.
A couple can borrow either 3.5 times the main salary plus 1 times the second salary, or 2.5 times both the annual
incomes added together.
If you are self employed then the lender will look at your average net income.
Check out our calculator, either now or later, to see how much you may be able to borrow.
In reality, assuming you have a regular income and clean credit history you're likely to get a loan fairly easily.
The competition between lenders to get your business is fierce. Sometimes people are lent as much as five times their
income. However, it is important to remember that what you can borrow is not necessarily what you can afford.
There can be many other costs associated with taking out a mortgage and it is always a good idea to have some money
set aside beforehand.
Some lenders will get you to fill in a detailed questionnaire to ensure that your budget is not being
overstretched. If you're a first time buyer it will always help if you can show that you've been paying regular rent
of an amount similar to what your intended mortgage payments will be.
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Mortgage Tips
Shop around
There's a lot of competition between mortgage providers. There are big differences in the deals available which can
amount to thousands of pounds. Be sure to compare.
Don't be taken in by low-sounding "headline rates"
"Headline rates" are very low initial interest rates that usually come with hidden long term "tie ins". A much better
guide to the true cost of a loan is the APR.
Always read the small print
When you take out a mortgage you make an agreement with the lender covering the amount you have to repay and the
period for which this is set.
If you want to get out of the deal before the agreed period is up you may have to pay a redemption penalty - a
charge which supposedly compensates the mortgage lender for the time and expense of your leaving. These are sometimes
hidden in the small print. Always ask your prospective lender what the exit/redemption penalties are.
You should also watch out for "overhanging lock-ins". These are penalties for leaving a lender AFTER a special deal
interest rate has come to an end.
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Please note: TheMoneyFactor.co.uk makes every effort to ensure that all our information and the results from our calculators are accurate and current. However, we cannot guarantee 100% accuracy and cannot be held liable for any errors.
Nothing within TheMoneyFactor.co.uk website is, or shall be deemed to constitute, financial or other advice or a recommendation to purchase any product or service. Any and all information provided within TheMoneyFactor.co.uk website is for general information purposes only.
TheMoneyFactor.co.uk advises that you always check with the finance service provider before signing any agreement or purchasing any product.
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