Put simply, a mortgage is a loan that you take out so that you can buy a house.
Apart from the fact it’s for more money than you’ll ever need to borrow for anything else – it’s the same as any other loan.
In this article, I look at the important stuff you need to know about mortgages.
How do they work?
How can I get one?
And why are there so many different types?
But first, let’s start with the basics..
What Is Mortgage Interest?
When you take out a loan with any lender, for whatever reason or amount, you’ll be charged interest.
The same applies with a mortgage.
Next question!
What are Mortgage Payments?
A mortgage is a secured loan, meaning that until all that money is paid back to your lender you don’t own what you’ve bought – much in the same way you might have a loan secured against your car.
If you don’t keep up with your monthly mortgage repayments your home could be repossessed.
In short – if you don’t pay, they’ll take it away.
What Are The Conditions Of Getting A Mortgage?
No lender in the world (even the really, really nice ones) will sign off on the huge amounts of cash needed to buy a house without expecting you to meet some kind of criteria.
Those things will vary from lender to lender, but the standard things that need to be taken into account by any lender are:
1. Deposit
Lenders will no longer take the risk of lending you 100% of the money you will need to buy your new home.
(Yep, that was a thing that really used to happen!)
This is because if, in the future, you are unable to pay your mortgage, the lender will need to be able to take your home and sell it in order to cover the loan.
Makes sense.
This is why you will need to provide a percentage of the house price as a deposit.
The minimum you need to put down is 5% of the purchase price.
As a guide, the more of a percentage you can put down for a deposit, the lower the rate of interest you will pay on your mortgage.
We look at this more in depth in our article, ‘HOW MUCH DEPOSIT DO I NEED FOR A MORTGAGE?’
2. Affordability
It seems very obvious to say, ‘can I afford my monthly remortgage payments?’, and to look at your wage slip and say, ‘yes’.
BUT, it is not just whether you can afford them NOW that you need to consider.
You need to think about whether you will be able to afford your repayments if the interest rate rises.
Would your take-home pay have increased at the same rate?
Probably not.
It is always best to budget on the assumption that interest rates WILL rise, so that you can be sure you can afford to pay your mortgage IF they do.
3. The Valuation and Survey
Before anyone is going to lend you the money to buy a house, they’re going to want to check that it’s worth what you’re going to pay for it.
Quite often lenders will offer a basic Mortgage Valuation where THEY cover the cost, however, this is not ALWAYS the case.
Any potential valuation fee will vary depending on the lender, the property value and the type of survey that you require.
This can cost anywhere between £300 – £1000 on an average property with a value not exceeding £500,000.
Properties with a value above this will obviously cost more!
The valuation is for the lender’s benefit, so that they feel comfortable lending against the property.
You will be able to add a survey to the valuation that will give you a report on the overall condition of the property.
This will give you the peace of mind that the house you’ve just fallen in love with isn’t hiding any skeletons in its closet!
4. The Type Of Property
To be honest this one’s only really relevant if the house of your dreams happens to be an old converted church or something – but for all I know that could be the case.
It’s worth knowing then that some lenders don’t operate in the market of grade listed buildings where there might be restrictions on altering the property.
They also might not operate in the market of unlisted buildings that might be subject to similar restrictions (ie: properties built in Areas of Outstanding Natural Beauty).
You might run into similar problems if you are looking to purchase a flat over a commercial property, studio flat, or ex-local authority premises.
These might be seen as being less attractive in the future and therefore it could reduce your lending options.
The above examples are by no means an exhaustive list and it’s always good to check with a Whole of Market Mortgage Advisor first to be sure before you fall in love with the property!
5. Time Frame
A self-explanatory one.
Mortgage providers have a maximum number of years over which they will lend you the money and will have a set date when it must be paid in full.
Your lending options will be greatly influenced by this time frame, and it goes without saying that the younger you are when you take out your mortgage, the longer the lender will give you to pay it back.
The standard mortgage length is 25 years, although some lenders will extend that to 35 or even 40 years.
Ok, so let’s say you’ve just had your application for your first home accepted in principal.
Brilliant.
But don’t relax just yet; now you have to decide HOW you want to repay your loan…
What Is A Repayment Mortgage?
A repayment mortgage is one where your monthly repayments are paying off both the capital (the amount you borrowed), as well as the interest.
This means that the full amount you borrowed will decrease throughout the term, and by the end your loan has been fully repaid.
Simple.
What Is An Interest Only Mortgage?
An interest-only mortgage does exactly what it says on the tin – you only pay the interest on your loan.
But before you get too excited about those much lower payments, you still have to eventually pay the original loan amount you borrowed at the end of the term.
Not all lenders offer interest-only mortgages, and those that do will require a decent sized deposit and an approved repayment plan in place to pay off the capital at the end of the term, such as ISAs or investments.
If you have an interest-only mortgage you do have some options to ensure you are able to pay off your loan at the end of the term. These are:
1. Switch to a repayment mortgage– yes your monthly payments will increase, but it will be repaid in full at the end of the term.
2.Switch to a repayment mortgage – and repay the loan over a longer period to make the payments more affordable
3. Pay into an investment plan – a financial advisor will be able to suggest a suitable plan that could be used to pay off the loan at the end of the term.
4. Make overpayments – Some lenders will allow you to make lump sum overpayments on your mortgage.
What Are Some Of The Other Types Of Mortgage Available?
So far I have covered the bog-standard, buy-a-house-and-live-in-it mortgage, which is probably most relevant to you and your situation.
But there are other types of mortgages available. Such as:
1. Buy-To-Let Mortgage
This is a mortgage taken out by someone who wants to buy a house to rent to tenants.
It’s just like a standard residential mortgage but with some differences in criteria and eligibility.
For example, some lenders won’t lend to people under 25 or those that earn less than £25,000 a year.
2. Self-Build Mortgage
If you are going to build your own house, a residential mortgage isn’t for you.
A self-build mortgage is!
This type of mortgage tends to be charged at a higher rate of interest as it is considered more of a risk for a lender than a conventional mortgage.
3. Second Charge Mortgage
Basically another mortgage in addition to a homeowners existing mortgage.
These are sometimes called ‘Homeowner Loans’, and as the name suggests are only available to homeowners.
The rate of interest on this second mortgage is generally higher than on your first (or main) mortgage.
4. A Remortgage
A remortgage can be a way to get a better monthly payment than you currently have, to raise money for home improvements, or to consolidate debts.
It involves moving your current mortgage to another arrangement either with your existing lender or a new one.
Some borrowers choose to review their mortgage every few years to take advantage of the rates on offer.
Now you know what a mortgage is, if you decide you want one, or if you have any other questions related to mortgages at all, why not give us a call?
When it comes to mortgages we really know our stuff – and we’d love to help!
Always remember
Your home may be repossessed if you do not keep up repayments on your mortgage.