Taking out a mortgage is a big financial commitment so it’s important to know what you’re doing and how mortgages work. You must also be sure that you can afford the repayments.
What is a Mortgage
A mortgage is a loan taken out to buy property or land. The loan is ’secured’ against the property, which means that if you fail to keep up the repayments on the mortgage – called falling into ‘arrears’ – the lender could repossess your home. Most mortgages run for 25 years but the term can be shorter or longer.
Taking out a Mortgage
You can get a mortgage from a bank, building society or a specialist mortgage lender. Before they agree to lend, they will check that you can afford the monthly mortgage payments, and that the property you’re buying is worth the amount of money they are lending you.
Almost all mortgage products require you to put down a deposit. The mortgage that makes up the difference is expressed as the percentage ‘loan-to-value’.
Example: If you put down a £10,000 deposit on a £100,000 property, the deposit would be 10% of the purchase price and the mortgage loan-to-value would be 90%.
In general, the higher the deposit you can save, the lower the mortgage interest rate you’ll be offered.
How You Repay Your Mortgage
Capital and Interest Explained:
A mortgage has two parts: the capital, which is the money you borrow, and the interest, which is the charge made by the lender based on the outstanding loan amount until it is paid back.
This is the most popular option and the preferred option for most people.
If you have a repayment mortgage you’ll make monthly repayments for an agreed period of time (known as the term) until you’ve paid back both the capital and interest.
With this type of mortgage, you have the benefit of knowing your mortgage balance will get smaller every month and that if you keep up the repayments, your mortgage will be repaid at the end of the term.
Just one thing to be aware of is that to start with your payments will be mainly interest, so if you want to repay the mortgage or move house in the early years, you’ll find that the amount you owe won’t have gone down by very much.
Interest Only Mortgages
With an interest only mortgage you only pay the interest due on the amount you borrowed each month. So while you’ll be paying out less than with an equivalent sized repayment mortgage, you will still owe the original amount you borrowed at the end of the mortgage term.
How you pay back an Interest Only Mortgage:
Most lenders will require that you have a repayment vehicle or strategy in place if you want to take out an interest only mortgage. This may mean paying separately into an investment plan each month to build up enough money to pay off the capital at the end of the term.
In addition, some lenders may ask for a higher deposit than with repayment mortgages.
Unless you can meet all of these criteria its likely to be difficult to get an interest only mortgage – with no repayment strategy in place you could end up without the means to repay your loan.
If you have a substantial deposit and are considering an interest only mortgage you may want to get financial advice to work out the best repayment vehicle for you.
Buy to Let Mortgages
Are you looking for a buy to let mortgage? If you are planning to buy a property to rent out you will need a buy-to-let mortgage. As many existing landlords already know, this market has shrunk considerably over the last few years. However, there are still mortgages out there.
Self Build Mortgage
As the name suggests, a self-build mortgage is a home loan take out on a property which you are building yourself.
The biggest difference between self-build mortgages and standard residential mortgages is that the funds are given to you in stages rather than as a single lump sum. This is to reduce the lender’s risk and ensure that the money is spent as planned so you don’t run out when you are only half way through the project.
Exactly when funds are released will depend on the lender but, as a general rule, you’ll get the first tranche when you buy the land, more when the foundations are laid and a further payment when the property is built up to eaves level.
The final payments will be made when the roof is watertight and then when the interior walls are plastered, and the last installment is paid on completion.