Mortgage Guide
Introduction How much can I borrow Deposit Various Types of Mortgages Types of Interest Rates Other Questions| Introduction | Top |
One of the best investments you can make in your life is to buy your own home.
What other investment gives you the opportunity to live in it, entertain in it, relax in it, decorate it, and most likely make a substantial profit with it.
Now having made the decision to buy your dream home, the next thing to do is to figure out how you are going to pay for it. As most of us do not have a spare couple of hundred thousand pounds lying around, we have to look for other ways to finance our home purchase and where we are going to borrow the money to start us on the first rung of the property ladder.
| How much can I borrow? | Top |
Most mortgage providers will lend you an amount three to four times your salary, when calculating your salary be sure to include all commissions and bonuses you receive as well. If you intend to buy a property with your partner, the mortgage provider should take both salaries as the basis for working out a final figure to lend you.
Some mortgage providers dig a little deeper into your finances to ascertain whether or not you are careful or extravagant with your hard earned money. In other words, if your credit card is ‘full’ and you have a personal loan then you possibly will be offered less than the basic figure and conversely if you have a savings account and are always in credit then you should be offered more than the basic figure.
| What do I have to put down (Deposit) | Top |
Most mortgage providers will lend you up to 95% of the value of the property you want to buy. For example, you would need to put down a deposit of 7,500 GBP on a property valued at 150,000 GBP.
There are however, mortgage providers that will lend you 100% of the value of the property but will inevitably charge you a higher interest rate because you constitute a greater risk in case you default on the mortgage and the mortgage provider wants to be sure they will get their money back.
As a standard rule of thumb, you should aim to put down as a deposit the most you can afford, the more of your own money invested in the property, the lower the rate of interest you are likely to be offered.
Another benefit or safeguard obtained by putting down as a deposit the maximum you can afford, is that over the repayment period, the price of your property is liable to rise and fall, and if you want to move house during one of the negative downturns, it protects you from going into “negative equity “where the value of your property falls below the amount you have borrowed.
| Various Types of Mortgage | Top |
With all the various types of mortgage on offer these days, it is a some what confusing choice that awaits you in the mortgage jungle. Just because one mortgage offer is cheaper than another, this does not necessarily mean that it is the right one for you, let us look at the types of mortgage available.
Firstly, a brief explanation on just exactly what a mortgage is:
A mortgage is a secured loan taken out against the value of your property. It is paid back over an agreed period of time. A secured loan is one that is ‘secured’ against a property, your home. If you don’t repay the payments as agreed with your mortgage provider, they have the right to sell your property so they can get their money back. It is important that if you get into difficulties with paying back the mortgage, you must inform the mortgage provider immediately, otherwise you run the risk of losing your property.
Repayment Mortgage
This is probably the safest and the most straightforward way of paying off the loan.
1. You borrow the money
2. You make the repayments over 25 years
3. House is yours!
The downside of a repayment mortgage is that because of the way the repayments are structured, in the early years of repaying your mortgage most of the monthly payments will consist mostly of interest charged on the amount lent, and only a little goes towards paying back the principal borrowed. What this boils down to is that, for the first ten to fifteen years the majority of payments made do not significantly reduce the original debt, so if you want to repay the mortgage early then you would have to pay most of what you had borrowed.
In most cases, your lender will allow you to increase the amount of your repayments so that you can complete the term earlier. However you should contact your mortgage provider to make sure there are no restrictions for you to do this.
Interest Only Mortgage
This type of mortgage is what its title says Interest Only.
With the wide range of financial products on offer many people are choosing to go for an interest only mortgage and using an investment fund to finance the original capital borrowed. This type of mortgage needs a little more planning and constant monitoring of your chosen way of investing for the repayment of the principal sum.
There are various ways to build up the amount needed to pay back the mortgage provider, ISA, Investment funds, Pension Plans etc. It is however vitally important to invest in a solid fund and not look to higher risk investments, the old saying better safe than sorry comes to mind. Always take the advice of IFA professional before making any final decisions as he/she can point out all the relevant advantages and disadvantages of choosing this mortgage option.
| Types of Interest Rates | Top |
Now, after you have chosen your preferred type of mortgage, you need to figure out what type of interest rate is best for you.
Fixed Rate Mortgage
This rate allows you to fix the interest rate for a specified period of time, whether or not the interest rate changes in the market. It is usual for mortgage providers to offer fixed interest rates for a period of between two to five years, however longer or shorter terms are available and offered by some mortgage providers.
When the agreed period of the fixed interest rate has ended the interest rate usually changes to the SVR (Standard Variable Rate).
Most mortgage providers charge an up-front payment for so called booking or arrangement fees. Also mortgage providers raise a fee for ERC (Early Repayment Charge)
Be aware of this, as it may not be cost effective paying off your mortgage early.
Always make sure that the mortgage provider tells you what charges are liable for paying the mortgage off early.
Discounted Rate Mortgage
As the title suggests your mortgage provider gives you a discount against the interest rate of the SVR (Standard Variable Rate) for a set period of time.
An example of this is when the SVR is 6.5% and the mortgage provider offers a discount
1.5% for a set period of time. The interest on the principal borrowed would then be
6.5% - 1.5% = 5 % for the period of time agreed.
If the SVR went up to 8% then the interest rate charged would go up to 6.5% because the mortgage providers discount rate is tied to the SVR (Standard Variable Rate).
Equally if the SVR (Standard Variable Rate) fell then the interest rate charged would go down.
Again if you want to pay off the mortgage early, then an ERC (Early Repayment Charge) will most likely apply.
Variable Rate Mortgages
This type of interest rate will follow the SVR (Standard Variable Rate).The mortgage provider will adjust the rate depending on the state of the market.
Capped Rate Mortgage
This type of interest rate mortgage is almost the same as the fixed rate mortgage, but there are differences such as if the SVR (Standard Variable Rate) dropped below the capped rate, then the interest rate repayment would be based on the variable rate.
On the other hand if the SVR ( Standard Variable Rate ) rises above the capped rate then the interest rate repayment would be “’capped’ and would not rise above the capped rate.
As a general rule it would be better to have a capped rate than a fixed rate interest mortgage.
Tracker Rate Mortgage
As the name suggests, the interest rate mortgage ‘tracks ‘the rate such as the Bank of England Base Rate or the London Interbank Offered Rate.
The interest repayment rate will be calculated as a set percentage number above the particular base rate for a period of time.
An example of this would be if the interest tracker mortgage rate was set at one percent above the Bank of England base rate for 3 years. If the Bank of England base rate was 5% the tracker interest rate would be 6%.
Because the tracker interest mortgage rate ‘tracks’ the variations of the base rate which they are linked to, the interest mortgage rate can go up or down accordingly.
For example the Bank of England base rate increases by one percent, then the tracker interest rate also rises by one percent. Conversely if the Bank of England base rate decreases by one percent, then the tracker interest rate also falls by one percent.
| Other Questions | Top |
One of the first questions to ask your prospective mortgage provider is how frequently interest is calculated. The difference between interest calculated on a daily basis and interest calculated on a monthly and in some cases a yearly basis.
If you choose a mortgage where the interest is calculated on a daily basis (sometime known as a Australian mortgage) you will end paying less interest than a mortgage where interest is calculated monthly. This is because when you make payments based on interest calculated daily, you immediately reduce the outstanding amount, whereas when you make payments based on interest calculated monthly you could wait one month before the interest is recalculated, therefore paying interest on money you have already paid back.
The worst scenario is when interest is calculated at the start of the year, this can lead to your monthly repayments being quite a bit more than a typical monthly repayment.
When deciding what type of mortgage is best for you, it is better to compare the monthly repayments as opposed to the various interest rates as there are different ways that the interest rate APR (Annual Percentage Rate) can be calculated.
Because of this, two mortgages that seem to charge the same rate of interest could actually result in different monthly payments.
