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Mortgages


What is a mortgage?


Buying a home is a major financial commitment, and will probably be the single most expensive purchase that you will ever make. When buying a home, most of us will find that the costs are too high, and will need to borrow money.

A mortgage is a long-term loan secured against your home. ‘Secured’ means that, if you don’t keep up the loan repayments, the lender can repossess your home and sell it in order to make their money back.

A mortgage can be broken down into four main parts:


Whether you are a first time buyer or not, getting a mortgage can be a very daunting experience. There are literally thousands of mortgage deals out there, from ‘fixed rate’ to ‘flexible’, but are they really all that different?

Despite the deals that are available, there are really only two types of mortgage on offer:

Each one has its advantages and disadvantages, but the real difference between the two comes from how the money is paid back to the lender.


Repayment mortgage.


With a repayment mortgage (also known as a ‘capital and interest’ mortgage), your monthly payments go towards both repaying a chunk of the capital, and a chunk of the interest on the loan (hence ‘capital and interest’).

As long as every repayment is made, the whole mortgage will be paid off at the end of the term.


Interest-only mortgages.


This kind of mortgage differs from a repayment mortgage in the sense that the monthly repayments pay off the interest, but not the capital. This means that, at the end of the mortgage term, the capital is still left owing.
If you have an interest only mortgage, you will be responsible for repaying the capital at the end of the mortgage term. Usually you will need to have made regular savings – for example into an endowment policy or an ISA – to build up a fund to pay back the capital.

It is possible to combine a repayment mortgage with an interest-only mortgage. This would mean that your savings plan would only have to cover a fraction of the capital at the end of the mortgage.


Mortgage deals.


Many mortgages differ due to the way in which the interest is charged. Many lenders will offer ‘special’ rates or terms to sell their mortgage. Most of these deals relate to the interest charges. The four main types of mortgage deal available are:

Standard Variable Rate – This means that your payments will go up and down as the mortgage rate changes. (Mortgage rates tend to move in line with the base rate of interest set by the Bank of England.)

Fixed Rate – This means that your payments are set as a certain amount for a fixed period of time. At the end of this period, you are usually ‘tied-in’ for a certain period of time, and will be charged a variable rate of interest for the remaining term.

Capped Rate – Your payments will go up and down with any changes in the mortgage rate, but are guaranteed not to go above a certain level (the ‘cap’) during the period of the deal. At the end of the deal, you will be charged the lenders variable rate.

Discounted Rate – Your payments are variable, but they are set at a rate less than the lenders variable rate (standard variable rate) during the period of the deal.

Although the mortgage term may last for 25 years or so, these deals will only last for a fixed period of time. A deal may last one year, or it may last five. It all depends on the terms and conditions of the deal set out by the lender.


How much can you borrow?


When looking at how much money a lender is willing to let you borrow, there are two factors that they will want to consider.

First of all, they will want to know how much you earn. Usually you will only be able to borrow so many times your salary. Generally this can be around three times your salary. This is known as the ‘income multiplier’.

If you are looking to purchase a joint mortgage with a partner or friend, then the income multiplier may be worked out differently. Some lenders will offer two-and-a-half times the joint salaries, or three times the higher salary, and one times the lower salary, whichever is higher. Each lender will have their own ‘income multipliers’, so these may vary.
Most lenders will also take into account the amount that you are looking to borrow, and the total value of the property. Although some lenders will allow you to borrow the full value of the property, most will only lend a certain percentage, say 95%. This is known as the loan to value ratio.


Flexible mortgages.


Flexible mortgages have only been introduced in recent years, and offer many features that traditional mortgages don’t.

Where traditional mortgages committed you to paying a certain amount of money, every month for a fixed period of time, a flexible mortgage allows you a lot more choice in how your payments can be made.

Flexible mortgages can offer the ability to make overpayments. This will allow you to pay more than the regular monthly figure, and will either pay the mortgage quicker, or can save you being charged a lot of interest.

They can also offer the chance to make underpayments, or take payment holidays if you feel that you can’t afford the regular monthly payments, or you are looking to save up for something else. These payments will have to be made up again at a later date, but it allows you the option to choose, where a traditional mortgage would not.


Points to consider when applying for a mortgage.


When applying for a mortgage, there are certain points that you will need to consider before you sign on the dotted line.

First of all you need to consider how much you can afford. You should complete a budget, and work out how much money you have coming in, and how much money you spend each month. This should then give you an idea to how much you can afford to pay a lender each month for your mortgage.

You should also consider whether your income would allow you to afford the property you are after. Typically, a lender will offer you a maximum of three times your salary, but you should also find out what their loan to value ratio is.

You also need to think about how long you will need to borrow the money for. A mortgage is a major financial commitment and will require that you can keep up the repayments for the full term, this can be twenty-five years, or longer.

You should also think about the deals on offer. Do you want a fixed rate? Do you want a flexible mortgage?

Getting a mortgage can be very complicated. If you are unsure about which mortgage to go for, then you should seek some financial advice.


Disclaimer,   Target Audience,   Jurisdiction    Last updated & checked: 30/03/2006