Mortgages - The Basics
Mortgage Advice for Everyone
Mortgages - The Basics
Mortgages are the largest single transaction in most people's lives. Buying a property can be a stressful and time consuming experience, although nowadays the financing of a mortgage is a case of finding and selecting the most suitable deal, rather than simply accepting a lender's offer.
Hundreds of banks, building societies, and smaller niche lenders compete for your business, all offering a variety of interest rate deals, associated fees and other enhancements to attract borrowers.
Getting a mortgage - where do you start?
The first stage is to find out whether you can borrow enough and that you can afford the repayments. To get a quote based on your circumstances fill in our online enquiry form and get an up to date quote emailed to you.
It is important to organise your mortgage as soon as you are ready to start looking for property. The loan may take a few weeks to process, and the person you are buying from (and the estate agent) will want to know your mortgage lender is all set to go.
If you arrange mortgage finance before you've even found your property you can get an Agreement In Principle (AIP) from your chosen lender. An AIP costs nothing and does not commit you in any way, but it does confirm your ability to obtain a mortgage.
To obtain an AIP we will require three years residential and occupational history with details of you income and outgoings. The lender will credit search and credit score you, so you need to be aware that this will leave a footprint on your credit records.
This AIP is often handy to convince the vendor that you are a genuine purchaser and can help make the vendors mind up to accept your offer.
The amount you are able to borrow is primarily determined by your income, your employment status, the size of deposit you can provide and what other financial commitments to you have.
Checklist for choosing your mortgage:
- What are the setting up costs?
- What are the legal fees including stamp duty?
- Look out for early redemption penalties that can make it costly to change lender should you wish to renegotiate your mortgage later.
- Will the loan let you take payment holidays if the repayments are likely to become a strain at certain times of year? This is known as a flexible loan and can also be helpful for people whose income fluctuates from one month to the next
- Will you still be able to afford the loan when any fixed-rate or discounted period is over? When special offer periods like this come to an end, most mortgages move to the lender's standard variable rate which may be significantly higher
- Don't forget the additional costs for Life Cover, Mortgage Payment Protection and Buildings & Contents.
There remains two main methods of repaying a mortgage loan, and it is possible to set up the loan on a 'part repayment and part interest only' basis. A description of these methods is provided below.
Repayment (capital and interest) mortgages
Under a repayment mortgage your monthly repayments consist of both interest and capital hence, over time, the amount of money you actually owe will decrease. In the early years your repayments will be mainly interest and therefore the capital outstanding will reduce slowly in the early years.
Whilst this method ensures that the loan is repaid at the end of the term providing all payments are made on time and in full, it is generally more expensive at the start.
Interest only mortgages
As their name suggests, with an interest only mortgage you only repay the interest on the loan. At the end of the term the capital is still outstanding. Therefore you will usually need to take out some kind of investment policy to save up enough to repay the loan at the end of the term.
Traditionally the preferred product for repaying the capital of an interest only mortgage was a mortgage endowment policy (which included a set amount of life cover) - although more recently customers are using Individual Savings Accounts (ISAs) and pensions to build up a sufficient sum and taking advantage of the tax breaks offered by these products.