Mortgages are types of loans that are used to buy property. Mortgages can be complicated so in this section we aim to help you improve your knowledge by looking at 3 key areas: Buying your first home, types of mortgages and re-mortgages.
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Homes and mortgages
Before beginning to view properties, you may be asked for a ‘mortgage in principle’ by the estate agent. This tells you how much you are likely to be able to borrow and provides an indication to sellers of whether you are in a position to make an offer on a property. You can ask any mortgage lender for a mortgage in principle who will discuss your finances with you and arrive at a decision. It is at this stage you will be asked about the deposit you are able to put down when buying the property. This will generally need to be at least 10% of the purchase price, however this varies with lenders and the minimum deposit required can change during economic uncertainty.
When considering the type of property you may be able to afford, it will be important to consider the associated costs of buying a home. These costs may vary, however there are a number of online resources available to give you a guide.
Stamp Duty – this is the tax that is payable by the buyer when the sale completes. Rates vary depending on factors including the value of the property.
Click here to visit gov.uk and use the stamp duty calculator to find out more.
Legal Fees and valuations – These are the costs for the legal work, searches and valuations that are required as part of the home buying process. These may vary depending on the type of property and the complexity of the legal work required.
Money Helper estimate these costs to be typically between £850 and £1,500.
Moving Costs – These are likely to vary depending on the items you will be moving and whether you will hire a van or arrange for a company to take care of the move for you. Money Helper estimates this to cost between £300 and £600.
For further information and other costs you may need to consider as part of the house buying process click here to visit Money Helper.
A mortgage is exclusively used to finance the purchase of a property and it’s unlikely that you’ll be able to finance this type of purchase in a different way.
Mortgages can either be on an interest only or a capital repayment basis.
- An interest only mortgage only requires you to pay the interest on the money borrowed, each month, for the term of the loan – you will not pay off any of the original loan, therefore you will need to make alternative arrangements for repaying the capital balance at the end of the term.
- Capital repayment mortgages have a term set at the outset (often 25 years or more) and your monthly mortgage payments are used to pay off some of the loan as well as the interest costs over this term. At the end of the mortgage term you will have cleared the debt – provided you made all the monthly payments.
Capital repayment mortgages are now the most common with few lenders continuing to offer interest only mortgages to new customers. When taking out one of these mortgages, there are 3 common ways that interest can be applied to the money you are borrowing. These are:
- Fixed rate
- Tracker Rate
- Variable Rate
A fixed interest rate means you will pay a fixed rate of interest and a fixed amount each month for an agreed term (often between 2 and 5 years). Usually at the end of that fixed rate, you’ll move to a standard variable rate set by the bank so you’ll have to renegotiate your deal again if you’d like another fixed rate.
A tracker mortgage is a type of variable rate mortgage in that it tracks a specific rate – usually the Bank of England base rate. Your interest rate and monthly payments would move in line with this rate. This doesn’t mean they are the same, just that they move in line with each other, so your monthly payments may go up or down. Tracker mortgages can be good while interest rates are low, but you are also open to the risk of interest rates rising and your payments rising too.
A variable rate mortgage is set at a rate determined by your lender which can change over time. It is likely that your lender will change their variable rate when the Bank of England base rate changes, however unlike a tracker mortgage they do not have to follow this ‘base rate’. As a result, a variable rate can change by more or less than the Bank of England based rate at any time.
Another type of variable mortgage that some lenders offer is a ‘discounted variable rate’ mortgage. This works like other variable rate mortgages, however the rate you pay is a fixed percentage below the lenders standard variable rate. This ‘discount’ is set by the lender when you take out the mortgage.
For more information on mortgages please click here to visit Money Helper.
Whilst there are some ‘lifetime mortgages’ available that never have to be renewed, many new mortgages are for a fixed term of between 2 and 5 years. At the end of this term, the fixed or variable rate that was agreed at the start will revert to the lenders Standard Variable Rate (SVR). You will have been advised by your lender of what the SVR is when taking out the mortgage, however it is normally linked to the Bank of England base rate which changes over time.
Your lender will write to you when you are approaching the end of your mortgage term and explain your options. If you don’t take any action, your mortgage will revert to the SVR which in many cases is more expensive than other mortgage deals that may be available to you.
It can be useful to keep a note of when your current mortgage deal expires so you can begin shopping around as early as possible. There may be a penalty charge applied to your outstanding mortgage if you move to a new mortgage deal before the end of the fixed term of your current deal.