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Mortgages

Paying a mortgage is your ticket to owning your own home. In essence, a mortgage is a loan that you take out to buy a property over a certain amount of time. The mortgage market is a fiercely competitive business, with many high street banks and building societies all vying for your custom. Taking out a mortgage is a major commitment and an important decision - get it right and you’ll be laughing, get it wrong and it could prove to be a costly mistake.

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The ins and outs of a mortgage

• With a mortgage you take out a loan for a set amount of time agreed with the lender, based on the value of the property and how much you can afford. The most common period is between 25 – 30 years.
• You are then charged interest on the loan, which is based around the Bank of England base rate. As a general rule the lower the interest rate then the less you will have to pay.

The mortgage can be paid back in three ways:

1. Repayment mortgage
   With a repayment mortgage you pay the lender both the capital and the interest on the loan over an agreed set number of years. At the end of the mortgage term you will have then paid the lender the full amount borrowed and the mortgage is cleared.
   • Pros
     • The most popular mortgage type, repayment mortgages are the most safe and structured way of repaying the mortgage capital.
     • After the mortgage term ends, you will own the property outright
   • Cons
     • By their very nature, repayment mortgages are typically more expensive than interest only mortgages
     • Affordability wise, some lenders wont let you borrow as much as you would like to
       
       
2. Interest only mortgage
   With an interest only mortgage you will only pay the lender the interest on the loan, rather than any of the capital. At the end of the interest only term the lender can call in the loan and you will have to pay back the capital borrowed, so you will have to be able to fund this.
   • Pros
     • Interest only mortgages are much cheaper, as you are not paying back any of the capital borrowed.
     • For the short term, interest only mortgages can help if your finances are tight or you already have an investment plan in place
     • In a booming property market, you could sell up and make a profit when your deal ends
   • Cons
     • Whilst initially a more viable alternative, interest only mortgages are far more expensive than the repayment option in the long term.
     • If you are not able to pay back the total amount, you could stand to lose a significant amount
     • So don’t fall into the trap of staying with an interest only mortgage for more than you need to!
       
       
3. Or a combination of both
   • You then have to choose what type of interest rate payment you would like to make.
   • Think about how many years you would like to pay off the mortgage for, and check to see if you can extend the term. A typical term is around 25 years, but there are some mortgage deals for up to 52 years.
     

Always remember, your home may be repossessed if you cannot keep up with the repayments on your mortgage.

Before you begin

Think about how you want to pay your mortgage. The most popular method is a repayment mortgage, but an interest only mortgage may be for you if you will be able to pay the full amount once your mortgage term ends.

Then consider what type of interest rate structure is best for you? This is the most important question that you need to answer before you can choose a mortgage that best suits your needs. Read our brief guide on mortgage types first to help you understand the different mortgage types available.

• Asscociated costs
  Arranging a mortgage can be an expensive business, and you have to take into account a range of associated costs that you may need to pay:
  • Arrangement fee
    Many lenders will charge an arrangement fee for booking the mortgage. You could book a mortgage for six months in advance, but be aware that it could end up eating into your deal. You can see these clearly in the mortgage best buys.
  • Higher Lending Charges
    Essentially, this protects the lender if you are unable to pay back the mortgage. Charges range between 7 and 12% over and above the mortgage threshold (this is typically anything above 75% of the total mortgage amount). You can filter these out in the mortgage best buys.
  • Brokers’ fees
    If you are arranging a mortgage through a broker, they may also charge you a fee for their service either before or after you mortgage application has been completed. All brokers are required by law to show you how much commission they will earn from the lender in a Key Facts document, so make sure you get this up front. The mortgage broker business is extremely competitive, so get some quotes from a variety of brokers before you sign on the dotted line.
  • Survey / Valuation fees
    A lender has to be sure that their mortgage offer is based on a sound property. For this they will require a survey of the property, which will usually be paid for by you.
  • Redemption penalties
    A redemption penalty may be payable if you pay back your mortgage early or switch lenders before your deal has expired. You can filter this out in the Best Buys too.

What to avoid

This is a tough question when it comes to mortgages because it all depends on the type of mortgage you choose. However, there are five golden rules that can apply to all mortgages:

• BEWARE of headline-grabbing interest rates – if it’s too good to be true then it probably is. Remember, mortgage lenders want to make money, so wont give something away for nothing. Watch out for hidden catches and other strings attached.
• Don’t just look at the interest rate look at all of the associated fees too. This will help you work out the true cost of the mortgage.
• Watch out for extended tie-ins that will force you to stay with the lender for a longer period of time.
• Be wary of higher lending charges; if you can avoid them then do. That’s because if you fail to keep up with your mortgage payments and your home is repossessed, you’ll still be liable to pay any shortfall once it is sold.
• And finally, don’t stick with your existing lender just because it’s easy. Make the effort to shop around when your deal comes to an end, you could save yourself a small fortune.

What to do next

• Search for a mortgage that suits your needs
• Find the best mortgage rates currently available
• Use a mortgage calculator to work out monthly repayments