Buying property tips: Mortgages
The range of mortgages can at a glance be confusing. As the property
market continues to expand mortgage lenders are turning up the heat
in the competition to attract your business. For the buyer this mean
that if you are prepared to shop around and learn the jargon a good
mortgage term can be obtained. Choice Homes are not in any capacity
a financial adviser but we hope the guide below sets out the basic
mortgage options available to you.
Mortgages can generally be divide into two categories according to
how they are repaid: : This type of mortgage requires you to pay off the
amount borrowed and the interest on that amount over the full term
of the mortgage.
: As the name suggests you pay the interest accumulated
on your mortgage loan each month, this is also known as an endowment,
pension or ISA mortgage. At the end of your mortgage term you are
required to pay the entire amount of the loan. To be able to achieve
this you invest the loan at the start in a separate ISA, pension or
investment concern. The money that is paid into this separate concern
is invested for the length of your mortgage term. With this type of
mortgage the risk is that the final pay-out from your investment may
not cover the amount of capital borrowed initially.
Your next decision is what type of interest rate to have for your
mortgage.
: This rate is correlated
with the Bank of England?s base rate. Your repayments depend on the
move in interest rates, which if they rise so do your repayments,
and if the rates fall then your repayments should also drop. This
is the most common rate offered by mortgage providers but is unpredictable
and depends entirely on rates of interest. Your repayments could stand
to change from one month to the next, even so this type of mortgage
is still the most popular. Generally, there are no penalties for paying
off the mortgage earlier than agreed.
: As opposed to a variable
rate the interest rate on your repayments are fixed at one rate for
a fixed number of years ranging between two and five. Each repayment
made in this time frame will be exactly the same. After this period
the rate then returns to the standard variable rate. As the fixed
rate is an introductory rate there may be penalties to pay by switching
to a new mortgage provider at the end of the fixed term.
: A capped rate is
much like a fixed rate, the difference being that the mortgage lender
will not move the interest rate above a certain limit, they will put
a ceiling on interest rate growth. When the interest rate falls below
this, you pay the standard variable rate. Because of this, capped
rates tend to be higher than fixed rates, so a capped mortgage may
be more expensive than a variable rate mortgage.
: At a discounted
rate you will still be moving in line will the rise and fall of the
interest rates of the Bank of England. The difference being that initially
the lender will set your interest rate a couple of points below their
standard variable rate, but the difference between the discounted
rate and the standard variable rate will remain the same.
The maximum amount you can borrow is calculated against a set of basic
criteria for most mortgage providers, typically the factors influencing
the what you can borrow are:
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Your income |
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Your employment status |
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Your other financial commitments |
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The size of the deposit you can secure |
Typically most mortgage lenders will lend you up to three and a half
times your salary as an individual. As a couple you can normally borrow
slightly more, depending again on employment status and salary, but
you should be able to borrow:
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Up to three times the income of the main earner, added to
which is the income of the second earner or, |
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Up to two and a half times your combined salary |
Proof will be asked for as to your annual earnings and up to six months
worth of pay slips may be required to prove you are able to repay
the loan. For those who are self employed you will be required to
submit at least three years worth of accounts to check the stability
of your business.
Also taken into the equation are your other monthly financial commitments
such as other existing loans, hire purchase payments and credit card
repayments. The size of the deposit you are able to secure will also
have an impact, by putting down a larger deposit the mortgage lender
should be more willing to agree to a mortgage.
The interest you repay on your mortgage loan will depend on the length
of time you borrow the money for. Typical mortgage terms will last
25 years but the longer you take to repay the mortgage the more the
interest will be. The positive side of this means that if the mortgage
term is longer then although it will take longer to pay off your repayments
each month will be lower.
Aside from the capital cost of the mortgage there are other fees that
need to be taken into account and taken into consideration when arranging
a mortgage.
: Some lenders
may charge arrangement fees in the range of £300 although many
now waive these.
: All mortgage
providers will insist on a valuation as it is the property that acts
as the security of the loan. The provider will want to make sure that
the property is worth the sale price, any valuation or services carried
out will be at an added cost.
: This
is basically an insurance policy in the event that you cannot afford
to pay the mortgage, or in the event of a interest only mortgage that
the eventual sale price of the property does not cover the initial
cost of the loan.
NOTE: Remember to read the small print
Carefully consider all aspects of your mortgage policy, in the event
of missing a payment there may be large penalties to pay or if you
repay the entire sum early there may also be an added penalty. If
you are self employed or your income is affected by seasonal tourism
be sure to check whether you are able to take a break from your repayments.
This allows you to take a break from paying the capital cost of the
loan although you will still have to pay the interest accumulated
during this time, however this interest may be transferred over to
your next payment.
At the start of your mortgage term the title deeds of the property
will go to the lender, as in effect it is the lender that owns the
property. Only when you have fully repaid the entire mortgage will
you be the legal owner of your home.
Problems may arise getting a mortgage in the following areas:
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Properties with a short life. The expected life of a property
from the time of the mortgage loan is generally 60 years. |
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If buying a leasehold property with a short lease. Lenders
will require that the lease should run for at least 20 years
after the mortgage has been completely repaid. |
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Converted flats. As long as the construction is structurally
sound and complies with local authority building regulations
most mortgage providers will lend on converted flats. You will
need to check with your lender concerning the maintenance of
the common or shared parts of the building. |
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Freehold flats may not be acceptable due to legal difficulties
in keeping the building in repair. Again, you should check with
your lender. |
If in any doubt be sure to check with your lender before your make
a commitment.
Useful links
Selling your home
First time buyers
In-depth mortgage guide
Choosing a property
Search for property online
Property news
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