If you’re looking for a guide to mortgages, then look no further. Here, we will answer all of your questions about mortgages, including what a mortgage is and how they work. We’ll also discuss mortgage interest rates and how much of a deposit you need to get one yourself. It’s important that you budget properly before trying to buy your first house so make sure you read on!
A mortgage is a loan that allows you to buy property, such as a home to live in or to let out to a tenant. It’s basically the same thing as other loans like car finance and personal loans but for buying homes. The main difference between mortgages and other normal unsecured loans is that there is no security; this means that if you miss payments on an unsecured loan and default then there is no collateral attached as security to the loan, whereas with a mortgage the house is the security and if you stop paying the mortgage then the bank as a last resort would repossess the property in order to obtain their funds back.
A mortgage term can last anything from a few years to up to 40 years, however the most common term length is 25 or 30 years.
There are three types of repayment methods –
The most popular repayment method is the capital and interest method, which means that you repay both the capital (the amount you borrowed) and the accrued interest over the term of the mortgage, this provides a guarantee that the mortgage will be repaid at the end of the term.
The other two options are less popular but may be more suitable for some people.
With an Interest only mortgage, you simply pay back the interest accrued on the loan, which means that your debt will never decrease but the monthly repayments are much lower than compared to a capital and interest repayment method.
This method is best used by people who intend to sell their property before the mortgage term comes to an end and is commonly used for buy to let investment mortgages.
A Part and part repayment method combine both capital and interest and interest-only methods with part of the loan being repaid you payback on capital and interest and part interest only, this means that a reduced amount of the original loan is repayable at the end of the term.
There are many different types of mortgage rates: fixed rates, tracker rates, discount rates, standard variable rates, capped rates, collared rates, LIBOR rates.
Mortgages last for a very long time. The market and the cost of lending fluctuates so unlike a personal loan where you usually have a rate that lasts the entire loan term this is not typical of a mortgage. You will start with an introductory rate which will last a specific period of time and after this ends if you do nothing then you will transfer onto the lender’s standard variable rate.
Fixed-rate means that the interest rate you pay on your mortgage will be set for a certain amount of time, this can be as short as two years and up to 15 years, some fixed rates will now last the length of your entire mortgage term. This provides security as you know exactly how much your monthly repayments will be for that period of time. Fixed rates will usually come with a tie-in period which means if you repaid that mortgage early then penalties would apply (but most lenders will allow some over repayments).
Tracker-rate means that the interest rate will follow the base rate. The bank or building society cannot change this rate unless the base rate changes but it is a variable rate so it will fluctuate up and down as the bank of England changes the base rate. Tracker rates can be offered as a lower starting rate than comparable fixed rates but you take the risk that the rate will rise as well as fall. They can sometimes be more flexible than fixed rates offering more generous overpayment terms and lower or no early repayment charges. Tracker rates tend to be a short term not lasting more than 2 years but there are some lenders that offer term trackers which last for the term of your mortgage
A discount rate is a type of tracker rate that offers an initial lower interest rate (a discount off the lenders standard variable rate) for a period of time usually 2 years. However, after this period expires then your mortgage will revert to the lender’s standard variable rate. Discount rates are controlled by the lender, if they raise or reduce their standard variable rate then your discount rate follows.
A standard variable rate is the lender’s default rate, if you are not on any other type of rate then you will most likely be on a standard variable rate. They are set by each individual lender, this means that one may be cheaper than another although this rarely is a reason to justify recommending one lender other another as most people will remortgage or product transfer at the end of their rate term.
A capped rate is a type of variable rate where the mortgage interest rate cannot go above or below a certain level, this can be helpful if you are worried about future interest rates rises.
A collared rate is a type of rate where the mortgage interest rate cannot go below a certain level, tracker rates tend to have a collar on them to protect the lender if the bank base rate drops below a certain level.
LIBOR (London Interbank Offered Rate) rates are the rates that banks charge each other for lending money, they are usually higher than standard variable rates and change more frequently, some specialist lenders that consider bad credit will use this rate to determine your pay rate.
Offset mortgages work by you having an account attached to your mortgage where you can save money, as the name suggests this offset’s the outstanding mortgage debt against any interest earned on the savings meaning that you would pay less interest on your mortgage. The benefits of this are that you can reduce the amount of interest you pay and pay back your mortgage quicker while still maintaining access to your savings if you need them.
This answer really depends on the lender and your personal circumstances. Some specialist lenders will want you to have a deposit of at least 15%, most high street banks will accept 10% but with increased rates, and others will go as low as 5%. For example, if you were looking at a £400,000 house in Kent then the minimum deposit required would be £20,000. If you can save more then this will only increase your chances of being accepted for a mortgage and could also lead to a better interest rate. There are also government schemes such as the help to buy equity loans that can help you increase your deposit.
Again, this answer depends on your personal circumstances but as a general rule of thumb, you can borrow up to four and a half times your annual salary, although some lenders may go up to 6 times your income. You will also need to pass the lender’s affordability test.
This is where using a broker can be really helpful as they will have access to all the latest deals and rates. They will also be able to answer any questions you may have.
In summary, a mortgage is an agreement between a bank or building society where they lend money to purchase property over a certain term with interest being repaid monthly. There are many types of mortgages available from standard variable rates all the way up to specialist products such as offset mortgages. When choosing a mortgage, it’s important to consider your personal circumstances and what would be the best product for you. A broker can help with this process and provide impartial advice.
Momentum Mortgages are mortgage brokers based in Sevenoaks, Kent. We help people to buy, invest or remortgage property while reducing stress and saving time. We have helped clients all over Kent including Tunbridge Wells, Tonbridge, Maidstone, Swanley, Dartford, Bromley, Orpington and more.