What is a mortgage?
A mortgage is a loan that allows you to buy a home or other property by securing the loan against the property that you buy.
Repayment v Interest Only?
Strip down the bulk of mortgages, the rates and different features and what you are left with can be split into two main categories in terms of how you repay the money you borrow: repayment & interest only mortgages
We’ll explain the difference between these two in more detail below, but you should know that the basic principles of a mortgage are the same; the factors which divide them are the rate, type of repayment, and how much you pay back over what time period.
This is currently the more popular method of mortgage repayment. Like the name would suggest, it is a mortgage that you repay the whole balance of over time.
The main principle of a repayment mortgage is that the monthly payments not only include the interest but also a portion of the sum you borrow, so you are paying off the debt in smaller, more manageable chunks until you have repaid the mortgage in full.
Interest only mortgages
A less common type of mortgage, however they are still available if you can prove that you have the capital or equity to be allowed one. With interest-only mortgages, you only pay back the interest on the mortgage during its term. You don’t actually pay back the capital, and other arrangements should be made for paying the capital back.
Different types of mortgage?
When choosing a mortgage many people are swayed by the idea of having a smaller payment to make each month, but decisions like this should be thought through and not just relished for their short term benefits.
Fixed rate mortgages – offer an interest rate which is fixed for an initial term – typically 2, 3 or 5 years and occasionally longer. This is one of the more popular choices when it comes to picking a mortgage rate, because with a fixed rate mortgage, changes in interest rates do not have any effect on your repayments during the fixed term. At the end of the set term, the mortgage will usually revert to the lender’s Standard Variable Rate (SVR), so at this point many borrowers will shop around to find the best deal at that time.
Standard Variable Rate (SVR) mortgages – are set by your lender and can usually be changed at their discretion – it’s the rate you’ll often move to once your initial deal finishes. SVRs will often follow changes in the Bank of England’s Base Rate but not always.
Tracker mortgages – With this mortgage, the amount you pay tracks a specific rate, usually the Bank of England’s base rate, and by a set margin. This does not mean that you will be paying the exact same percentage, just that your payments will move in line with any changes.
How much can I borrow?
In April 2014, the Financial Conduct Authority (FCA) introduced new rules compelling the mortgage providers to carry out stringent affordability checks before approving a mortgage. This means that they will analyse all of your regular monthly outgoings before approving your loan. The lender will also take into account you main salary, any income from a second job, any extra income such as tax credits and maintenance payments.
What deposit will I need?
This will depend on your circumstances and the provider. More and more lenders are starting to offer 95% mortgages and some of their benefit packages, such as free valuations, are becoming more lucrative to the client.
Freehold v Leasehold?
The freeholder of a property owns it outright, including the land it’s built on. Generally, most houses are freehold properties although some might be leasehold – usually through shared ownership schemes. If you buy freehold, you are responsible for maintaining your property and land, so you’ll need to budget for these costs.
Owning a share of freehold
You can buy a share of the freehold with the other leaseholders (such as other people living in a small block of flats) as long as at least half of them agree to buy a share. Together you will have to serve a Section 13 Notice on the freeholder of the property. It gives you more control over your home, and the costs you pay out, plus you can extend your lease fairly easily for up to 999 years. It may be expensive to buy the freehold and you and the other leaseholders will then need to set up a company to manage the building, or find a managing agent to do it for you
Most flats and maisonettes are owned leasehold, apart from in Scotland where there are very few leasehold properties. With a leasehold, you own the property and its land for the length of your lease agreement with the freeholder. When the lease ends, ownership returns to the freeholder unless you are able to extend the lease.
What is a Decision In Principle?
Also known as a ‘Decision in Principle’ (DIP), ‘Mortgage Promise’ or an ‘Agreement in Principle’ (AIP), a mortgage in principle is a certificate or statement from a lender to say that ‘in principle’ they would lend a certain amount to a particular prospective borrower or borrowers based on some basic information.
What to expect from your Solicitors?
Once you’ve found the right home and started making plans for a mortgage, you’ll need to get a conveyancer to help process the legal side of things. Conveyancing is done by a
property solicitor, or conveyancer, who will sort out a range of things including dealing with the Land Registry and transferring the cash to buy your house.
Every house purchase and sale is different but in general a conveyancer will manage things like:
- Dealing with the Land Registry
- Stamp duty charges and payments
- Collecting and transferring money during a house sale
- Providing legal advice and recommendations
- Drawing up and assessing contracts
What to expect from your Estate Agents?
Estate agents market and sell property. They also deal with paperwork, monitor the chain (of buyers selling their old home and sellers buying their new home), liaise with your solicitor and negotiate with buyers and sellers. Estate agents do not deal with surveys – you will need a surveyor for that, but they might have partnerships in place to recommend a surveyor to you.
Estate agents and fees:
If you are buying a property there should be no estate agent fees involved. If you are selling, you will usually pay between 0.75% and 3.5% of the selling price to your estate agent. Again, shop around, and negotiate once you’ve found an estate agent that you would like to work with. Check that the fee includes VAT or you’ll need to add another 20% to the price of the fee.
Buying from an estate agent:
Stay in regular contact with your estate agent so they think of you when the perfect property arrives on the market.
You can register with several estate agents. To choose which will be best, look at the type of properties they offer, ask their fees (if applicable) and speak to friends and family for their recommendations.
Keep on top of the process when you’re house-hunting:
Make a note of conversations that you have, including who you spoke to, the date and time. This keeps you in control and is a useful reminder of what’s been discussed and agreed.
What is Stamp Duty?
Stamp duty land tax (or Land and Buildings Transaction Tax in Scotland) is a lump-sum tax that anyone buying a property or land costing more than a set amount has to pay. The rate you’ll pay the tax at varies based on the price of the property and the type (we’ll focus on residential buildings, rather than commercial).
Sweeping changes to stamp duty were announced in the Chancellor’s Autumn Statement in December 2014. Stamp duty has been reformed – the slab system (where you’d pay a single rate on the ENTIRE property price) has been swept away, and in its place is a more progressive system.
Under the new system, you’ll only pay the rate for the proportion of the property that’s at that rate. It’s quite complex, so here’s an example to better illustrate the changes:
Let’s assume you’re buying a property for £300,000.
You would have paid 1% on a property between £125,000 and £250,000, between £250,000 and £500,000 you’d pay 3%. So because the purchase price is over £250,000, you’d have paid 3% on the entire purchase price, despite only being £50,000 above the threshold. Thus, you’d have paid £9,000 in stamp duty.
You pay nothing below £125,000, which is £0
You pay 2% on between £125,000 and £250,000, which is £2,500
You pay 5% on the value of the property above £250,000, which is £2,500
So in total this means you’ll pay £5,000 (£0+£2,500+£2,500).
Can I move house?
Some mortgages can be ported if you want to move house, meaning you can take your mortgage deal and its remaining term with you and use it on your new property. However, you may have your affordability and credit score rechecked and the situation could be complicated if the new property is worth significantly more or less than your current home.
Is my home at risk if I can’t keep up repayments?
It could be, so speak to your lender as soon as possible if you aren’t able to make your mortgage repayments. It’ll be able to tell you the options available, such as a short repayment holiday or a new repayment plan that could help you get back on your feet.
What happens if interest rates increase?
It depends what type of product you have. If you’re on a fixed rate deal, your repayments will stay the same until the fixed rate term ends, regardless of how much the Bank of England base rate or your lender’s SVR fluctuate.
If you’re on variable rate mortgage, including tracker rates and SVRs, your monthly repayments will increase if your lender increases it’s SVR – which is likely to happen as a result of the Bank of England Base rate rising.
What fees are involved in getting a mortgage?
Sometimes some or all of these fees can be added to your mortgage debt, but this will work out more expensive in the long run than paying up front, due to the interest charged on the fees.
Low-fee or fee-free mortgages include these costs in the overall cost of the mortgage, so it might work out cheaper to take a low-fee mortgage with a slightly higher interest rate. Additional costs, such as solicitor fees and any stamp duty that might be payable will need to be paid for out of your own pocket and cannot be added to a mortgage advance.