Entering the world of mortgages can feel daunting, particularly if it’s your first time purchasing a property. However, after you have gotten to grips with the jargon, the process is far less intimidating. The main goal is to ascertain which type of mortgage will best suit your needs.
Capital: The amount of money you are borrowing to purchase a property.
Deposit: The amount of money you can pay up-front for your property.
Equity: The amount of money you owe, compared to the current value of the property.
Interest: Also referred to as ‘rate’ or ‘rate of interest’. Interest is an amount of money paid to a lender in exchange for ‘borrowing’ money to purchase a property.
LTV: ‘Loan to value.’ The price of the property after paying your deposit.
Porting: Moving to a new property and taking your mortgage with you.
Repayment: An agreed plan of how you will pay back the money borrowed from the lender. Term: The agreed time-frame to pay back the loan.
How do mortgages work?
A mortgage is simply a loan that enables you to purchase a property and repay the funds over an agreed time-frame, usually 25 years. However, there are occasions when the agreement can span a shorter or longer period.
If you are unable to make the repayments, the lender can take ownership of the property; therefore, you must calculate how much you can comfortably borrow.
Types of mortgages
There are many different types of mortgage available. The choices can be confusing and, while you want the best rate, there is much more to consider.
The type of property or your job role and income can impact the type of mortgage you will choose. Just some of the mortgages available include:
- First-time purchase
- Right to buy
- Shared ownership
- Self-employed mortgage
- Foster carer mortgage
- Buy to let mortgage
Whatever your situation, it is essential that you understand what is available so that you choose the loan that will be the most beneficial for your situation. Sometimes the cheapest option will not suit your individual needs, which is why it is essential to seek expert advice.
Mortgage rates explained
Mortgage interest rates are split into two groups: fixed rates and variable rates. The rate you choose will depend on your circumstances. Interest rates can fluctuate, so it is worth bearing that in mind when deciding which type of mortgage rate to opt for.
Fixed rate mortgage
When you choose a fixed rate option, it is guaranteed that the interest you pay will remain the same for an agreed time-frame regardless of market fluctuations. These are usually advertised as either ‘two-year’ or ‘five-year’ fixed rates.
This is an enticing option for individuals who would prefer the peace of mind that comes with knowing their monthly repayments won’t change, even if interest rates increase.
However, these rates do tend to be higher than the variable route, and if interest rates fall during your agreed time-frame, you will not benefit.
Variable rate mortgage
This type of rate means that the amount you pay may vary depending on the national interest rates set. There are a few options available with this type of agreement:
- Standard variable rate: This agreement is valid throughout the entirety of the term.
- Discount mortgages: This is discounted from the standard variable rate and will only be applicable for approximately two to three years.
- Tracker mortgages: These fluctuate, usually in line with the Bank of England’s base rate.
- Capped rate mortgages: This agreement is similar to a standard variable rate; however, it will be capped at a certain level.
- Offset mortgage: These rates are linked to your savings account.
All of these come with pros and cons. Therefore, if you are interested in a variable rate, it is recommended that you look into all of the options to ascertain which route will be the most suitable.
Mortgage repayment options
A major decision when choosing a lender is whether you want to make repayments that will reduce the amount of money owed, or if you would prefer only to pay the interest accrued throughout the term.
How does a repayment mortgage work?
A repayment mortgage is by far the most common type of mortgage. With this option, your monthly payments consist of some interest and some repayment of the capital borrowed. This means that, at the end of your term, you will have paid off the whole loan and the associated interest.
Should you wish to move during the term of your loan, you may be able to port your mortgage. Alternatively, you may choose to repay the balance of the loan and take out a new mortgage for your new property. As you have been paying off the capital, you may have some equity to use towards your new purchase.
|You understand how long it will take to pay off your debt.||Interest rates can fluctuate.|
|As the value of your property increases, so does the equity.||If you move and take out a new loan, the new term may be for another 25 years - lengthening your total borrowing over time.|
|Your home belongs to you at the end of the term.|
How does an interest-only mortgage work?
As the name suggests, an interest-only mortgage means that you only pay the interest on the loan. The capital does not reduce with this option. At the end of the term, you will still have to pay the money owed for the property.
If you opt for this route, you will need to consider how you will pay the loan in full at the end of your term. This could be via investments, inheritance, or you can hope that the value-increase of your property will cover the loan; although this would mean either selling or remortgaging your home to pay off the debt.
|Your monthly repayments will be lower as you will not be reducing your full loan, just the interest.||Lenders may request evidence of how you intend to repay the capital at the end of the term before they offer you a loan.|
|You could switch to a repayment mortgage at any point.||As with repayment mortgages, interest rates can fluctuate.|
|There is a risk that you will be unable to pay the capital at the end of the term.|
|If you are investing to raise the money, your investment could fail.|
|You could lose your property if you cannot repay the capital at the end of the term.|
Even if you have an idea of which payment plan you are interested in, it is worth having a conversation with an expert broker to ensure that you are as protected as possible.
Frequently asked questions
How are mortgages calculated?
The criteria for calculating a mortgage will vary from bank to bank. However, in general, a lender will carry out an affordability assessment where your income and outgoings, including both personal and living expenses, are taken into consideration.
They will also carry out a ‘stress-test’ where they review your ability to meet your mortgage repayments. This test will review potential interest rate fluctuation and lifestyle changes that may occur.
Mortgage calculations will differ from lender to lender, so bear this in mind and do sufficient research.
What happens if you pay off your mortgage?
Once you have repaid the capital on your mortgage, the following needs to take place to prove that you have full ownership of the property:
- You will receive ‘mortgage satisfaction’ or ‘mortgage release’ documents from your lender.
- A certificate of satisfaction will need to be filed with the county government. This can be done either by you or your lender.
- Your insurance and taxes need to be updated - some lenders pay your homeowner insurance via escrow throughout the term; therefore, you will need to take on this payment moving forward. You will also need to have your property tax invoice sent to you so that you can make payments as and when they are required.
- It is recommended that you check your credit report once all the paperwork has been filed to ensure it states that you now own the property.
It is worth asking potential lenders what their process includes before you apply.
Should you pay your mortgage early?
If you have funds available, you may be interested in making an additional payment towards your mortgage. Consult your mortgage deal first as you may be charged for making a payment that takes you over the agreed limit, or you pay your mortgage off early. The amount you can overpay before facing a penalty will vary from lender to lender.
Should I invest in a mortgage specialist?
A mortgage specialist at AMS Mortgages will have years of experience which you can use to your benefit. Not only can they explain the entire process, but they can also help you source the best mortgage solution for you and your specific circumstances.