Mortgages – a beginner’s guide
Taking out a mortgage is a big financial commitment so it’s important to know what you’re doing and how mortgages work. You must also be sure that you can afford the repayments.
What is a mortgage?
A mortgage is a loan taken out to buy property or land. The loan is ’secured’ against the property, which means that if you fail to keep up the repayments on the mortgage the lender could take back your home and sell it to repay what you owe. Most mortgages run for 25 years but the term can be shorter or longer.
Taking out a mortgage
You can get a mortgage from a bank, building society or a specialist mortgage lender. Before they agree to lend, they will check thoroughly that you can afford the monthly mortgage payments and that the property is worth the amount you want to borrow.
Almost all mortgage products require you to put down some money of your own – called a deposit. The mortgage that makes up the difference is expressed as the percentage ‘loan-to-value’ or LTV and is expressed as a percentage of the value of the property.
If you put down a £10,000 deposit on a £100,000 property, the deposit would be 10% of the purchase price and the mortgage loan-to-value would be 90%.
In general, the higher the deposit you can save, the lower the mortgage interest rate you’ll be offered.
How you repay your mortgage
A mortgage has two parts:
- the capital, which is the money you borrow, and
- the interest, which is the charge made by the lender until the loan is paid back.
When you take out a mortgage you have to say how you will pay it back. This can be either via repayment (capital plus interest), interest-only or a combination of the two. With an interest-only mortgage you have to be able to show how you will repay the capital at the end of the term. Read our guide below to find out more about the different ways you can repay a mortgage.
Different types of interest rate
Mortgages come with fixed or variable interest rates. With a fixed-rate mortgage your repayments will be the same for a certain period of time regardless of what interest rates are doing in the wider market. If you have a variable rate mortgage, the rate you pay could move up or down. Find out more in our guide below.
Working out what you can afford
Work out what you can afford. Your home may be repossessed if you don’t keep up with mortgage repayments.
Before you sign on the dotted line, you must be sure you can afford your mortgage repayments. If you fall into arrears, you may find it hard to borrow in the future.
In the worst case, you will lose your home if you are unable to afford the monthly payments on the mortgage. Making sure customers can afford the mortgage they are taking out is the main reason for the tougher new rules on affordability that apply from 26 April 2014.
As a result, lenders now require proof of income and outgoings such as credit cards, and other debts as well as household bills, child maintenance and personal expenses when deciding how much to lend to you.
They’ll also look ahead to check you can continue to afford your mortgage repayments if interest rates rise and ask you questions about whether you know about any future changes which could have an impact for example, if you are planning to retire or have a baby, as this could affect your ability to pay your mortgage in the future.
Follow the links below to check the true cost of buying a home and to see how much you could afford.
Where to get a mortgage
You can apply for a mortgage direct from a lender, such as a bank, building society or specialist mortgage lender – however, they can only give you a mortgage from their own limited product range so you’ll need to have done your research first.
As an alternative you can use a mortgage broker or financial adviser who can compare the different mortgages available to you and will also have access to some lenders who do not offer mortgages direct to customers. Some brokers look at mortgages from the whole market while others look at products from a limited number of lenders. They’ll tell you this when you first deal with them. It’s best to have the widest choice possible.
Applying for a mortgage
Whether you go directly to a lender or use an independent mortgage broker, under new rules introduced in April 2014, you will receive advice in most cases when applying for a mortgage.
This means you will be asked a range of questions about the type of mortgage you want, whether it is appropriate for you and how long your mortgage should last. Depending on your answers, the lender or mortgage broker will only be able to recommend a mortgage that meets your needs and circumstances.
Taking advice will almost certainly be the best for you unless you are confident and competent in financial matters. You can complain to the Financial Ombudsman Service if the advice you were given turns out to have been unsuitable for you.
Alternatively, you can choose a new mortgage on your own based on information you’ve found on the internet, newspapers or elsewhere. This way of choosing a mortgage is called execution-only.
You’ll need to provide all the details about the mortgage you want, the home you’re buying and how much you want to borrow. The lender will act on your instructions but it can’t give you an opinion on whether the mortgage is right for you because that would be giving you advice. Mortgage brokers and financial advisers can’t deal with you on an execution-only basis.
The lender will write to you declaring that you haven’t received any advice and that the mortgage hasn’t been assessed to see if it’s suitable for you. They will also point out that you don’t have the protection of the advised route. In most cases, you will then need to confirm in writing that you are aware of the consequences of taking out a mortgage without receiving advice, and that you are happy to go ahead. Not all lenders will offer the execution-only option.
Whether you choose to have advice or go down the execution-only route the lender will still carry out the same detailed affordability checks.
Find out more by following the first link below.