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Guide to Mortgages
 
 

Guide to Mortgages

By Nevena Mulyachka and Mark Todd
Nevena Mulyachka is moneyhelpline’s Marketing Manager, specialising in money products such as insurance, credit cards, loans and savings. Mark Todd is one of the founders of energyhelpline and moneyhelpline. He is regularly on BBC1 and Radio 5 Live commenting on switching and saving.

Last updated on 07/04/2016



What type of mortgage do I need?

A mortgage is a loan to help buy your house. It typically takes a long time to pay off, 25 years or more, and is ‘secured’ on your home so if you can’t pay, the lender has the right to take your house and make its money back.

Ensuring that you borrow only what you are able to afford is therefore crucial. With thousands of different deals out there, navigating through them can be tiresome and confusing and since comparing mortgages is hardly a "one size fits all" sort of thing, it is important to be clear on what you need to consider.



Do you need an interest-only or repayment mortgage?



Interest-only mortgages

With interest-only mortgages you only pay off the interest, so you won't be paying down the mortgage balance.

If you choose this, you’ll need to have a plan for repaying your mortgage at the end of the mortgage term, for example the sale of your property or a suitable savings plan, or you would need to get another mortgage.

Many lenders now restrict the amount you are able to borrow on interest only basis. Working out the cost is easy: If you’ve borrowed £100,000 at an interest rate of 5% for 25 years, you’ll be paying £5,000 every year until the end of your term, covering only the interest portion of what you have borrowed.

 

First Time Buyers

Some mortgages enable you to pay interest only in the first couple of years and switch to repayment later. Whilst this may be good for getting onto the property ladder, try to shift to a repayment mortgage as soon as you can to start reducing the amount you have borrowed.

The Government's Help to Buy scheme could help you get on the ladder too, either with an equity loan or 95% LTV mortgage.

First time buyers Guide to Mortgages

 

 

Repayment mortgage

With repayment mortgages, you cover both the interest AND the capital you have borrowed (your mortgage) and whilst it’s more expensive on a monthly basis, you’ll owe nothing at the end of the term. This is now the most common type of mortgage, especially after the Mortgage Market Review in 2014.

Initially most of your monthly repayment covers the monthly interest with only a small amount going towards reducing the capital balance owed.

Over time as the capital balance reduces, so does the interest owed each month and the capital starts to get paid down more quickly.

To see how much your mortgage will cost, use our handy calculator

 

Remortgages

One of the most common reasons why people remortgage is to get on a better deal after a fixed deal is finished. Although this can require some work, the savings can be huge so it's usually worth the time.

When you a switch your mortgage to a new lender as long as you maintain the outstanding mortgage balance and term, you will pay your mortgage off at the same time you initially planned.

Some people remortgageif they want to make home improvements for example, in which case they can choose to keep the mortgage term the same and pay more each month or extend the term to make payments more affordable.

 

What type of deal do you want?

Fixed rate mortgage: If you go for a fixed rate mortgage, you know exactly what your mortgage will cost each month during the scheme period and your repayments are fixed for as long as the deal lasts. Fixed rate mortgages typically last 2, 3, 5 or even 10 years and you’re effectively ensuring a lower interest rate should rates rise.

Variable rate mortgage: The interest rates on variable rate mortgages will fluctuate over time as the Bank of England Base Rate goes up or down due to changes in the UK economy. Generally, rates will rise in times of growth and inflation, to discourage spending by making savings more attractive and borrowing costlier, and they’ll decrease in times of recession to encourage spending.

Types of variable rate mortgages:

  • Tracker Mortgages: A tracker follows the UK Bank of England Base Rate. Most tracker mortgages only run for a few years but are also available for the life of your loan.

  • Sandard Variable Rate Mortgages (SVR): The simpler option, not always available to new customers but many introductory fixes or trackers revert to this on expiry. They tend to roughly follow the base rate, often just above it. Whilst they generally follow movement in the base rate they don’t always shift by the same amount and they are set by individual lenders.

  • Discount Mortgages: These deals tend to last for a short period - 2 or 3 years. Whilst the initial rate might seem attractive, make sure you check what rate they are discounted from. If it is a lender’s standard variable rate, then the lender can increase this and so the cost of the discount will increase too. If the interest rate goes up significantly at the end of the offer, you would probably be better off remortgaging to another cheaper deal.

  • Hybrid Mortgages: These are part variable, part fixed, you benefit from interest falls and have some protection from interest rate rises from the fixed rate portion of the mortgage. Good for those who like to hedge their bets but check arrangement costs carefully as lenders may charge 2 administration fees.

Offset mortgages

Offset mortgages allow you to use your savings or current account balances to help reduce the overall interest you pay on your mortgage as well as reduce the monthly payments or the term.

You need to have the mortgage and any money you want to offset with the same provider in a specific offset account.

Although the rates on offset mortgages can be slightly higher, they offer better flexibility so could be worth your consideration.



Key Questions

Do you want flexibility? You’ll generally pay a higher rate of interest for added flexibility.

Do you want to overpay? Overpaying means you can clear your debt substantially quicker, so you pay less interest overall. Many standard mortgages allow for this but cap their overpayment and sometimes penalise you if you go over this limit.

Do you want to be able to miss a payment? This facility isn’t generally available on most mortgages so check carefully at the outset if this is a feature you want. Remember, you’ll generally pay more for this type of flexibility.



Other Costs to Look out for

  • Does your mortgage broker charge a fee? If they do, this will add to the cost of arranging your mortgage. It can be typically from £400 up to 1% of your mortgage amount. Opt for one that offers fee-free advice - moneyhelpline's mortgage service in association with L&C offers fee-free, expert mortgage advice.

  • Watch out for the fees associated with obtaining a mortgage. You will usually have to pay a lender arrangement fee, a valuation fee (for a survey), legal fees and stamp duty land tax. Make sure you factor these costs into your planning. You may be able to add some to your mortgage but if you do, you’ll end up paying interest on the amount borrowed for these fees.



 

Income Protection

 

YOUR HOME OR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

These guides are for informational purposes only and do not constitute advice. For best personal advice contact a financial adviser.

The moneyhelpline Mortgage Service is provided by London & Country Mortgages (L&C), Beazer House, Lower Bristol Road, Bath, BA2 3BA. London & Country are authorised and regulated by the Financial Conduct Authority (registered number: 143002). The FCA does not regulate most Buy to Let mortgages.



 
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