7th December 2017
A guide to mortgages
Buying a house can be one of the most stressful times in your life and if you’re a first-time buyer, you’ll more than likely have a lot of questions to ask. We spoke to our Mortgage Advisor, Chris, about how mortgages work and what you need to consider before committing to purchasing a property. Here’s what he had to say…
1. How do mortgages work?
In order to purchase a property, many people are not in the fortunate position of being able to pay outright for a property in cash. You’ll therefore need to borrow money from a bank or building society, pay interest on this to the lender and pay the loan back over a certain period of time. When you start looking for a mortgage, you’ll begin to realise there are thousands to choose from. It can be very daunting and a lot of people just don’t know where to begin! Many people begin by trying to pick the lowest interest rate, but you should understand that the lowest interest rate may not actually be the cheapest overall for you, as a number of factors have to be taken into account, such as overall fees.
2. What are the different types of mortgage?
There are so many to choose from. Here are just a selection:
* repayment mortgages
* interest-only mortgages
* fixed rate mortgages
* variable rate mortgages
* tracker mortgages
* discounted rate mortgages
* capped rate mortgages
* cashback mortgages
* offset mortgages
* 95% mortgages
* flexible mortgages
* first time buyer mortgages
* buy to let mortgages
3. What repayment methods are available?
You can either choose Repayment or Interest Only.
If you choose Repayment, you pay back the capital and the interest together. This is the most popular and widely available repayment option. You’ll make monthly repayments for an agreed period of time (known as the term) until you’ve paid back both the capital and interest. Your mortgage balance will reduce each month, as long as you keep up the monthly repayments. A typical mortgage term is 25 years, though this may be extended as long as it’s before your anticipated retirement age.
If you choose Interest Only, you only pay the interest due on the amount you’ve borrowed each month. So while your monthly payments will be less than an equivalent repayment mortgage, you’ll still owe the same amount that you originally borrowed at the end of the mortgage term. Lenders will want to ensure you have a repayment strategy in place for this, so that you’ll have enough money to pay off the capital at the end of the mortgage term. If your repayment vehicle isn’t on track, you may find it difficult to remortgage or switch to another lender in the future. Some lenders ask for a larger deposit for interest only and some lenders don’t allow interest only at all.
4. How do banks decide how much to lend me?
In the past, mortgage lenders based the amount you could borrow mainly on a multiple of your income. However this is no longer the case in the majority of cases and the lenders must also assess what level of monthly payments you can afford, after taking into account various personal and living expenses (loans, credit cards, car hire purchases…) as well as your income. This is called an affordability assessment. The lender must also look ahead and ‘stress test’ your ability to repay the mortgage. This takes into account the effect of possible interest rate rises and possible changes to your lifestyle, such as redundancy, having a baby or taking a career break. If the lender thinks you won’t be able to afford your mortgage, they might limit how much you can borrow.
5. How are mortgages calculated?
If only the answer were as simple as this question sounds! If you simply want to know how much you’ll pay in capital and interest on your repayment mortgage, I would suggest using an online mortgage calculator. For any given mortgage amount, a decent online calculator will tell you the monthly mortgage payment and the total amount of interest you pay over the life of the mortgage. The calculation itself is fiendishly complicated and formula extremely long!
6. What mortgage fees are there?
Deposit: Mortgage providers will need you to save at least 5% of the cost of the home you wish to buy. The more deposit you put down, the better the interest rate you’ll get. A 10% deposit for example will get you a much better interest rate than a 5% deposit.
Mortgage set-up fees: Some lenders charge a mortgage booking fee (or equivalent), usually to reserve the funds on a fixed or tracker deal. The typical cost is between £99 and £250. Others may just have an arrangement fee instead.
Mortgage Arrangement fee: Some mortgage products will incur lender ‘arrangement fees’. This may be in addition to a separate booking fee. It can cost up to £2,000 (sometimes more) and can be paid upfront or added to your mortgage amount. You will have to pay interest on the amount over the life of the mortgage, increasing its cost if you decide to do this.
Mortgage broker fee: if you choose to use a broker to arrange your mortgage, the average cost of this tends to be £500. It is expected that you may save more than the broker fees overall by them potentially offering you lower interest rates than you can source directly from the lenders, free surveys, cashbacks etc…
Legal costs: You will need to pay your solicitor to carry out the legal work and searches. This can cost approximately £850 – £1,500.
Stamp Duty: this is paid on land and property transactions in the UK. Buyers now pay stamp duty progressively based on how much over the threshold your purchase is.
You will pay nothing if you are buying a home under £125,000, or £40,000 if it’s a second property. And if you’re a first-time buyer, you will pay nothing if you are buying a property under £300,000.
- 0 per cent on up to £125,000
- 2 per cent on £125,001 and £250,000
- 5 per cent on £250,001 to £925,000
- 10 per cent on £925,001 to £1.5million
- 12 per cent on amounts above that
Survey: This is paid by the buyer to a surveyor to check for structural defects on the property. There are three types of survey:
Home condition survey – this is the most basic and cheapest survey. It’s best for new-build and conventional homes. Typical cost: £250+.
Homebuyer’s report – this is a fuller survey, looking thoroughly inside and outside a property. It also includes a valuation. If you are choosing this option, you should see if you can get the valuation and homebuyer’s report done at the same time to cut costs. Typical cost: £500+
Building or structural survey – this is the most comprehensive survey and should always be done on older or non-standard properties. Buyers often skip one of these as they cost the most, however, they should pull up any problems with a property that could be very expensive to fix, which can then be negotiated with the seller before you buy, and doing this may save you much more than you pay for the survey. Costs £700+
Remember: You may not have to pay all of the above fees. But you will need to factor these charges in when working out how much you can stump up for a deposit.
7. What happens when the mortgage is paid off?
You own the property outright and should go to the pub to celebrate!
YOUR HOME MAY BE REPOSESSED IF YOU DON’T KEEP UP YOUR MONTHLY REPAYMENTS.