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A mortgage is a loan borrowed from the bank, building society or a mortgage broker in order to purchase property. You will pay back your mortgage each month over the course of between 25-35 years, with added interest depending on which type of mortgage you choose.
Your mortgage will be secured against the value of your property until the whole sum of the loan is paid off. If you are unable to keep up with repayments, your mortgage provider may repossess the property to make their money back.
Conveyancing solicitors will liaise with your mortgage provider to help with the legal aspects of buying a house. We’ve compiled this guide on everything you need to know about mortgages, from the different types of mortgage to how to apply.
A mortgage is just like any other loan, but it allows you to pay the money back over a long period of time. A typical term for mortgage repayment is 25 years, however the likes of 35-40-year mortgages have increased, especially amongst first-time buyers with the ever-rising house prices and deposits.
You will pay interest on your mortgage loan, with how much you pay depending on the base rate and which type of mortgage deal you go with. Interest rates can vary monthly, but a fixed-rate mortgage will mean the amount you pay monthly will remain the same.
You will first need to work out what you can afford when searching for a mortgage. Money Advice Service's affordability calculator will help you find out roughly how much you will be able to borrow.
When looking for a mortgage, you should aim to lower the loan to value (LTV) as much as possible as the amount of mortgage you’ll be eligible for will depend on how much of a deposit you pay. Therefore, the larger your deposit, the more mortgage deals will be available to you.
An LTV indicates the deposit size in proportion to the entire value of the property you wish to purchase. For example, if your deposit is £20,000 for a property valued at £100,000, this would give you an LTV of 80%. Most providers offer mortgages with a 95% LTV, although the deals offered may not be the best available.
The lowest LTV mortgages usually start at 60% which will offer best deals, and can range all the way to 100%, although 100% LTV mortgages are rare. Most common LTV mortgages are usually 85-95%.
You can either apply for a mortgage directly from the bank or building society, or you could use a mortgage broker or independent financial adviser.
Mortgage from Bank or Building Society
All banks in the UK have a number of mortgage products available as exclusive direct deals. Many banks may offer better deals for current account holders, so it is worth checking the products on offer with your bank first before committing to any outside deals.
You may find lower interest rates in some cases, and it is usually very simple to connect your mortgage to your current account to take automatic payments. However, unless you have a low loan to value (LTV), it is unlikely that you will find rates that are any better than those found by a mortgage broker.
Mortgage brokers, or independent financial advisers (IFA), will compare the whole market for the best suited mortgage for you. They will offer impartial advice and provide you with a range of choices, whereas a bank could only offer you their own mortgage deals.
Although this service comes at a cost with many mortgage brokers often charging a fee or taking commission for their service, they could save you a lot of money in the long run. Not only could they save you money, but they do all the hard work by comparing every type of mortgage on the market.
What Will I Need To Apply for a Mortgage?
When mortgage hunting, it's also a good idea to arrange a will. If you die without a will, your house may not be distributed how you wish. For example, if your estate is worth under £250,0000, it's distributed to your spouse only, whereas anything over £250,000 is distributed between your spouse and children (Perfectfuneralplans.com).
There are a range of mortgages on offer, each come with different rates. We’ve listed the most popular mortgage deals along with the advantages and disadvantages that come with them.
Fixed-rate Mortgage – A fixed rate mortgage means that you will pay the same amount each month as your interest rate won’t rise. Whilst a fixed rate mortgage means the amount you pay won’t increase, it also won’t decrease when the base rate overall goes down, potentially leaving you paying more than you would with another mortgage deal.
Standard Variable-rate Mortgage – With a standard variable rate mortgage, the amount you pay monthly will vary. The amount will match the bank’s standard variable rate and not the Bank of England’s base rate.
Tracker Mortgage – A tracker mortgage will track the base rate of interest offered by the Bank of England at that time, meaning your monthly payments will fall or rise accordingly. A tracker mortgage may seem ideal with your monthly repayment decreasing with the fall of the base rate, but each month will leave you feeling uncertain on how much you have to pay.
Capped Mortgage – With a capped mortgage, the amount of interest that comes with your monthly payments will be limited. Whilst this is an advantage knowing you’ll never go over that limit, a capped mortgage doesn’t mean that the base rate of interest will not rise over time.
Offset Mortgage – Having your mortgage offset is something you can add to either fixed or variable rate mortgages. It works by linking your savings or current account to your mortgage. You still pay monthly instalments, but your savings and current balance act as over payment. This will help to clear your mortgage early.
It's worth noting that if you're selling your existing house but want to arrange a mortgage for a new property, but the dates just don't overlap, you can explore the possibility of a bridging loan. Commonly known as bridging finance, this is a short term loan that can act as a 'bridge' between selling and buying a home, to speed up the transaction.
A mortgage is the only way most people can afford to buy a house, with the average house price in UK at £232,554. We’ve compiled a list of the benefits of having a mortgage.
Cost Effective – With a mortgage, many people pay it back over 25-35 years with a small instalment each month. By paying a small amount every month over many years, it doesn’t seem like a substantial amount of money that’s easily manageable.
You’ll Be a Homeowner – The main advantage of taking out a mortgage will be owning your home at the end of it. If you plan on selling your house after paying off your mortgage, there’s a high chance that its value would have increased.
More Beneficial than Renting – Although renting a house can sometimes be cheaper, with a mortgage you’re paying money towards owning your home instead of straight to a landlord. It will work out cheaper in the long run to buy over rent.
It goes without saying that taking out a large loan such as a mortgage comes with disadvantages. Here we’ve listed the disadvantages that come with a mortgage.
Interest Rates – With a mortgage comes added interest rates. This means that over the course of the 25-35 years, you will end up paying a lot more than the original price of the house.
Decrease in Property Value – Not only do you end up paying a lot more than the original price, there’s a small chance that your property’s value has decreased by the time you’ve paid it off.
Debt – A mortgage loan is a substantial amount of money and will be the highest debt most people have to pay in their lifetimes, the added interest on top can make paying it back overwhelming.
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