Mortgages

What are mortgages exactly? Please give me a basic definition.

A mortgage is a loan that you obtain to buy your home. You receive the home loan and pay it back, repaying both the capital sum you borrowed and the interest which is due on the loan. The mortgage offer is a ‘secured’ loan, which means that if you fail to make the necessary repayments, the lender can repossess the property and sell it off to recover the lost loan.

Interest rates for mortgages tend to be lower than interest rates on other types of loans from the banks and are dramatically lower than interest rates payable for any credit card debts.

Mortgage loans are commonly repaid over many years such as 25 to 30 years, although they can be arranged for shorter repayment periods, although this will tend to increase monthly payments to the lender.

What institutions offer mortgages and how do I know they are bona fide businesses?

You can obtain a mortgage quote from a bank such as Halifax, Nationwide, or HSBC, a building society, and other lending finance specialists. All such businesses are regulated by the Financial Services Authority (FSA). Regulated firms are put on a FSA register and have to meet certain minimum standards and follow certain mortgage guides and guidelines.

How do I find out about what mortgages are available and which ones are suitable for me? Are there special mortgages for first time buyers?

There are many mortgage brokers who can provide advice on the kinds of home loans that are suitable for you and who can scour the market looking for mortgage deals which meet your individual needs. There is a vast range of deals that are available and you are likely to need a broker with their specialist knowledge and skills to find something that fits your needs. You should only use a mortgage broker who is regulated by the FSA. If you use a broker, you will have to pay a fee that usually is paid at the start of the process.

How much capital can I borrow?

Different lenders have their own policies in assessing how much you can afford to pay, which will determine how big a mortgage they will be willing to offer you. A typical bank will assess:

• Your total income whether as an individual or joint income in the case of a couple who both earn salaries

• Your ability to pay if mortgage rates were to rise at some point in the future

• Your existing liabilities such as other loans or credit card debts

• Your total household bills and living expenses

Lenders are expected to lend responsibly and not lend to individuals or couples who will have difficulty repaying their given mortgage. They want to get the loan right – it’s best for both parties involved.

What types of home loans are available? What are my mortgage options?

Compare mortgages - There are essentially two main types of home loans:

Repayment (also known as a capital or interest loan)

With these kinds, you repay in your monthly payments both part of the capital sum you have borrowed plus interest payable on the loan. At the end of the borrowing period, you will have paid off the full capital sum and the interest that was due.

Mortgage rates during the course of the repayment period may rise or fall and such changes may have a significant effect on you monthly repayments. However; especially in the early years of the loan, you can obtain special deals, such as fixed interest rates for 2 years to protect you from changes in rates and thus keeping your monthly payments stable. This solution is popular for mortgages for first time buyers. In the worst case, you can seek out mortgage interest relief options.

Interest only – 100% mortgage

With these type of home loan, you only pay the interest on the loan during the term of the mortgage. However; you then have to set aside savings on a regular basis to produce a capital sum, which will pay off the entire capital amount that you borrowed at the start of the finance contract period. If you don’t save that capital sum so that you repay the loan then, the lender will take possession of your home when the end of the term is reached.

Obviously, during the term of the contract, the monthly payments will be lower because there is no capital element in the payments, but you still have to set aside savings to meet the capital repayment sum when it is due. A 100% mortgage includes all the above plus no down payment.

As with repayment mortgages, you will be affected by any changes in general interest rates. The effect will be greater in this case since you are only paying interest on the loan so changes in rates will impact you greater.

An emerging type of home loan is called a remortgage. A remortgage is where one takes out a second mortgage on the same property to pay off the first one. This is usually done if the second bank loan can be obtained at a lower interest rate, to lower monthly payments, to raise capital, or for some other reason.

Other examples of less common mortgages are mortgage let or buy to let mortgage.

What fees and charges will I have to pay to obtain a mortgage offer?

You are likely to pay the following charges:

Broker fees - if you use one

Booking fee or arrangement fee - payable to the lender

Valuation fee – The lender or bank will arrange to have the property you want to buy valued

Survey fee – It is not obligatory, but it is highly advisable to pay for a structural survey of the property you wish to purchase

Legal fees – A buyer needs to use solicitors to undertake the necessary searches on the property

Stamp duty – A government tax on the purchase of property. Stamp duty is based on a percentage of the sale price of the property. It increases in a series of stages the higher the sales price of the property is

House insurance – Lenders will insist you take out proper house insurance on the property. Some lenders will require you to insure your property with an insurance company of their choosing

Early payment charge – With some mortgages, if you repay part or all of the borrowed amount early, then you may have to pay an early payment charge to the lender

What is the best way to prepare for taking on a home loan?

• Try and reduce any existing debts, especially credit card debts

• Build up your savings

• Plan your budget so that you will be able to easily pay all the fees and charges that are due on the purchase of a new property

• Plan your budget so that you can deal with emergencies such as losing your job or becoming ill and off work. Consider taking out insurance to cover these possibilities

• Plan your budget so that you can deal with any increases in interest rates that may occur in the future. A mortgage payment calculator is useful here.

• Take advice on the pros and cons of taking a fixed interest rate loan for a defined period

• Try not to take the maximum offer you can obtain in case something goes wrong in the future

• Make good use of a mortgage calculator to see your monthly payments based on the borrowed sum and home loan interest rate

Following the basic advice and information above will enable you to select what is the right mortgage for you. Good luck!

This document does not constitute financial advice under the Financial Services and Markets Act 2000. If you require such advice, you should seek appropriate professional advice.