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Mortgages - A Beginner's Guide

This document provides a beginner's guide to mortgages. It explains that a mortgage is a loan taken out to purchase property, secured against the property's value. It discusses determining an affordable borrowing amount, obtaining a mortgage from banks/building societies or brokers, and the application process. It also outlines different mortgage types like repayment, interest-only, and combinations; and how interest rates can be fixed or variable.

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ramondoniak
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52 views3 pages

Mortgages - A Beginner's Guide

This document provides a beginner's guide to mortgages. It explains that a mortgage is a loan taken out to purchase property, secured against the property's value. It discusses determining an affordable borrowing amount, obtaining a mortgage from banks/building societies or brokers, and the application process. It also outlines different mortgage types like repayment, interest-only, and combinations; and how interest rates can be fixed or variable.

Uploaded by

ramondoniak
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Mortgages – a beginner’s guide

Buying a home is the largest purchase you’re likely to make. Before you arrange your mortgage, make
sure you know what you can afford to borrow. Find out where to get a mortgage, the different types
and how the process works.

What is a mortgage?
A mortgage is a loan taken out to buy property or land. Most run for 25 years but the term can be
shorter or longer. The loan is ‘secured’ against the value of your home until it’s paid off. If you can’t
keep up your repayments the lender can repossess (take back) your home and sell it so they get their
money back.

Working out what you can afford

Don’t stretch yourself if you think you’ll struggle to keep up repayments, and also think about the
running costs of owning a home such as household bills, council tax, insurance and maintenance.

New affordability rules were introduced in early 2014. As well as proof of income, lenders will now
want to see proof of what you spend, and if you have any debts. They may ask for information about
household bills, child maintenance and personal expenses. Lenders want proof that you will be able
to keep up repayments if interest rates rise. They may refuse the mortgage if they think you spend
too much or have too much debt.

Where to get a mortgage

You can apply for a mortgage directly from a bank or building society, choosing from their product
range. Compare mortgages using our Mortgages comparison table. You can also use a mortgage
broker or independent financial adviser (IFA) who can compare different mortgages on the market,
as well as mortgages which are not offered directly to customers. Some brokers look at mortgages
from the ‘whole market’ while others look at products from a number of lenders. They’ll tell you all
about this, and whether they have any charges, when you first contact them.

Applying for a mortgage


You will be asked a range of questions about the type of mortgage you want, if it is appropriate for
you and how long your mortgage should last. Depending on your answers, the lender or mortgage
broker will be able to recommend a mortgage that meets your needs and circumstances. Taking
advice will almost certainly be best unless you are confident and competent in financial matters. If
you are unhappy about the advice you receive, complain to the Financial Ombudsman Service. It is
sometimes possible to choose a mortgage without receiving advice – this is called an execution-only
mortgage. Execution-only mortgages are offered under limited circumstances. You’d be expected to
know exactly what you want to buy, including the lender’s name, interest rate and type, the length of
the term, mortgage type and how much you want to borrow. The lender will write to confirm that
you haven’t received any advice and that the mortgage hasn’t been assessed to see if it’s suitable for
you. In most cases, you must 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. If for some reason the
mortgage turns out to be unsuitable for you later on, it will be very difficult to make a complaint. Not
all lenders will offer the execution-only option and mortgage brokers and financial advisers can’t deal
with you on an execution-only basis. If you go down the execution-only route, the lender will still
carry out the same detailed affordability checks.

Your deposit – size matters


When buying a property, you will need to pay a deposit. This is a chunk of money that goes towards
the cost of the property you’re buying. The more deposit you have, the lower your interest rate could
be. When talking about mortgages, you might hear people mentioning “Loan to Value” or LTV.
Though this sounds complicated, it’s simply the amount of your home you own outright, compared to
the amount that is secured against a mortgage. For example, with a £20,000 deposit on a £200,000
property, the deposit is 10% of the price of the property, and the LTV is the remaining 90%. The
mortgage is secured against this 90% portion. The lower the LTV, the lower your interest rate is
likely to be. This is because the lender takes less risk with a smaller loan. The cheapest rates are
typically available for people with a 40% deposit.

How you pay back your mortgage


The money you borrow is called the capital and the lender then charges you interest on it until it’s
repaid. Depending on whether you want to repay interest only, or interest and capital, will affect the
type of mortgage you might want to apply for.

Repayment mortgage
With repayment mortgages you pay the interest and part of the capital off every month. At the end of
the term, typically 25 years, you should manage to have paid it all off and own your home.

Interest-only mortgage

With interest-only mortgages, you pay only the interest on the loan and nothing off the capital (the
amount you borrowed). These mortgages are becoming much harder to come by as lenders and
regulators are worried about homeowners being left with a huge debt and no way of repaying it. You
will have to have a separate plan for how you will repay the original loan at the end of the mortgage
term.

Combination of repayment and interest-only mortgages

You can ask your lender if you can combine both options, splitting your mortgage loan between a
repayment and interest-only mortgage.

Different types of mortgage


Once you’ve decided how to pay back the capital and interest, you need to think about the mortgage
type. 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 - typically two to five years - 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, in line with the Bank of England base rate.

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