Understanding Mortgages – The Basics
A mortgage is the biggest financial commitment the majority of us will ever make, so it’s essential, when the time comes, that you have a firm grasp of the basics. In this guide, we’ll take a look at some of the mortgage fundamentals, as well as delving into a few of the details to help you find the best deal.
What is a mortgage?
Very simply, a mortgage is a loan made by a bank or a building society to help finance the purchase of a home. Interest is paid on the loan by the homeowner, and the property is used as security on the loan. So, if you can’t keep up with the mortgage repayments, you risk losing your home.
What types of mortgage are available?
One of the first decisions you’ll need to make is to decide whether a fixed or variable rate mortgage deal is better suited to you. A fixed rate of interest provides the certainty that your mortgage payments will remain the same for the duration of the loan. A variable rate will go up and down with the Bank of England’s base rate, so there could be times when a variable rate will save you money, and others when it’ll cost you a bit more.
If you think a fixed rate is the right option for you, most of the mortgages you’ll find are two year deals, at which point you’ll need to remortgage. However, some banks also offer three and five year deals. If you prefer the sound of a variable rate mortgage, make sure you factor in the additional cost of your repayments if the base rate were to rise by a couple of percent. Tracker mortgages move up and down with the base rate, while discounted variable rate mortgages are linked to the bank’s standard variable rate. You should also check for exit penalties on variable rate deals, as they can often apply.
How much can you borrow?
Most mortgage providers will be able to give you a good idea of the amount of money you’ll be able to borrow relatively quickly. Generally speaking, banks will be willing to lend between three and a half and four times your salary. However, they will also look at your overheads to check your level of expenditure. To find out how much you could borrow, you’ll need:
- Your income details (i.e. salary, bonuses, overtime & pension)
- Details on any payments you make on money you’ve borrowed (personal loans and credit card payments)
- Information about your outgoings (monthly travel costs, council tax, insurance policies, maintenance costs)
How much can you expect to pay in fees?
Most mortgage products have at least one fee attached to them, if not two. Here’s how it works:
The biggest fee you’ll have to pay is the arrangement fee, although it can also be called the product fee, booking fee or application fee. Some lenders can offer low rates, but hike up the cost of their fees to make their products more attractive, so be sure to check out the arrangement fee before you agree a loan. You can expect to pay between £0 and £2,500, which can be paid on the mortgage application or added to the cost of the loan.
Some lenders also charge a booking fee on fixed rate, tracker and discount deal mortgages. This could also be called the application or reservation fee. The booking fee will usually cost between £100 and £200.
Some lenders will also charge a valuation fee. This is paid to the lender to cover the cost of valuing the property to make sure the investment is sound. The valuation fee will vary according to the lender, and some lenders will not charge a valuation fee at all. As a guide, be prepared to part with £300-£400.
Where can you find the best deal?
There are a huge number of mortgages available at any one time, which can make it difficult to know whether you’ve found the best deal. Approaching the banks and building societies is one way to find a mortgage. However, there are also specialist mortgage brokers out there who will research the market on an ‘unlimited’ basis, not just the mainstream lenders, to find you the best deal.
Get in touch with The Mortgage Centres today for the impartial advice you need.