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MORTGAGES INFORMATION LIBRARY
Welcome to the Which Way To Pay Info Library on Mortgages. Are you a first-time buyer or thinking of moving house? The world of mortgages can be complex, but here we aim to clarify some of the basic facts and FAQs for you...
- What is a Mortgage?
- Mortgage Types
- What is a Fixed Rate Mortgage?
- What is a Variable Rate Mortgage?
- What is a Tracker Mortgage?
- What is a Discounted Rate Mortgage?
- What is a Capped Rate Mortgage?
- What is a Collared Rate Mortgage?
- What is a Buy-to-Let Mortgage?
- What is an Islamic Mortgage?
- How Can I Get a Mortgage?
- Using a Broker
- Mortgages Direct from the Lender
- First Time Buyers
- How Much Can I Borrow?
- How Long does a Mortgage Last?
- What is Remortgaging?
- What Happens if I Can't Repay my Mortgage?
- Mortgage Payment Protection Insurance
What is a Mortgage?
In very simple terms, a mortgage (or mortgage loan) can be described as a secured loan which allows you to purchase a property, or to secure against the property. Typically, a person will take a mortgage on a house (or other type of home) and pay the loan off in installments over a set period of time. As with any loan, the borrower pays interest.
For the majority of people in the UK, a mortgage is the largest and most important loan they will ever take. There are many different types of mortgages and each one carries its own advantages and disadvantages.
There are two basic ways to pay off your mortgage:
This means you pay off your mortgage loan in installments, bit by bit. In other words, you are paying monthly loan repayments plus interest for a set period of time. At the end of that period, your mortgage is cleared – and the property is fully yours.
This means you pay off the whole mortgage at the end of your set period. In other words, you are paying interest on the mortgage loan but not the capital, for a set period of time. At the end of that period, you pay off the capital in full.
In general, repayment mortgages are seen as being less risky than interest-only mortgages, because they are more like any normal loan. Interest-only mortgages are popular in the UK, but are seen as more risky because many borrowers do not adequately plan ahead on how they will repay the capital at the end of the loan period.
What is a Fixed Rate Mortgage?
A fixed rate mortgage is probably the most common type of mortgage in the UK. Many first-time buyers opt for this type. A fixed rate mortgage means the amount you repay each month is fixed for a set period of time, regardless of changes to the Bank of England base interest rate.
This fixed amount is also regardless of the variable rate that your mortgage lender offers. Most fixed rate periods last between two and five years.
What is a Variable Rate Mortgage?
A variable rate mortgage means that the borrower is paying the rate that is set by the lender. Therefore, if the interest rate changes then the mortgage rate will change as well. Usually, the mortgage will be calculated by taking into account all interest rate changes that have occurred throughout the year. The borrower's repayments will then be altered in accordance with these alterations.
What is a Tracker Mortgage?
A tracker mortgage 'tracks' its rate in accordance with the Bank of England's rate, or another core base rate. Therefore, rate payments will go up or down as the base rate moves.
What is a Discounted Rate Mortgage?
A discounted rate mortgage means that the rate on the loan is offered at a discount for a limited period, after which it moves to the lender's variable rate.
What is a Capped Rate Mortgage?
A capped rate mortgage means that the rate on the loan is capped at a set 'ceiling amount' – that means the rate is variable but will not go any higher than a specified amount. Capped rates only last for a set period, as part of a deal. After the capped period, the rate will most likely resume to a normal variable rate.
What is a Collared Rate Mortgage?
A collared rate mortgage is used in conjunction with a capped rate mortgage, or with a tracker mortgage. The collar rate is a set lowest rate, in other words your mortgage payments will not fall below a certain amount. Other than that the rate on the mortgage stays variable.
What is a Buy-to-Let Mortgage?
A buy-to-let mortgage is a mortgage that allows you to purchase a property which you then rent out to a tenant (or tenant), thereby earning rental income. Just like a regular mortgage, the loan is secured against the property but in many cases the amount you can borrow is related to the amount of income that you will earn from the rent.
What is an Islamic Mortgage?
Islamic law has strict rules regarding money and the handling of money. As part of this, those within the Muslim faith may not pay or receive interest. So, what happens on a mortgage, where interest payments are part of the deal in Britain? Fortunately, both Islamic banks and some regular banks have recognized Muslims living in Britain and offer special Islamic or 'Halal' mortgages.
There are two types of Islamic mortgages:
The Murabaha mortgage means you are required to pay around 20 per cent of the value of your home on the day of purchase. This may sound like a lot, but in return the property is then registered as your own from that moment onwards. Generally, there will be a fixed repayment period on the mortgage, but the borrower can repay debts on the mortgage at any given time. The monthly repayment amount on a murabaha mortgage is fixed.
The Ijara mortgage is generally more flexible than the murabaha mortgage. The borrower does not need to pay a large amount of capital on the day of purchase. Outstanding balance on the mortgage can generally be paid at any time without penalties. An Ijara means that the lender actually purchases the property on your behalf, and you then pay the lender in installments, as part of a lease agreement. In other words, you are paying rent to the lender until you have paid off the full mortgage amount.
How Can I Get a Mortgage?
Generally, there are two ways of getting a mortgage: using a specialist mortgage broker to help you find the right one, or going directly to a lender to obtain the mortgage.
Both methods have their pros and cons.
Using a Broker
This option can save a lot of time and hassle, and as experts they can scour the market and find the best deals on offer. They may be able to help you negotiate your property deal or provide additional advice and guidance. However, brokers may charge fees which can sometimes be high. By going directly to a lender, you save on these fees but you may find it harder to find the right mortgage on your own.
In the UK, mortgage brokers must be authorised by the Financial Services Authority (FSA), or they must be agents for companies that are authorised by the FSA. As part of being under FSA rules, brokers must provide full and clear information on the process, including some known as the 'Keyfacts' documents . These are designed to provide borrowers with balanced information on the mortgage and the services that the broker offers.
Mortgages Direct from the Lender
If you plan on getting your mortgage directly from the lender, it is wise to take your time and really hunt around for a good deal. Of course, you can use a site like Which Way To Pay to compare and weigh up the different offers on the UK mortgage market. By using an independent comparison website you can gain a good overview of what is on offer.
First Time Buyers
Being a first time property buyer can be daunting. There are so many aspects of the purchase to consider, such as negotiation on the value of the property, finding the right mortgage and making sure that you have planned the financial obligation that a mortgage brings, often for up to 25 years.
Given there are so many mortgage products available in the UK, it can be even more tricky to find the right deal if this is your first time!
To get started, it is wise to consider the following costs of buying a home:
- Legal fees
- Stamp Duty
- Lender's Valuation
- Survey fee
- Property insurance (building and/or contents)
- Broker fees
Luckily for first time buyers, new rules since March 2010 mean that in some cases Stamp Duty (or Stamp Duty Land Tax) will not be charged. The new rule means that all homes which cost £250,000 or less are not subject to the tax for first time buyers.
It is vital to spend some time to go over all the costs of property purchase either on your own, with your partner or with a professional independent financial adviser.
How Much Can I Borrow?
Just like any loan, the lender will assess your individual financial circumstances before deciding how much to lend to you – or how much you can afford to borrow.
Most lenders have their own methods for assessing mortgage applications, but they should have a fair and sensible approach.
Often, a lender will carry out an assessment on you based on your income, any other existing loans or credit cards you may have, and your living expenses.
How Long does a Mortgage Last?
The length of your mortgage depends on the lender you use. However, the standard mortgage term is 25 years. This may sound like an endlessly long time, but for most people this helps to spread the relatively high cost of buying a house or other property.
If you're lucky and you can afford it, your mortgage may be shorter. The length will be decided by your lender after a full assessment of your income and other financial obligations. Remember to draw up your own budget, to factor in your mortgage with the other costs in your life.
What is Remortgaging?
Remortgages are widely used in the UK, and can be either switching the mortgage to a better deal or to another lender. Most commonly, remortgages are used to consolidate existing debts. This is done by taking out a remortgage at a larger amount than was owed on the original mortgage. Some people use a remortgage because they have found a cheaper or better deal from their own (or another) lender.
What Happens if I Can't Repay my Mortgage?
A mortgage is a secured loan, which means that if you are unable to keep up with payments on the loan, you risk losing your home – it could become repossessed.
If you begin to have problems paying your mortgage, or think you may be heading into difficulty, it is wise to act quickly. The FSA recommends that you contact your mortgage lender as soon as you experience any form of problems with your payments. This is because mortgage lenders are regulated by the FSA and as such, must treat you fairly.
You may be able to seek additional advice or help. Find out if you have relevant insurance cover that could help lighten your load, or you may be entitled to state or government help/benefits in a time like this. Many lenders are willing to discuss your options with you, to find a solution. However, it is vital to seek their help as early as possible.
Mortgage Payment Protection Insurance
Mortgage payment protection insurance (sometimes referred to simply as mortgage insurance) is a type of insurance that is designed to cover you in the event that you are unable to manage your mortgage payments. For instance, if you have an accident, become ill or are unable to work / lose your job, you may be able to claim with a good mortgage payment protection policy.
There are many insurance providers on the UK market, and the period for how long you can claim benefits under the terms of the policy do vary greatly. Therefore it is sensible to shop around and compare offers before signing up with an insurer.
In general, mortgage insurance can be taken out anytime during the term of your mortgage (though terms may apply).
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