Unless you are fortunate enough to have the cash in the bank, a mortgage will be a necessary requirement in order to buy your own a house, and getting the right mortgage in place will be the first crucial step to that dream of home ownership. Put simply when you buy a home using a mortgage you agree to pay a part of the property’s price and you borrow the rest from a bank or building society. But there’s a lot more to it than that, so let’s explore how a mortgage works exactly.
Types of Mortgage
First off, to know how a mortgage works you need to know what terminology to become familiar with. At its most basic level, a mortgage is made up of capital (the amount that you borrow) and interest (the money you pay back to the bank in return for them lending you the capital).
A mortgage can be interest only (where you just pay off the interest, but have the capital outstanding to be paid at a later time), or repayment (where you pay some interest and some capital, at the end of the term you’ll have paid back everything you owe).
Your mortgage is “secured” against your property, meaning if you don’t pay back the money you borrow, your lender can repossess your property.
Mortgage and Interest Rates
In terms of rates, banks and building societies will offer a range of different interest rates that will suit different purchaser’s needs. When they say it’s a “buyers’ market” – it really is. Let’s explore the choices of mortgage for buyers:
Fixed-rate: a popular choice for first time buyers, this kind of mortgage will “fix” your interest rate for a set amount of time, typically from 2, 3, 5, or sometimes even 10 years. It provides stability for those wanting to know how much they have to pay each month, regardless of what happens to interest rates. When the set period is up, you’ll be transferred by your lender to a Standard Variable Rate, which will likely be higher than your fixed rate. At that time, you’ll have to find and apply for another fixed rate deal.
Risky? Only if the interest rates drop and you’re stuck paying a higher rate for months on end.
Standard Variable Rate (SVR): This is the basic mortgage you can apply for. Every lender has an SVR, and the rate can change from one month to the next. It can follow the Bank of England base rate, but also be changed just by your lender.
Risky? Potentially, especially if rates skyrocket. A bad choice for those who want some stability in their outgoings.
Tracker: as the name implies, tracker mortgages ‘track’ a particular interest rate, usually the Bank of England base rate. The Tracker rate will usually be above or below this figure depending on the lender, but in short, when the rates go up, so does yours. When they come down, yours do too.
Risky? Not bad if you can afford to pay more if the rates increase, but good to have when rates look like they’re dropping.
Discount Rate: these are generally discounted SVRs. They are potentially the cheapest mortgages you can get, but like SVRs the rates can still rise and fall.
Risky? Less to pay out per month, but still about as risky as a normal SVR.
Deposits and the Loan To Value (LTV) ratio
Mortgages work based on the idea that the buyer of a property will stump up with a cash deposit, usually a certain percentage of the house cost. This is where the “Loan to Value” ratio comes in. You want to buy a house for £100,000 and have £5,000 saved, which means you have a 5% deposit, and you’re borrowing the other 95% – therefore, you have a “Loan to Value” ratio of 95%. The lower the LTV ratio, the better rate you’ll get on your mortgage. Lenders will want to know if you can pay this money back, so if you haven’t applied for a mortgage, be prepared with payslips and bank account statements for proof of income.
If you already own a property, the deposit for your next house will be a cash lump sum, plus your equity in your existing property (the amount left once the mortgage you owe is taken off your home’s value, leaving you with the percentage that you own).
If you’re looking for a mortgage, you’re no longer saddled with just their local high street banks when it comes to mortgage applications – building societies and banks from all over the country can accept a mortgage application online and over the phone, meaning as long as you have a search engine, you can see what options you have. If you want to cut out the legwork, independent mortgage brokers – like us at Grange Mortgages – can offer their services to help you find the best mortgage that will suit your needs.
What is re-mortgaging?
To “re-mortgage” a property is to take out a new mortgage on a property you already own. Primarily this is done to save money, so that you can secure a better rate when your current mortgage is about to end. However, it can be useful if your property’s value has gone up and your LTV ratio is therefore lowered. You will need to be careful as there may be an “early exit/repayment fee” which you could become liable for if you wish to leave whilst within a lenders initial incentive/deal.
It’s a carefully considered gamble
You never know what’s around the corner and some can approach mortgages with the grass-is-always greener attitude, always thinking there’s a better rate to be had. Mortgages aren’t easy to understand but can be given time, research and advice. The best thing to do is make a calculated effort and secure the best mortgage that applies to you.
Grange Mortgages offer expert advice from a team with years of experience dealing with mortgages, and have a dedicated administration unit that will be with you from your first step in mortgage purchasing, to the day you grab the keys and move in. Call us today on 01604877999 to see how we can help you.