Shall we start with what actually is a Mortgage?
A mortgage is a loan used to buy a property, but one which is secured on that property. This means that the mortgage provider (a bank or building society) retains an interest in the property until the entirety of the loan is paid back.
There are different types of mortgages, classified by the way the interest on them is charged, or how the interest rate changes over time. Each has its own advantages and disadvantages.
If you do not keep up repayments on the mortgage, they have the right to repossess the property.
Initially when applying for a mortgage we need to decide on 3 main features for our new mortgage.
This is the method of repaying all mortgages, however specialised they are, apart from interest-only loans. With repayment mortgages, each month you repay some of the interest you owe plus some of the capital you’ve borrowed. At the end of the period, often 25 years, you’ll have paid back everything you owe and you’ll own your home outright. Of course, you’re likely to move within the 25 years. In which case you might be able to take the mortgage with you (called ‘porting’ your mortgage) or you can repay the original loan and take out a new one. It could be that by the time you move, your house has gone up in value, and you will have repaid some of the capital. So next time, you can put down a bigger deposit and possibly find a new mortgage at a better rate of interest.
Repayment mortgages are usually taken when clients buy a property to live in so by the time they retire, the full mortgage will be repaid.
The advantage is that if you keep up with your repayments as per the mortgage agreement your mortgage will be fully paid once the mortgage term is over.
The disadvantage is the monthly repayments are much more expensive than an interest-only mortgage.
With interest-only loans, you pay just the interest month by month and repay the capital at the end of the period with money you’ve saved elsewhere. This is quite different from a repayment mortgage because at the end of the loan you’ll still have to find enough money to repay the whole debt. You can save up any way you want or use money from an inheritance, but you must be confident of having the money to hand when the time comes to repay. If you don’t, you might have to sell the house to pay off the mortgage. There’s a risk that you won’t be able to repay the capital on time so, before granting an interest-only mortgage, lenders can insist you show them how you intend repaying the loan at the end. The big advantage of interest-only mortgages is that your monthly repayments are lower than with any other mortgage because you are paying only the interest due. If you find you’re getting nervous about being able to repay the loan on an interest-only basis, you may be able to switch to a repayment loan at a later date.
The disadvantage here is that you will still owe the same amount of money at the end of your mortgage term as at the beginning, because you only paid off the interest on the loan, not the capital.
Interest-only mortgages are usually taken by investors for an investment property, so are often called Buy-to-Let mortgages.
Once we have decided on repayment or interest-only we need to discuss your mortgage needs in more detail before we make a recommendation on which type of mortgage is best for you.
There are many types of mortgages but the main two are tracker and fixed.
Tracker mortgages move in line with, or track, a nominated interest rate - usually the Bank of England base rate. The actual mortgage rate you pay will be a set interest rate above or below
the base rate. When the base rate goes up, your mortgage rate will go up by the same amount. And it will come down when the base rate comes down. Some lenders set a minimum rate below which your interest rate will never drop, but there’s no limit to how high it can go. This mortgage is a bit risky as one month you might be paying more than a previous month. However, your rate can also decrease and so will your mortgage repayments. The question is: are you willing to take the risk?
With a fixed-rate mortgage your interest rate is guaranteed to stay the same for a set period of time. This can offer peace of mind because, unlike a variable-rate mortgage (such as a tracker), you’ll know exactly how much you need to repay each month during this period. But while you have a guarantee of knowing your monthly cost for the next 2 or 5 years you will not be able to benefit from a rate drop as is the case with tracker mortgages.
And finally:
Setting the term when applying for your mortgage is very important as it is directly attached to your monthly payments. Typically, when taking a mortgage the term is 25 years. However, if you are still young you can extend this to 30 or even 35 years. While your monthly mortgage repayments will be lower, you must remember that you will pay more in interest over a longer term. On the same note however, if you can afford it, you can set your mortgage over a term of 15 years. In this way your mortgage will be higher per month but you will pay less in interest. Obviously this only applies to a repayment mortgage as for an interest-only mortgage you pay only interest so the term does not make any difference.
Confused? Probably, and this is why you need a good financial adviser to discuss every aspect specific and relevant to you. Unfortunately, in the mortgage market there is no single solution which will suit everybody, so I always recommend having a good chat with a mortgage broker. They will undertake a full client fact find which is very specific for each client and based on this, a suitable mortgage can be recommended.
Download the full Guide: