Services

Mortgages

Buying a home is the largest purchase you’re likely to make.  Most people cannot afford to purchase the property straight off and usually need to borrow money.  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.  Before you arrange your mortgage, make sure you know what you can afford to borrow. 

 

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.

 

Before applying for a mortgage you’ll need to think about more than just whether you can afford the monthly repayments.  Mortgage providers will be looking at your income and outgoings to see if you can keep up with repayments if interest rates rise or your circumstances change.

 

When you apply for a mortgage, the lender will cap the loan-to-income ratio at no more than four and a half times your income.  It must also assess what level of monthly payments you can afford, after taking into account various personal and living expenses as well as your income.  This is called an affordability assessment.

 

The lender must also look ahead and ‘stress test’ your ability to repay the mortgage.  This takes into account the effect of potential interest rate rises and potential changes to your lifestyle, such as redundancy, having a baby or career break.

 

If the lender thinks that you won’t be able to afford your mortgage payments in these circumstances, it might limit how much you can borrow.

 

These changes were brought into effect by the Financial Conduct Authority in 2014 following a comprehensive review of the mortgage market.

 

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.  This is because the lender takes less risk with a smaller loan.  The cheapest rates are typically available for people with a 40% deposit.

 

The money you borrow is called the capital and the lender then charges you interest on it until it is repaid.  The type of mortgage you are able to apply for will depend on whether you want to repay interest only or interest and capital.

 

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 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.

 

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.  There are various types of variable rate mortgages:

 

·                         Discount Mortgages: This is a discount off the lender’s standard variable rate (SVR) and only applies for a certain length of time, typically two or three years.

·                         Tracker Mortgages: Tracker mortgages move directly in line with another interest rate – normally the Bank of England’s base rate plus a few percent.  So if the base rate goes up by 0.5%, your rate will go up by the same amount.  Usually they have a short life, typically two to five years, though some lenders offer trackers which last for the life of your mortgage or until you switch to another deal.

·                          Capped Rate Mortgages: Your rate moves in line normally with the lender’s SVR.  But the cap means the rate can’t rise above a certain level.

·                          Offset Mortgages: These work by linking your savings and current account to your mortgage so that you only pay interest on the difference.  You still repay your mortgage every month as usual, but your savings act as an overpayment which helps to clear your mortgage early.

 

 

For more information, please contact us and we will be happy to assist you. 

 

Remember your home is at risk if you do not keep up repayments on a mortgage or other loans secured on it.