Mortgage FAQ
What is a mortgage?
A mortgage is a loan which you obtain to buy your home. You receive the loan and pay it back, repaying both the capital sum you borrowed and the interest which is due on the loan. The loan is a ‘secured’ loan which means that if you fail to make the necessary repayments on the mortgage the lender can repossess the property and sell it off to recover the loan.
Interest rates for mortgages tend to be lower than interest rates on other types of loans such as banks and are dramatically lower than interest rates payable for any credit card debts.
Mortgage loans are commonly repaid over many years such as 25 to 30 years, although they can be arranged for shorter repayment periods, although this will tend to increase monthly payments to the lender
What institutions offer mortgage loans and how do I know they are bona fide businesses?
You can obtain a mortgage from banks, building societies and other specialist lenders. All such businesses are regulated by the Financial Services Authority (FSA). Regulated firms are put on a FSA register and have to meet certain minimum standards.
How do I find out about what mortgages are available and suitable for me.?
There are many mortgage brokers who provide advice on suitable mortgages for you and who can scour the market looking for mortgage deals which meet your individual needs. There is a vast range of deals that are on offer and you are likely to need a broker with their specialist knowledge and skills to find something suitable for you. You should only use a broker who is regulated by the FSA.
If you use a broker you will have to pay a fee to the broker, usually at the start of the mortgage process.
How much can I borrow?
Different mortgage lenders have their own policies in assessing how much you can afford to pay which will determine how big a mortgage they will offer you. They will assess:
• Your total income whether as an individual or joint income in the case of couple who both earn salaries.
• Your ability to pay if interest rates were to rise as some point in the future
• Your existing liabilities such as other loans or credit card debts
• Your total household bills and living expenses
Lenders are expected to lend responsibly and not lend to individuals or couples who will have difficulty repaying the mortgage.
What types of mortgage are available?
There are essentially two types of mortgage:
Repayment mortgage (also known as a capital and interest loan)
With these you repay in your monthly payments both part of the capital sum you have borrowed and interest payable on the loan. At the end of the mortgage period you will have paid off the full capital sum and the interest due.
Interest rates during the course of the repayment period may rise or fall and such changes may have a significant effect on you monthly repayments. However especially in the early years of the mortgage you can obtain special deals, such as fixed interest rates for 2 years to protect you from changes in interest affecting your monthly payments.
Interest Only Mortgage
With these types of mortgages you only pay the interest on the mortgage loan during the term of the mortgage. However you then have to set aside savings on a regular basis to produce a capital sum which will pay off the entire capital amount that you borrowed at the start of the mortgage. If you don’t save that capital sum so that you repay the loan then the lender will take possession of your home when the mortgage term is reached.
During the term of the mortgage then monthly payments will obviously be lower because there is no capital element in the payments but you still have to set aside savings to meet the capital repayment sum when it is due..
As with repayment mortgages you will be affected by any changes in general interest rates. The effect will be greater than with repayment mortgages as you are only paying interest on the loan so changes in rates will more directly impact on you.
What fees and charges will I have to pay to get a mortgage?
You are likely to have to have to pay the following charges:
• Mortgage broker fees, if you use one
• Mortgage booking fee or arrangement fee, payable to the lender
• Valuation fee – the lender will arrange to have the property you want to buy valued
• Survey fee. It is not obligatory but it is highly advisable to pay for a structural survey of the property you wish to buy
• Legal fees. A s buyer need to use solicitors to undertake the necessary searches on the property
• Stamp duty. A government tax on the purchase of properties. Stamp duty is based on a percentage of the sale price of the property. It increases in a series of stages the higher the sale price of the property
• House insurance. Lenders will insist you take out proper house insurance on the property. Some lenders will require you to insure your property with an insurance company of their choosing.
• Early payment charge. With some mortgages if you repay part or all of the mortgage early then you may have to pay an early payment charge to the lender which may amount to a few thousand pounds.
What is the best way to prepare for taking on a mortgage?
• Try and reduce any existing debts, especially credit card debts
• Build up your savings
• Plan your budget so that you will be able to pay easily all the fees and charges that are due on the purchase of a property
• Plan your budget so that you can deal with emergencies such as losing your job or becoming ill and off work. Consider taking out insurance to cover these possibilities
• Plan your budget so that you can deal with any increases in interest rates which may occur in the future
• Take advice on the pros and cons of taking a fixed interest rate mortgage for a defined period
• Try not to take the maximum mortgage you can obtain in case something goes wrong in the future
This document does not constitute financial advice under the Financial Services and Markets Act 2000. If you require such advice, you should seek appropriate professional advice.