Beginners guide to mortgages
Warning: THE MORTGAGED PROPERTY (WHICH MAY BE YOUR HOME) MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
Beginners guide to mortgages
What is a mortgage?
Very few people can afford to buy a home outright. A mortgage is a loan secured against land (including your property) that you repay over a number of years. However, since it is secured against your property, if you don’t keep up with your payments the lender can repossess your home and sell it to recoup their money.
A house is usually the single most expensive thing you will ever buy, so it’s important to make sure you understand the different types of mortgages available.
How do you want to repay?
The two most common ways to repay your mortgage are:
- Repayment (capital and interest) - With this type of mortgage you repay the amount borrowed (the capital) plus the interest over the mortgage term.
- Interest-only- With this mortgage you only pay the interest over the course of the term, not the amount borrowed. This means that while your monthly repayments may be lower, you will still have the full debt and any additional interest to repay at the end of your mortgage term. Your lender will want to see proof that you have a reliable plan in place to repay the capital at the end of your mortgage term.
What are the different types of mortgages?
There are many different mortgages available, and which type you choose should be based on your requirements.
Fixed rate mortgages
The rate of interest is fixed for a period, usually 2, 3, 5 or 10 years, meaning your monthly repayments will stay the same. You won’t pay more if interest rates increase but could miss out if they fall.
Your payments can go up or down since the interest rate is variable and usually set at a fixed percentage above or below the Bank of England base rate.
Standard Variable Rate (SVR) mortgages
This rate is based on a lender's SVR. The interest rate is variable which means your payments can go up or down depending on the rate set by your lender.
Capped rate mortgages
This is a type of variable mortgage, so your payments can go up or down. The rate of interest is capped, so it won’t go above (or sometimes below) a certain amount set by your lender.
This mortgage product reduces your payments for the discount period below a lender’s SVR. The mortgage rate then increases for the remainder of the mortgage period. For example, if you had a three-year discounted mortgage at 1%, you’ll pay 1% below the SVR each month for 3 years.
After this the interest rate will go back to the SVR. This doesn’t stop the SVR from either going up or down, only what you’re saving on it. This means your payments can increase or decrease each month.
These link your mortgage to a current account or savings account, to reduce the amount you pay interest on. For example if you had a mortgage for £100,000 and had £10,000 in savings, you would only be charged interest on £90,000. These can be ideal for people who have a lot of savings, or self-employed people who set aside money for their tax returns.
First Time Buyer mortgages
There are also mortgages that are designed for first time buyers.
Help to Buy: Equity Loan mortgages
With at least a 5% deposit, you can arrange for an equity loan of up to 20% (or up to 40% in London) of the cost of a new-build home from the government. The equity loan is interest free for the first five years. After that, you will pay a fee of 1.75% which rises each year by the increase (if any) in the Consumer Price Index (CPI) plus 2%. This may be subject to change. For further information, please visit the Help to Buy website.
This product allows you to buy a share in a property and pay rent to a housing association for the share you don’t own. You usually have to buy at least 10% of your home, and you may have the option of purchasing shares in the property in the future but this can vary between schemes.
Of course in all cases you have to look at the booking and arrangement fees, as well as any other charges that might apply, before deciding which product is best for you. You can find out more about fees and charges in our ‘Fees Checklist for First Time Buyers’.
This article is intended for information purposes only and is accurate at the time of publication. It’s always advisable to verify any information you take before relying on it.