Need to know: mortgages

Are you ready to take on a mortgage but overwhelmed by percentage rates and jargon? The Mix takes the complication out of mortgages.

Hmm, can I afford this place?

What is a mortgage?

Basically it’s a whopping great loan to buy a property. Like any other type of loan, you’ll pay interest on your monthly payments. It sounds simple but there’s a huge range of different types of mortgage out there as well as different methods of paying it back, so it can be confusing.

How much can I borrow?

Most mortgages lenders require at least a 10% deposit. Then the amount you can borrow is usually calculated at three and a half times your gross monthly salary (before tax) – you can work out roughly how much you can borrow using a mortgage calculator. Some lenders, however, base their calculation on affordability, so it’s always best to ask.

I’m self-employed, can I get a mortgage?

If you’re self-employed, the amount you can borrow is based on your income after tax (net income). You’ll typically need at least three years’ worth of accounts and may be restricted to certain lenders.

How do I repay my mortgage?

As your loan is made up of the amount you want to borrow (the capital) plus interest one of the most important things to consider is how you pay this back. You have two options:

• Repayment mortgages: Each month you pay off a little of the capital, as well as interest on the loan. At the end of the term the mortgage is cleared. It’s the easiest to understand and least risky mortgage type.
• Interest-only mortgages: With this type of mortgage you only pay the interest on the loan. At the end of the mortgage term you’re expected to repay the capital. It’s totally up to you how you save for this – investment, inheritance or saving in a high-interest account – but if you’re relying on investments it takes on a whole new element of risk.

Different types of mortgages?

Because of the size of the loan there isn’t a one loan fits all. The range of mortgages out there is huge, but the four main types include:

Fixed rate

These fix the rate of interest you pay – usually for the first two to five years – although longer-term deals are available.

• Pros: You can budget accurately without having to worry about a sudden increase in your monthly payments if interest rates rise.
• Cons: Once the fixed term comes to an end, your monthly payments will return to your lenders’ standard variable rate (SVR) – the lenders own rate of interest – which will be higher. If you don’t want to pay this you can take out another fixed rate mortgage, but you’ll be charged a fee.

Variable rate

There are several kinds of variable rate mortgage deals, but the most common is known as a ‘base rate tracker’. This ‘tracks’ UK interest rates (known as the base rate) usually by a certain margin above. Again, this could last for a designated amount of years, or the life of the loan.

• Pros: Great when interest rates are low.
• Cons: Not so great when they go up.

Capped rate

This literally ‘caps’ the rate you pay. So you’ll always know the maximum amount, but your payments will fall if either the base rate or the lender’s SVR drops – depending on how the mortgage is priced.

• Pros: Your payments will be lower if the base rate or lenders SVR drops.
• Cons: You’ll have to budget for the maximum level.

Discounted rate

This is when you will receive an initial discount off the lender’s SVR for an agreed period of time.

• Pros: The discount is a welcome financial relief while it lasts.
• Cons: Unlike the base rate, your lender can alter its SVR as and when it wants to.

There are also newer kinds of mortgages that promise to save you money in the long run, such as flexible, current account and offset mortgages. However, you generally have to pay more for these mortgages.

It’s a good idea to enlist the help of an independent mortgage broker. Some charge a fee for their services, others are on commission, but don’t let this put you off. Not only will they be able to talk you through the mortgage minefield, but they probably have access to the best rates too.

What else will I have to pay?

On first glance, some deals may appear too good to be true, so it’s important to look out for the fees charged by the lender. These include booking and set-up fees, as well as early redemption penalties. Also look out for any special clauses.

What happens if I can’t pay my mortgage?

Finding yourself skint and unable to pay your mortgage is undoubtedly a gut-wrenching situation. But as stressful as this may be, please don’t ignore it. See our article about mortgage arrears for help.