What is a Mortgage?
A mortgage is like any other kind of loan – you borrow money, and you pay it back with interest over a period of time. But it has one key difference: it’s secured against your home to enable the lender to recover their money.
How much can you borrow?
Lenders should lend responsibly. This means that they should consider whether you can keep up the mortgage repayments now and throughout the term of the mortgage; for example after an initial discount period ends. They should base it on things like your income, expenditure and other circumstances.
Lenders may take into account:
- If you have other money coming in, such as bonuses, overtime or commission. However, since it isn’t guaranteed income, lenders may only take into account half of this money.
- If you already have lots of expenses, such as other loan payments, they will offer you less.
Recently it has become more common for lenders to make an affordability assessment when calculating how much they are prepared to lend you. Each lender will have its own method, but generally they will all try to calculate your disposable income, taking account of:
- Your total income.
- Any credit commitment such as loans and credit cards.
- Household bills and living expenses.
How much can you afford?
Four main things affect what your monthly mortgage repayment will be. These are:
- How much you borrow.
- How long you borrow it for.
- The type of mortgage you have(e.g. interest only or repayment).
- The interest-rate deal that you choose.
Always check the Annual Percentage Rate(APR) and use it to compare mortgages. You pay back more than just the interest on the amount that you borrow – other things may also affect the overall cost of the mortgage, such as administration fees, survey fees and insurance charges. The time at which the credit and other charges have to be paid back affects the rate of the charges and the overall cost to you.
What if you get into difficulties
You might lose your job through redundancy or find yourself unable to work due to long-term sickness. By law, an employer must pay most employees statutory sick pay for up to 28 weeks but this will probably be a lot less than full earnings. After that, you would probably have to fall back on State benefits. If you are self-employed, you have no employer to help so you would have to turn to the State straight away unless you have some savings. This is when insurance to protect you or your family’s income or borrowing can be useful.
It’s crucial to talk to your lender as soon as possible otherwise you could risk losing your home. You may be able to come to an agreement with them, such as a payment plan, and avoid more serious problems.
How long does a mortgage last?
There is no right length (term) to a mortgage. The standard term is around 25 years, and most of us tend to have a mortgage throughout our working lifetime. With the large sums involved, this spreads the cost and makes your monthly payments more manageable.
However, you can choose a different term if it suits you and the lender agrees that you can afford it. If you can afford a shorter term you may have higher monthly payments but pay less in total. With a longer term, you may pay less each month but more in total.
Fees and costs?
While all the mortgage-related costs will be set out clearly in the key facts about this mortgage document that the lender or mortgage broker gives you, there’ll be other costs you’ll need to budget for. These include stamp duty, estate agency fees and lawyers’ fees.
Often you can add certain fees charged by the broker or lender to the mortgage and pay them back over time with your monthly payments. But if you do this, remember that they will cost a lot more in the long run because of the interest. If you want to do this, ask your lender or broker to give you a key facts about this mortgage document on this basis and one without the fees added, so you can compare what you’ll pay. Make sure that you take into account the related costs when comparing mortgage deals, as they could vary significantly.
Insurance?
You can buy many types of insurance with a mortgage. Some types of cover are required as a condition of your loan such as buildings insurance, whilst others are optional and depend on your circumstances. In some cases, mortgage payment protection insurance (PPI) might be a condition of your loan but you don’t have to buy it from your lender.
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Advice
A recommendation about the most suitable mortgage for you made by an adviser who is regulated by the FCA.
Annual Statement
A statement from your mortgage lender, sent every year, showing among other things what you have paid and what you still owe.
Approval in principle
A certificate which some lenders will give you that shows the amount they will probably be prepared to lend you. This is not a guarantee, but can be helpful when signing up with estate agents.
APR
Annual Percentage Rate. This shows the overall cost of a loan, taking into account the term, interest rate and other costs.
Authorised firm
A firm that has permission from the FCA to carry out regulated activities.
Buy-to-let mortgage
A loan you can take out to buy a property which you intend to rent to tenants.
Capital
The amount you borrow to help buy your home.
Capped mortgage
A mortgage that has a maximum limit on the interest rate you’ll have to pay during a special deal period.
Cash back mortgage
A mortgage that comes with a cash sum(often a percentage of the amount you’re borrowing).
Collared mortgage
A mortgage with a minimum interest rate you’ll pay during a deal period.
Deposit
The amount of money that you’re putting into buying a home (not including the mortgage money you’re borrowing).
Discounted mortgage
This has a discounted variable rate of interest for a set period, after which the rate will increase.
Easy repayment charge
A charge you have to pay if you break off a mortgage deal – by paying it back early and/or moving to another lender.
Fixed rate
An interest rate that is fixed(ie it doesn’t move up or down) for a set period of time.
FCA
The Financial Conduct Authority – The UK’s financial services regulator.
Income multiples
The factor by which your earnings are multiplied to find out how much you can borrow.
Interest
The charge made by lenders when you borrow their money.
Interest rate
The figure that determines how much interest you pay. Usually linked with the Bank of England’s rates and can move up or down.
Interest only mortgage
A mortgage where you only pay the interest charges of the loan each month. This means you are not reducing the loan amount(or capital) itself, and this will need to be repaid in some other way.
Key facts documents
Standard documents that all authorised lenders and brokers must give to you to explain their services and details about the mortgage you’re interested in.
Loan-to-value
The percentage of money you want to borrow compared to the cost/value of the property.
Mortgage
A loan which is secured against your property.
Mortgage broker
A mortgage broker helps you understand the various mortgage types and deals available to them. A mortgage broker may recommend a mortgage for you or they may provide you with information to enable you to make your own choice.
Register
An online register of firms that are regulated by the FCA to carry out financial services in the UK.
Remortgaging
The process of changing your mortgage for a different one, without moving home.
Repayment mortgage
A mortgage that pays off both the home loan and the interest at the same time. Make all the payments and the mortgage will be fully repaid.
Stamp duty
A tax which home buyers must pay on properties above a government set figure.
Standard variable rate mortgage
A loan at the lender’s normal mortgage rate – ie without any discounts or deals.
Secured
A mortgage is a secured loan on your home; this means that if you fail to repay it, your lender may be able to sell your home to get its money back.
Survey
A report on the condition of the property you are planning to buy.
Tracker mortgage
A mortgage with an interest rate that is usually linked to a particular rate that is set independently from the lender and moves up or down with it.
Term
The length of your mortgage.
Valuation
A brief inspection, for the benefit of your lender, of the home you hope to buy. This is to make sure they are not lending more than the property is worth and that the property is suitable security for the mortgage, but this will not tell you if it is a good or bad buy. For your own peace of mind, you may want your own survey.