The basics of a mortgage might look a little daunting at first, but if you do a bit of research, it all becomes clear quite quickly.
A mortgage is basically a large, long term loan that is secured (guaranteed) on the property it relates to.
Now, unfortunately, the ease of securing a mortgage often reflects the economic mood of the moment. Thus, at the time of writing, a dramatic slowdown has occurred because banks and other financial institutions are not prepared to lend people money for houses. Simply put, the credit crunch means that there is no cost-effective money around for individuals, or banks.
As to what amount of mortgage you can get, this depends on a number of factors, including your income (or you and your partners’ income) and the amount of the money (deposit) you can put down. Usually, most lenders will give a multiple of three times one salary, or two and half times two salaries, or some variation thereof.
Again, in the good old days, 100% mortgages (no deposit needed) were freely available, especially for first time buyers. And even 125% mortgages were available; so you could borrow the price of the house, plus 25% extra.
It’s doubtful whether these easy term mortgages will be seen again for many decades and now it’s not uncommon for lenders to provide a maximum of only 90% mortgages (10% deposit needed), with even some insisting on a 20 to 25% deposit.
But, what goes around comes around and most experts believe that the mortgage market will free-up in the medium term.
Right, so what type of mortgages are available? The two basic choices are repayment, or interest only. And they are as they sound. Repayment is a straight paying back of the capital sum lent plus interest, with mostly interest being repaid first, then mostly capital as the interest decreases. With interest only, you only repay the interest calculated on the capital sum, and you take a financial package (such as an ISA, pension policy, or endowment), to repay the capital sum at the end of the term of the mortgage.
The rate of interest is based on the standard variable rate (SVR) and this goes up and down, depending on the Bank of England base interest rate which can change month by month.
So they are the two basic types of mortgage, but there are a large number of variations within those categories, and much focusses on the interest rate being offered.
Discount mortgages are a good idea for someone trying to get a cheap start, as they can reduce the interest rate by one to 1.5% below the SVR. But, be warned, they return to the SVR rate after about two years.
Fixed rate mortgages don’t change, which is good when base rates are high, but not so good when base rates are low. Also, there might be a time limit to the fixed rate mortgage, which means you could get a nasty shock when that’s over.
Tracker mortgages track the base rate and are independent of what the lender might set. This type of mortgage is for those that are betting the rates will remain low, or go lower.
Capped mortgages are basically fixed rate mortgages with a get-out clause if the worst happens and rates fall dramatically.
Offset mortgages combine your mortgage with what’s in your current account, allowing for a lower rate of interest should you have surplus cash hanging around.
Flexible mortgages are for those that have fluctuating incomes, meaning you can repay at different levels throughout the year, although the interest rate might be a little higher to allow you this flexibility.
Right, you pays your money and you takes your choice. There’s a mortgage to match everyone, just keep an eye on the rate you are being asked to pay.
