Mortgages
If you have any questions, wish to make an enquiry or start the process of remortgaging or equity release. You can speak with our partner at TMG Direct
Mortgages and How You Can Get One
The current state of interest rates has helped many to get on the housing ladder, although this has been countered by the increasing price of housing over the past 10 years. Mortgages are likely to be a cause of concern over the next couple of years as the Bank of England is finally talking about raising interest rates. If you’re thinking about getting a mortgage, here’s what you need to know.
What is a mortgage, exactly?
A mortgage is a secured loan on a property. Essentially, by securing it, you promise (pledge – the meaning of mortgage) to give the lender your property (or the amount remaining on the mortgage) should you fail to make repayments on the loan. This gives the lender collateral, so mortgages tend to have lower interest rates than unsecured loans. Although they can in certain situations, on the whole as house prices don’t tend to drop after you buy them (unlike a car, for example), the lender stands a good chance of getting its money back no matter what happens.
For this reason, you usually pay a deposit on the house. This is typically 5% to 25%, depending on the mortgage requirements. This covers the difference should the mortgage provider have to sell the property, and it reduces the amount of risk the provider takes.
How long do mortgages last for?
The average mortgage lasts for 25 years, although repayment schedules can vary between 5 and 30 years. There are 40- and 50-year mortgage options on the market, but these push the debt well into your retirement. The longer the repayment schedule is, however, the more in interest you end up paying, so a longer mortgage is more expensive.
This is because you’re paying off less capital each time, and the mortgage has longer to accrue interest. While the initial repayment seems more affordable, you have to consider your finances for the long term.
What do I need to consider?
There are mortgages that start off as a fixed-interest mortgage, so you’ll usually pay a set amount each month. However, this is sometimes calculated as a fixed rate above the base rate, and this is called a tracker rate (because it tracks the base rate). The Bank of England base rate sets the cost of borrowing for banks, so they often charge a set rate above that so that they reduce their risk and ensure their loan pays a certain amount over the intervening years. Essentially, the cost of a mortgage is calculated as:
- Base rate (if applicable): 0.25% (as of October 2017)
- Lender’s rate: up to 5%
- Arrangement fee: up to 2% of the value of the mortgage, although it’s often around £1,000 to £2,000
This hasn’t been an issue over the last 8 years, as the Bank of England base rate has been below 1% since March 2009. Historically low rates have made access to borrowing easier, but that means not everyone is prepared if the base rate does rise. Not all mortgages initially take into account the base rate, however.
If the base rate rises by 3%, which is fairly normal, the average family in a £250,000 home borrowing £225,000 could be paying up to £500 per month more for their mortgage. That’s something to consider when looking at future affordability.
What further complicates the overall price is that most mortgages are fixed at a much lower rate for the first few years. These fixed rates can last for 2, 5, or 10 years. Those with 10-year fixed rate mortgages will typically pay higher interest rates initially than those with 2-year fixed rates. Once the fixed-rate expires, they move onto a new variable rate, which is usually much higher than their fixed rate. At that point, many choose to remortgage. The arrangement fee may make this option prohibitively expensive, however.
How do you get the best interest rates?
Getting the best interest rates for mortgages usually involves a lot of comparison shopping. Having a low loan to value rating (LTV) is good, as this reduces the risk to the lender. Loan-to-value refers to the value of the home vs. the amount the mortgage is for. If you have a lot of equity in the house, you’ll find that the loan rates drop substantially.
What about interest-only mortgages?
Once a staple of the buy-to-let market in particular, interest-only mortgages are much harder to come by. This is because those taking out a mortgage must show how they’ll repay the mortgage when the term ends, and this usually means having the cash on hand or showing that you have some sort of investment that you could sell to cover the cost.
They’ve essentially gone from being a major source of borrowing for those less able to pay to become exclusively for better-off professionals with significant investments. This is primarily because the then-Financial Services Authority deemed these investments high risk and criticised banks for offering them to people who couldn’t conceivably repay them when they matured.
How do you apply for a mortgage?
Applying for a mortgage typically involves selecting a relevant mortgage provider, filling in a few forms and then selecting a relevant option. Alternatively, you could use a mortgage broker or an online aggregator to select a variety of possible mortgages suitable for you.
You need to know:
- How much the mortgage is for
- The value of the house
- Your deposit
Your lender will contact you and ask you a number of questions, typically asking about your finances and asking for proof of identity, income and deposit. In addition, you’ll likely have a number of questions about your future financial plans and your income will be subject to stress testing – this should show whether you can still afford the mortgage should something major happen in life, such as a baby. You’ll need to pass a credit check as well.
The provider should break down the costs for you in a mortgage illustration document, and you’ll have 7 days in which to make comparisons and accept the offer. At this point, the offer can only usually be withdrawn if you’ve provided false information or if you take longer than 7 days to say yes.
Getting a mortgage can be a stressful affair, as it means you need to know exactly how your finances stack up and reveal that information to a provider. However, if you’re organised and ready to face an in-depth examination of your finances and potential future finances, you can hopefully get a good deal on your new house.
Who can you speak to about this?
As with all financial products you have a choice of searching the market yourself or speaking to a qualified adviser to help you wade through all the possibilities.
Often going to the high street yourself takes a lot of time and if for any reason you do not qualify or don’t get accepted for the loan or mortgage you are looking for then you have to start all over again from scratch.
The alternative is to speak to a qualified adviser who will take all your details in one go and then look for the best possible deal for you. If for some reason you do not get accepted for the loan or mortgage you are looking for then it is up to them to try to find an alternative.
We have partnered with TMG Direct to offer this help.