Mortgages

A mortgage is a loan secured against a property. They were introduced in the 19^th century to make it possible for people to work towards owning their own house. At the time, the vast majority of people rented which made them vulnerable to unscrupulous landlords. Mortgages allowed them to borrow most of the capital for the property and pay it off over a number of years.

Today the global mortgage market is worth almost $9 trillion. You can take out a mortgage through a bank or building society on almost any type of property, whether you’re buying a new home, plan to rent or are purchasing a commercial property.

How does a mortgage work?

When you take out a mortgage, the bank will effectively be buying the property. You will then live in the property and pay it back.

The provider will look at your personal details and assess your application based on your

income, credit history and other personal circumstances. They will then decide if they will offer you a mortgage and, if so, what terms.

You will usually pay a deposit based on the sale price and pay the rest back. The bank makes money by charging interest. The size of the deposit on offer varies from one organisation to another and your personal circumstances. Generally speaking, the better your credit history, the more favourable the terms you’ll be offered.

Mortgages come in many different forms. For example, you may choose between fixed rate plans or variable rates. Fixed rates offer you a set interest rate which you’ll pay throughout the course of the term. Variable rates move with the market. For example, if wider interest rates fall, so will yours. You may also choose an interest only mortgage which means you only cover the interest rate for the first five or ten years. This can be useful in reducing your monthly payments although it will lengthen the time you have to pay it back. This in turn will mean paying more in the long run.

Mortgage Calculators

Many mortgage providers will have mortgage calculators on their website. These provide an idea of how much money you might be able to borrow. You input your personal details, how much you need to borrow, the term length and deposit size and it will give you an idea of payment options.

These are useful if you’re buying your first home, have an existing mortgage or want to remortgage your property. It gives you an idea of how much you can afford, how much you might be paying each month and if your application is likely to be successful.

However, this will not necessarily be the rate you pay. Each mortgage provider sets a rate depending on your personal circumstances. The calculator merely offers a guide to their average rates.

Mortgage advisors

A mortgage advisor can also be called a mortgage broker. He or she will offer expert knowledge of the mortgage market and can help you find the right policy for you. Some will charge you a fee while others may offer their service free of charge but charge the mortgage provider commission.

The advantage of using a mortgage adviser is that they save you leg work and may have better access. Some providers, for example, may work with certain brokers and offer better deals through them.

The disadvantage is that you may have to pay a fee and there is no guarantee that the broker can get you a better deal. If you’re prepared to go direct or shop around, you may be able to find something better.

There is also no guarantee that a mortgage adviser has your best interests in mind. You are in it for the long haul whereas they simply want to get you into a mortgage so they can earn their commission.

Mortgage agreement in principle

A mortgage agreement in principle is an initial approval for a mortgage. It might also be called a mortgage promise or a mortgage in principle. This is a certificate from a mortgage provider saying that they would, in principle, be willing to offer you a mortgage.

This is useful when you are house hunting. Some estate agents want an agreement in principle before you make an offer. They need to know you can realistically afford the house. It can also help you when making your choice because it gives you an idea about how much you can afford. If you’ve had credit problems in the past, it might also give you the reassurance of knowing you are likely to be approved.

This is not a full mortgage application, but you will have to provide basic details such as name, income, three years of addresses and so on. The mortgage provider will run a credit check to see if they will, in principle, be willing to offer a mortgage. The AIP will typically run for 90 days. If it expires before you need it, you can reapply for another one.

It is important to remember that this is not a guaranteed mortgage offer. For that you’ll still have to go through the full mortgage process and it is possible that they may decide not to offer you a mortgage after all or change the terms.

However, this does give you a good indication that, in all likelihood, you will be able to get a mortgage. During this new application you may also change the price and deposit level, but this may alter your chances of being accepted. For example, if you have already been accepted in principle for a house costing £200,000 with a 20% deposit, the provide may take a very different view if you’re looking for a 10% deposit and a price of £250,000.

Benefits of a mortgage

• Allowing you to buy: A mortgage is vital for most of us who want to get onto the property ladder, except for the very few who can buy a property outright.
• Spreads costs: Even if you are lucky enough to have the money to buy outright, a mortgage might be a good idea to spread the costs, leaving you with plenty of cash to use as you wish.
• Building for your future: Although you’re paying a monthly mortgage fee there’s a good chance this might be less than the average rental price. In addition, you have the comfort of knowing every pound you spend is going towards the day when you will own your house outright, rather than paying off someone else’s mortgage for them.
• Tailored borrowing: You can choose from different types of borrowing, such as fixed or variable rates. A fixed rate sets an interest rate at a certain level. This lets you know how much you’ll be paying right the way through. A variable rate mortgage might move with the wider interest rates. If these fall, you might pay less, but if they rise you could pay more.
• Investment: A mortgage can also provide a long-term investment. The property market tends to rise over time, so once you’re on the property ladder, you are building up that capital which you might be able to put to use elsewhere. The contrasting side of that is that even if your property is going up in value so is everyone else’s. At the end of the day no matter how much a property rises in value it is still only worth one house.

Downsides of mortgage

• Debt: The biggest downside is debt. Many people worry about getting into any kind of debt. Over time you will be paying significantly more than the house was worth if you could have paid cash.
• Foreclosure: The mortgage is secured on your home. If you suffer a financial set back, such as losing a job and get behind on your repayments, the bank may decide to take the house as security.
• Additional fees: There are a number of additional fees which you might have to pay including valuation and mortgage fees. These can add up to a fair amount if you’re not careful.

Major costs of a mortgage

Mortgages come with a number of costs. These include:

• The deposit: You will have to find a large chunk of the property price outright.
• Annual interest rates: The interest you pay on the mortgage.
• Arrangement fees: Your mortgage provider will charge a fee for setting up the mortgage.
• Booking fee: Even applying for a mortgage might incur a price. This might not be refundable even if your deal falls through.
• Valuation fee: The mortgage provider will value your property to make sure it’s worth the amount you intend to borrow. They will pass the costs onto you. These could be anything between £150 and £1,500.
• Transfer fees: Some mortgage providers will charge a fee for transferring the money to your solicitor. This is often nonrefundable even if the deal falls through.
• Mortgage account fee: You might have to pay this to cover the administration costs of setting up a mortgage.
• Late payment fees: If you miss a payment, they might slap you with a penalty.
• Mortgage adviser fee: If you use a mortgage adviser you may have to pay a broker fee.
• Higher lending charge: Not everyone has to pay this. Lenders will likely charge it if you’re using a small deposit. This covers the lender’s costs in taking out insurance in case you can’t pay back the loan.
• Own buildings insurance fee: Some mortgage providers will offer their own buildings insurance policies. If you decide not to take this out, they may charge a fee.
• Exit fee: You pay this to your mortgage provider when you finish paying off the mortgage. If you have already paid the mortgage account fee, it’s unlikely you’ll be asked to pay this.
• Early repayment fees: Mortgage providers don’t want you to repay your mortgage early. Think of all the interest payments they’d miss out on. For this reason, some charge an early repayment fee if you pay off a mortgage early.

What happens when you pay off your mortgage?

When you pay off a mortgage you may be charged an exit fee. From then on you own your property outright. You may choose to sell, remortgage or buy another property.