Mortgages Explained

The Basics

A mortgage is a loan secured against your property. This means that the lender essentially becomes your landlord and until the debt is repaid they own the property and you are the tenant. Your home may be at risk if you do not keep up with repayments and the lender can request that you give up your home in order to sell your property in order to make its money back.

 

Lenders will usually offer an initial “deal”, which will consist of a competitive interest rate over a set period of time. Once that period comes to an end, the lender will put you on what is called a “standard variable rate”. This is usually much higher than the initial deal you were on.

 

Avoiding the high SVR repayments is the main reason that people switch deals and lenders so often, although sometimes SVR’s can be more competitive than some of the deals on offer, and come with fewer restrictions, so its important to check.

 

The Bank of England base rate gives an indication of the cost in an economy. Although most mortgage rates do not match the base rate exactly, they do tend to go up and down roughly in line.

 

Tracker rates go up and down exactly in line, pegged at a rate a set amount above or below the base rate, so for borrowers with these deals, movements in the Bank of England base rate of more crucial.

 

Fixed rates

These are deals where the interest is fixed at a certain level for the duration of the deal. Most lenders offer a range of 2,3,5,7 and 10 year fixed rates, although it is possible to fix for as long as 25 years.

 

The advantage of having a fixed rate is that you know what your monthly repayments will be, giving you security and the ability to budget.

 

The disadvantage is that if interest rates fall, you will miss out on the opportunity to make a saving on your monthly mortgage repayments.

 

Tracker rates

Tracker rates ‘track’ the Bank of England base rate, by a certain number of percentage points either above or below.

 

With tracker rate deals the cost of your mortgage goes up if the base rate increases and vice versa when the base rate is reduced.

 

When economists expect the base rate to come down, you can expect that banks will introduce a slightly higher premium to these products in order to cover the lending risk.

 

Variable rates

Unlike trackers, these are prone to going up or down a lot more or less than movements in the base rate and at different times.

 

As well as the standard variable rate, lenders offer ‘discounted’ variable rate deals. These often offer big discounts initially, making them look more attractive than other tracker and fixed rate deals, but then borrowers risk above average rises should interest rates begin to creep up.

 

Offset mortgages

Offset mortgages are a relatively new concept that only really works if you have a certain amount of savings. They work by reducing the amount of interest you owe on your borrowings by ‘offsetting’ them against your savings balance. For example, if you have a mortgage for £250,000 and savings of £50,000, you would only be charged interest on £200,000 of you mortgage.

 

Generally, interest rates are set slightly higher than typical standard deals so the general rule of thumb says that this option is only really beneficial to you if you have savings worth at least 10 per cent of you mortgage.

 

Fees

There are many other fees to consider when taking out a mortgage. These include arrangement fees, which lenders charge for setting up the mortgage, valuation fees, to cover the cost of valuing your property and legal fees, to pay the solicitor for doing the necessary legal paperwork when you take out a deal.

 

If you decide to exit or finish a loan before the tie-in period is up you could also be hit with an early redemption penalty, which is usually about 3 per cent of the loan.

 

Overpayments

Most mortgage deals these days allow you the option to over pay on your mortgage. Usually you can over-pay up to a total of 10 per cent of the balance each year.

 

Some deals are very flexible and not only allow for overpayments but also allow for underpayments or payment holidays, for when cash is a little tighter or you have been hit with an unexpected bill.

 

“Drop-lock”
These are a relatively new type of mortgage product available to the consumer. They begin as a tracker loan but allow the borrower to opt into a fixed rate deal if the borrower thinks mortgage rates cannot drop any lower and are at risk of climbing. The borrower then fixes their mortgage rate at a certain percentage rate for the remaining term.

 

The term

Mortgages are usually repaid over a term of 25 years, because traditionally, spreading the repayments over this term brings them to a more affordable level. However these days, it is possible to extend or reduce the term, dependant upon the lenders conditions.

 

Reducing the term means you will have increased monthly repayments, however you will be mortgage free a lot sooner. Extending the term reduces monthly repayments but will increase in the overall amount of interest you pay.

 

Arrears

Failing to keep up with repayments is called arrears. Your lender will normally take your property back off you if you fall more than six months in arrears on you loan.   

 

 

Here at myyorkshirehome.co.uk we understand that selling your home can be a stressful experience and getting the right mortgage advice is essential. That’s why we have expert whole of mortgage advice here with our associate company the mortgage broker.

   

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