Your guide to mortgages

Whether you’re a  first-time buyerOpens in a new tab,  re-mortgagingOpens in a new tab or looking to buy a property to let it’s essential to know the wide range of options, what they mean and how they can impact you, when it comes to choosing your mortgageOpens in a new tab.

Firstly, there are some basics to cover, such as; how a mortgage works, deposits, surveys and valuations, legal issues and fees.

How mortgages work

Simply put, a mortgage is a type of loan designed to help you buy a house. It is what is known as a secured loan. This means the debt is secured against the property and you pay the lender back over a period of time, typically between 25 – 40 years. When you apply for a mortgage, you have to put down a percentage of the property value, which is known as a deposit. The remaining cost of your home is paid for by a mortgage.

The deposit amount depends on how much you can afford. Generally speaking, a larger deposit usually means a better interest rate and lower monthly payments.  Mortgages can vary based on factors such as mortgage type, term length, amount, and interest rate.

Surveys and valuations

The lender will arrange a valuation, which the buyer typically pays for, to get the value of the house you are buying and to make sure it’s worth the asking price. This is much more basic than a survey and does not supplement an independent, qualified surveyor. You therefore may also wish to have the house surveyed.

A house survey is an expert inspection, usually carried out once an offer has been accepted. A survey helps the buyer understand the condition of the property and any risks or potential problems that will be useful to know before being fully committed to buy the property. A surveyor visits the property, carries out an inspection and prepares a report on what they’ve found, giving buyers an informed decision on their purchase. There are different levels of surveys, each going into more detail and inspection than the previous.

Legal and fees

When you buy a house, you will need to hire a conveyancer. The Conveyancer will deal with all the legal aspects of buying a property, such as contracts, deeds, land registration and Stamp Duty, basically everything needed to carry out the sale of the property.

Stamp DutyOpens in a new tab is paid to the government and is a form of property tax.  Whether or not you have to pay Stamp Duty depends on the value of your property and your conveyancer will go through this with you. Currently, first time buyers in England and Northern Ireland are not required to pay Stamp Duty on the first £425,000 of a property’s purchase price, 5% is paid for any amount above £425,000 up to £625,000.  If the purchase price is above £625,000, the buyer is required to pay Stamp Duty at the home mover rate. Different rates of tax apply if you are buying a house in Wales or Scotland.

The Land Registration feeOpens in a new tab  is a charge to have the legal ownership of the house changed to the buyers name/s. The cost again, depends on the value of the property.

Your conveyancer will explain everything and go through all the associated costs with you.

Additional fees you might incur as part of buying a house include:

Application Fee. Some mortgage products have an application fee. This fee is charged to cover some of our administration costs in considering and processing an application for a new advance. You can usually choose between paying the application fee upfront and adding it to the loan. If you add the fee to the loan, you will pay interest on it.

Scheme Fee. Some mortgage products have a scheme fee. This fee is charged to secure the discounted or fixed rate of interest on the scheme you have chosen to take your mortgage.

Release of Funds Fee. This fee covers the administration costs of sending money electronically to yours, or your solicitor’s bank account, where the funds need to be available (cleared) on the same working day.

All mortgage product related costs will be outlined in a mortgage illustration document.

Mortgage repayment options

There are two ways to repay a mortgage, either on a capital and interest basis or on an interest only basis. These are explained below.

Capital and Interest repayment mortgage

A Capital and Interest repayment mortgage is the most common and well-known type of mortgage. With this type of mortgage, you pay the capital (the money you borrow) and the interest (the charge made by the lender on the amount you owe) back at the same time, over a period of time, typically 25 – 40 years. At the end of the agreed mortgage term, provided you have kept up with your repayments, you own the house outright.

Interest-only mortgage

An interest only mortgage means you only pay the interest due on the amount borrowed each month. Interest only mortgages tend to be more common with buy-to-let mortgages, which you can read more about below. With an interest only mortgage, the capital remains the same throughout the term of the mortgage, because you are only making interest payments. At the end of the mortgage term, you are required to repay the full amount borrowed.

For example, if you borrow 80% of the value of a property, with a 20% deposit, you just pay the interest on the 80% loan, when the mortgage ends or the house is sold, that 80% (Capital Amount) is repaid from the proceeds of the sale.

Types of mortgages

The type of mortgage you take will make a difference to the amount you repay each month.

Fixed-rate mortgage

A fixed-rate mortgage is a set interest rate over a certain period of time, usually 2-5 years, but this can vary.

This helps with budgeting as payments over this time period are consistent and set, meaning no surprises. Fixed-rates can help when Bank of England interest rates rise or the market is volatile, offering security and protection from sudden hikes, though this also means when rates drop, you may not benefit from lower interest rates because the fixed-rate remains the same during the product term.

Variable-rate mortgage

With a variable rate mortgage your monthly payment can go up and down in line with interest rate changes. This differs from a fixed rate mortgage where you know exactly how much you will be paying each month. There are three main types of variable rate mortgages – Standard Variable Rate, Tracker Rate Mortgages and Discount Rate Mortgages.

Standard Variable Rate

This is the basic interest rate lenders use and varies from lender to lender. Lenders set this rate, taking into account the Bank of England base rate. The interest rate can go up or down, during the product term, which means your mortgage payment can change during the product term.  When a mortgage product deal ends, the mortgage usually goes onto the Standard Variable Rate. But you don’t have to stay on the Standard Variable Rate, we can help you to take out a new mortgage product.

Tracker rate mortgages

Tracker mortgages are set above the Bank of England base rate and track the Bank of England base rate for a period of time, the interest will then rise or fall in line with the Bank of England base rate. Tracker mortgages can run for a set time or last the life of the mortgage. The monthly payments are less predictable and can vary subject to market conditions.

Discount rate mortgages

Discount rate mortgages offer a percentage discount of the lender’s Standard Variable Rate for a specific period of time, usually two or three years, but sometimes longer. The monthly payment will rise and fall in line with the Standard Variable Rate. The discount will remain the same in relation to the Standard Variable Rate, for example if the Standard Variable Rate is 6% and the discount is 3%, your rate will be 3%, if it rises to 10%, your rate will be 7%. There is no guarantee that interest rates will fall in line with the Bank of England base rate.

Ownership and buying types

First Homes Scheme

The Government’s  First Homes schemeOpens in a new tab is only available in England and is designed to help local first-time buyers and key workers across England to own their home. If you are a first-time buyer, you may be able to buy a home for 30% to 50% less than its market value as part of the First Homes Scheme.

You can look for new homes in your area that are advertised by developers or estate agents through the First Home Scheme.

Buy-to-Let

A buy-to-let mortgage is for landlords who intend to rent their property out.

These mortgages typically require a higher deposit of at least 20% and are commonly interest only mortgages, though can be repayment. The interest rates tend to be higher than on a residential mortgage.

Later Life mortgage

Later life lending mortgages are designed for those who are 75+ on application or will be aged 75 or over at the end of the mortgage term who may want to raise funds for their retirement.

Our friendly mortgage advisors can guide you on the right mortgage for your circumstances. For more information on mortgages, the different types and their features, including self-build and credit renew mortgages or what may be best for you, you can visit our page or call our five star mortgage team on 01257 235001.

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