A mortgage is a loan used to purchase a property, usually a home. However, it is becoming more popular to take out a loan against a property that is already owned and this is called a remortgage. This loan can then be used for such things as home improvements, business investments, and school fees. You may have to pay an early repayment charge to your existing lender if you remortgage. However you could save money in the long run.
A mortgage is a long-term loan and is traditionally run for a fixed term, typically 25 years. However most mortgages are flexible enough to allow for early repayment or, if necessary, the term can be extended beyond the original loan period.
Mortgages were once only provided by high street banks and building societies but there are far more mortgage providers available these days. This has led to more competition and a far greater choice of products.
Also known as Capital or Repayment Plus Interest Mortgages. There are various types of Repayment Mortgages but with all of them your repayments pay off the interest and part of the capital (money) borrowed each month. There is a set term in which you will pay off the whole amount.
With Interest Only Mortgages your repayments only pay back the interest on your mortgage. You are responsible for paying back the capital when the mortgage reaches the end of the term. At Cosy Unicorn we make sure people will have the means to pay off Interest Only Mortgages before we advise on taking one out.
Standard Variable Rate or SVR is a type of mortgage where the interest rate can change, influenced by the Bank of England’s base rate. Each bank sets its own standard variable interest rate which is usually a couple of percentage points higher than the Bank of England’s base rate. SVR is one of the more common type of mortgages available with many leading lenders offering at least one, and sometimes offering several with different rates and terms to choose from.
You are most likely to continue onto this type of mortgage after finishing a Fixed Rate, Tracker or Discount Mortgage.
A lender can raise or lower its SVR at any time and, as a borrower, you have no control over what happens to it.
An advantage of this type of mortgage is that you are generally free to make overpayments or switch to another mortgage deal at any time without having to pay a penalty charge. Another benefit is that the interest rate will usually go down if the Bank of England’s base rate goes down. The disadvantage is that the rate can increase at any time and this is worrying if you are on a tight budget. The lender is free to increase the rate at any time, even if the Bank of England’s base rate does not go up.
A fixed rate mortgage means that the rate of interest is fixed for the duration of the deal. Fixed rate mortgages are suitable for those who want to budget and prefer to know exactly what their monthly outgoings will be. You do not have to worry about general increases in interest rates, and can be safe in the knowledge that your payments will not go up during the fixed rate period. An early repayment charge may apply if the mortgage is repaid during the fixed period.
In addition to Standard Variable Rate and Fixed Rate Mortgages there are a few other kinds you may wish to consider before picking the right one for you. You could even combine a few of the options.
Basically a Discount Mortgage offers an introductory deal. This type of loan is cheaper than the Standard Variable Rate at the start of your mortgage. It allows you to take advantage of a discount for a set period of time at the beginning of your mortgage, usually the first 2 or 3 years. When the set period comes to an end the interest rate will be higher than the Standard Variable Rate.
The introductory discounted rate is variable as is the rate that follows it so be aware that, just the same as a Standard Variable Rate Mortgage, the amount you pay is likely to change in line with the Bank of England’s base rate during the duration of the mortgage. Also be aware that the discount offered at the beginning may be very good but you need to look at the overall rate being offered.
An early repayment charge may apply if the mortgage is repaid during the discount period.
With a Tracker Mortgage the interest rate is linked solely to the Bank of England’s base rate. If the Bank of England’s base rate goes up then so will the rate of interest you have to pay. If the Bank of England’s base rate falls then your monthly repayments will go down. By comparison the interest rate on a Standard Variable Rate Mortgage is similarly linked to the Bank of England’s base rate but it can also be changed by the mortgage lender whenever they wish to do so and for whatever reason. With a Tracker Mortgage you are guaranteed that the rate will only track the rate of the Bank of England and not be influenced by any other factors.
This type of mortgage is designed to accommodate your changing financial needs. It may allow you to overpay, underpay or even take payment holidays. You may also be able to make penalty-free lump sum repayments. If you make overpayments you may also be able to borrow back. However, to enable all this flexibility it is only to be expected that the interest rates charged on Flexible Mortgages are going to be higher than for most other repayment mortgages.
Capped Rate Mortgages, similar to Standard Variable Rate Mortgages, offer you a variable rate of interest. The difference is that your rate will have a cap. This guarantees that the rate will not go above a certain amount.
It sound like a great deal but there is a downside. The bank will start the mortgage on a higher interest rate than the normal standard variable rate or fixed rate. This is to cover the bank in case future interest rates rise above the rate they have capped for you.
Also caps tend to be quite high so it is unlikely that the Bank of England’s base rate would go above it during the term of the mortgage.
As the bank is able to adjust the rate on this mortgage at any time up to the level of the cap it is best to think of the cap as the maximum amount you might have to pay each month.
Offset Mortgages are sometimes known as Current Account Mortgages. They link your bank account to your mortgage. If you have savings they will go towards the balance of the mortgage. For example, if you have £20,000 in savings and a mortgage of £200,000 you will have to pay interest on the balance of £180,000. You won’t receive any interest on your £20,000 savings but you will not have to pay interest on £20,000 of your mortgage.
Some Offset Mortgages link only to your current account, while others link to both your current account and savings accounts. Offset Mortgages are available on fixed rate deals or a range of variable rate offers too.
The answer to that depends on your own personal circumstances. If interest rates going up would leave you feeling under pressure it may be best to fix your mortgage to give you peace of mind. Your monthly repayments will not change for the duration of the fixed term so you can plan ahead for that period of time. At the end of your chosen fixed rate term you will normally revert to the lender’s current variable rate but you may be able to choose another fixed rate from the selection available at that time. The downside is that generally you have to pay an early repayment charge to your lender if for any reason you repay the mortgage before the end of the fixed rate term.
Your current income (including bonuses, commission and overtime) will determine how much you can borrow. Some lenders work out how much you can borrow by a straightforward multiple of your income. Other lenders will work out your net income (ie income after deductions such as tax, national insurance and pension contributions) and then allow you to borrow a percentage of that. We will help you calculate how much you can borrow.
Mortgage rates in the UK vary depending on competition in the market and the base rate of interest set by the Bank of England.
The best mortgage rates available to you will depend on your financial circumstances and how much deposit you can put down. The lowest rates of interest are offered to those with the largest deposits, typically over 40% of the value of the property being purchased.
There are some standard fees and charges that will be fully explained to you by your Mortgage Advisor before any decision is made to proceed with a mortgage.
All lenders require a Valuation to be carried out on the property. This is to confirm its current market value rather than find out if there are any structural problems.
It is done for the lender’s benefit as it will confirm the property is adequate security for the loan. It does not involve a detailed inspection but it will show if the property has been over-priced.
A qualified Surveyor or Engineer would thoroughly inspect the property. This is not compulsory but it is advisable if the property has not been well maintained or if you suspect it may not be sound. A buildings survey would not usually be necessary on a newly built house.
It can be quite expensive to have this kind of survey carried out, depending on how detailed the report is. You are responsible for the cost of this, even if the purchase does not go ahead. However, it could show up costly repairs which, if they do not put you off buying the property, may enable you to renegotiate the purchase price.
This insurance is charged by some lenders to protect them in case the property has to be repossessed and its value, due to a fall in property prices, is less than the amount owed on the loan. It is normally only applied if the loan exceeds 75% of the purchase price and is only charged on the amount above that threshold.
It is worth shopping around for a solicitor as their costs are high and can vary considerably. In addition to the charges for their own work they will pass on to you the fees they have incurred on your behalf. These “outlay costs” will vary. For example, the deeds to the property could be registered with the Land Registry or the Registry of Deeds. Ask your solicitor at the outset what the costs for their work and any additional items will be.
Life Cover provides a lump sum if you die during the policy term. This can be used to pay off your mortgage so your family do not have to worry about making any further repayments.
Critical Illness Cover is designed to insure against critical illnesses which could have a severe impact on your ability to earn a living. It should pay out if you are diagnosed with one of the critical illnesses or disabilities listed on the policy. You could then use the lump sum to repay your mortgage or help pay expensive medical costs. Some policies pay out on death during the period of cover if you are eligible to claim.
Accident, Sickness & Unemployment Cover is a short-term income-protection policy. It pays you a tax-free monthly sum for up to 12 months if you are unable to work due to an accident or sickness or if you become unemployed through no fault of your own. Policies are available that protect you against all of these events or just cover you for accident and sickness only, or unemployment only.
This type of insurance is expensive so to reduce the cost you can choose to have a ‘deferred period’. Then, in the event of a claim, you will not receive any benefit for a period of time at the beginning. This deferment could be for 30, 60 or 90 days for all three types of claims. You can also have a longer deferred period of 180 days for accident and sickness cover. To help you decide which deferred period is best you should take into consideration such things as any savings you may have and any sick pay you get from your employer.
You can choose the amount of monthly benefit you wish to receive up to 65% of your gross monthly income. Gross income is your wages before deductions have been taken such as income tax and National Insurance contributions. Of course the higher the benefit you require the higher the cost of the insurance. Cover provided by some companies may be limited due to individual circumstances.
Just as an example, Accident, Sickness and Unemployment Cover typically costs £4.71 a month for every £100 of monthly benefit. This is based on a 36-year-old customer choosing £850 of accident, sickness and unemployment monthly benefit with claims paid after a 30-day deferred period.
The cost of this insurance depends on a number of factors including your age, your occupation and where you live.
A number of companies offer short-term income protection and other products designed to protect you against loss of income.
This covers the structure of the home such as the roof, walls, windows and permanent fittings.
This covers household goods, personal possessions and valuables within the home.
Conveyancing is the legal work involved in transferring ownership of a property or land, usually carried out by a solicitor or licensed conveyancer.
This is usually carried out on your proposed property by the solicitor as part of the conveyancing process. The search checks with the local authority for any plans involving things such as new roads, building developments and public rights of way that might affect the property. Most searches take around two weeks but they can take up to six weeks. You can usually pay extra for a faster ’personal search’ if you need to act quickly.
This is where a borrower can transfer their existing mortgage to another property without incurring any penalty charges. Most mortgages are now portable which means that if you decide to move house you take your mortgage to your new property on the same terms and conditions. This can be advantageous, especially if you originally secured a good fixed rate, a capped, cash back or discounted product and the market has since changed with no comparable deals still available.
Deciding which mortgage to apply for can be a long and difficult process. There are various factors to consider, with mortgage interest rates probably being the most important.
So how do mortgages interest rates work? Generally, the more deposit people have the lower their interest rate will be. It follows that when you are remortgaging the equity in your property is usually higher and so your interest rates are likely to be lower.
Similarly, if you have a lower deposit, you’re likely to have to pay a higher interest rate. It is important to understand what mortgage interest is before learning how it is calculated and how it works.
Mortgage interest is similar to interest on any other loan product. When you borrow money you have to pay it back with interest. The interest rate on a mortgage is very important because you are likely to be paying it back over as many as 25 or 30 years.
Also, the type of mortgage you select, be it Fixed Rate, Tracker, Offset or Standard Variable, will determine the interest rate you have to pay over the course of your repayment plan.
It is calculated quite differently to other types of credit and loans.
The amount of interest you pay on a credit card is calculated on the annual percentage rate (APR). This rate is applied when the interest-free period has expired. On a loan you are more likely to have a fixed amount of interest to pay each month for 3 to 5 years.
With a mortgage you have to start paying interest immediately and the level of interest charged by the mortgage provider can go up or down, mainly depending on the Bank of England’s interest rate. Read on to learn more about how this works.
The Bank of England ‘interest rate’ or ‘bank rate’ is the rate set to other banks by the central bank of the United Kingdom, the Bank of England. It is also known as the base rate as it is the starting point or base for banks to use for those customers who are borrowing from it and also those saving with it.
This means that the rate of interest charged on your mortgage depends on the base rate. It also affects the interest rates charged on credit cards and other loans as well as the interest paid on your savings. Generally speaking, the lower the Bank of England’s base rate the lower the cost of borrowing will be but the return on savings will also be lower too.
On the other hand, when the Bank of England’s base rate goes up the cost of borrowing increases, and the return on savings will go up too.
A variety of factors can affect the bank rate but generally The Bank of England sets the base rate according to its future assessment of the economy. When it looks like the economy needs to boost its spending the Bank of England may lower its bank rate. This encourages spending by making it cheaper for people to borrow money. It also gives less incentive for people to save.
The Bank of England interest rate is likely to fluctuate over the course of a mortgage term, especially if you are paying it off over 25 years or more. With this uncertainty choosing the right mortgage for you and your circumstances can be very difficult.
MMR stands for the Mortgage Market Review. This came into effect in April 2014 to make lenders look in more depth at your ability to repay a mortgage. Most lenders now ask to see your bank statements and might ask you questions about your spending habits to make sure you don’t over-commit yourself financially.
Under a leasehold agreement you are effectively buying the right to live in a property for as long as the lease lasts. You will only be able to make minor changes to the interior of the property. In most cases you will not own any communal parts of the building such as hallways, stairs and gardens in a block of flats. You won’t own the land that your property is built on. Generally speaking, this means you own everything within the walls of your property, including the floorboards and plaster, but nothing outside of it, including the roof.
If you buy a leasehold property you are only able to live there for as long as the lease lasts. When the lease runs out the ownership of the property returns to the freeholder. If there is less than 80 years left on a lease you may struggle to get a mortgage for the property, or to sell it. However, once you have been living in a property for two years you can apply to the freeholder to extend the lease, usually by adding on another 90 years. You will have to pay for this and it can be expensive.
The freeholder will charge you ground rent to live in your property. You will also need to pay service charges to cover the cost of maintenance and repairs to communal areas of the building. The freeholder might manage this or employ a property management company to do it.
One of the risks of owning a leasehold property is that the freeholder may have the right to demand large sums of money to pay for external repairs and renovations to your property. This is particularly common in older blocks of flats so it is important to ask about scheduled and anticipated works before you buy a leasehold property. It is a good idea to check the details on the lease.
If you own the freehold it means you own your property and the land it is built on. This means, subject to planning laws, you can make structural changes to it such as adding on a new extension or landscaping the garden. You can also pass the property on to your heirs when you die.
As the freeholder you are responsible for the cost of any maintenance and repairs to your property but at least you have the freedom to decide when to do them and whether to do them or not.
A mortgage broker is an intermediary who works together with a borrower and a lender while checking the borrower is eligible to obtain a mortgage. The broker gathers the borrower’s details on income and assets, employment documentation, a credit report and any other information required for assessing his or her ability to secure the necessary finance. The broker determines an appropriate loan amount, loan-to-value ratio and the borrower’s ideal loan type, and then submits the loan to a lender for approval. The broker communicates with the borrower and the lender during the entire transaction.
A Mortgage Broker is an expert who will guide you through the home buying or remortgaging process. He or she can show you the best rate products on the market by understanding your circumstances and goals for the future, potentially saving you a lot of money over the course of your mortgage. They make sure by pre-checking your application with lenders that any issues are dealt with quickly and efficiently so that you can move into your new home or obtain your new mortgage as soon as possible.
Cosy Unicorn is an Online Mortgage Broker. Our aim is to provide you with expert human advice whilst guiding you through the mortgage process as efficiently as possible without the hassle of long meetings. Our 24 / 7 service conveniently allows us to work together through your application and always give you a point of contact, anywhere, from any device.