How Does a Mortgage Work?
Let’s take things back to basics. Here is a step by step guide to the mortgage process.
But the thing is, there is more than one type of mortgage. In this blog, we’re going to go through different types of mortgages. As well as guide you through how a mortgage works. Here are some examples of different mortgage options on the market.
A mortgage is a loan you take out to help you buy a property or land. For most lenders, you will have to put down a minimum of a 5% deposit and the rest of the money you need will form the loan. Typically, most mortgages are taken out for a period of 25 years (Some mortgages may have longer or shorter terms) and the mortgage loan is secured against the value of your property.
You will pay back this loan monthly over an agreed period of time. You will also pay interest on the amount you have borrowed alongside your monthly payments. This is either a fixed interest rate or a variable rate of interest. Fixed interest rates are unchangeable payments you agree to. Whereas variable interest rates will fluctuate depending on the current interest rate set by the lender.
The interest rate of your mortgage is something you have to consider when planning your monthly payments. It’s important that the mortgage applied for is affordable and Lenders have strict criteria concerning affordability.
With affordability being a key consideration it is important that you work out your outgoings. Include financial commitments such as HP, loans or credit card bills, tax, food bills, and household bills. These are all things your lender will consider when calculating your affordability when you apply for a mortgage. Mortgage lenders require proof of your monthly income and specific expenditure information. As well as if you have any debts to repay.
Typical interest rates are the lender’s variable rate (often known as the standard variable rate), fixed rates, tracker rates and discounted rates.
Variable-rate mortgages. A variable-rate is set by the individual lender. As the name suggests, with a variable rate mortgage your interest rate and mortgage payment could go up or down from month to month. If you choose a variable interest rate, this can be beneficial if interest rates drop.
Fixed-rate mortgages set the interest rate at a fixed amount for a period of time. This is normally a period of 2 to 5 years, however, there are longer-term fixed rates around sometimes up to 10 years in term. The advantage of the fixed-rate is a known monthly payment, however, if interest rates drop below your rate, then you will be potentially paying more than you need to.
Tracker rates, follow the Bank of England base rate. The rate could be described as “base rate +2%, this means that your interest rate would be the Bank of England base rate +2%. However, if the Bank of England base rate changes, the rate you pay will change, up or down.
Discounted mortgages follow the lender’s standard variable layer rate. The lender sets the variable rate and typically when the Bank of England changes the base rate, up or down. Then the variable-rate will generally follow suit plus or minus a margin for the lender. This again means that the monthly payment can change up to or down.
With most mortgage deals, all your rate will revert to the lender’s variable rate when your initial scheme comes to an end. So, as an example, if you have opted for a two-year fixed rate, at the end of the 2 year period your mortgage would revert to a variable rate.
Depending on your mortgage deal, you may be able to transfer an existing mortgage loan onto your new property. This will depend on the value of your current property and your new house. You may be asked to take out more money to afford your new property. But, you may also be able to pay off your existing mortgage by scaling down in home size.
There are three main types of mortgages:
● First-Time Buyer – This a mortgage specific for people taking their first step onto the property ladder. If you’re buying your first home, this is the mortgage that you will benefit most from.
● Remortgage – Remortgaging can be a great way to save money and find a better interest rate for a similar mortgage type where there is no additional borrowing. It is always important to consult a mortgage advisor when you consider remortgaging. This way you ensure you find the best deal for you based on your needs, circumstances and preferences. You may have to pay an early repayment charge to your existing lending if you remortgage.
● Home-Mover – This type of mortgage helps you to move from one property to another. For people who have already brought their first home.
Whenever considering which mortgage is right for you and your circumstances, it is vital to consult a mortgage advisor. For more information from our mortgage experts, get in touch with our team today:
“A MORTGAGE IS A LOAN SECURED AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR ANY OTHER DEBT SECURED ON IT.”