Getting a mortgage can be a stressful time; there is seemingly endless information to take on board, usually coinciding with the added chaos of selling and moving home. It can seem impossible to process all of the information coming your way, learning the jargon alone can become a full time job; however this doesn’t have to be the case. In this article we have presented all of the basic information on mortgages that you will need to get started on making an informed decision.
There are two main types of mortgage available on the market today:
The first being the most common type; the ‘Repayment Mortgage’ this is the standard set up of making repayments on both capital and interest, lessening your debt month-by-month with the ultimate result being full ownership of your own home.
The other type of mortgage; an ‘Interest-Only Mortgage’ is becoming less and less prominent as lenders are becoming more wary of this format of lending With an Interest-Only Mortgage you only repay the interest on the capital borrowed each month, and make no dent in to your actual loan amount.
Firstly, let’s take a look at the most basic of terms you will be coming across on a regular basis during your time applying for, and holding a mortgage.
- Mortgage: A mortgage is a loan on land or property on which interest is due to the lender each month.
- Term: The term of your mortgage is simply the amount of time you agree to make repayments for; the length of time it will take you to repay the loan in full should you keep up to date with your regular payments.
- Capital: The capital is the total amount of money borrowed; this is the amount you will be charged interest on throughout your repayments.
- Rate: Your rate is going to be based on many factors which you will choose from before taking a mortgage (we will cover these options later); this choice will define the amount of interest you will pay on your total loan amount.
- LTV: LTV is the acronym for Loan to Value; this represents the difference between the appraised value of your home at the time of your taking out a mortgage, and the total amount you are borrowing against it. For example if your home is worth £100,000 and you need to apply for a loan of £75,000 to afford it, your LTV will stand at 75% taking in to consideration your deposit amount (see below).
- Deposit: Your deposit is the amount of money you volunteer upfront against the value of your home, this directly affects your LTV, the larger your initial deposit = a lower LTV, which can increase your chances of securing a mortgage significantly. It is almost always a good idea to maximise your deposit as this can decrease interest rates, length of term, and other factors. For example if your home is valued at £100,000 and you have £25,000 to put down and need to loan the remaining £75,000, your LTV will stand at 75%, if your deposit is £30,000 your LTV drops to 70% and so on.
- Origination: This is the division of your bank you will deal with through the initial application stages, usually your representatives such as solicitors, and mortgage agents will do most of the work on your behalf during this stage.
- Servicing: This is the division of your bank that deals with the day-to-day maintenance of your loan; they will be your first point of contact should any issues arise, or if you simply have a query about your account. They will also be able to advise and assist you should you wish to request any changes to your loan agreement.
- Arrears: The dreaded arrears department, in most cases mortgage holders very rarely (if ever) have to deal with the lovely people in the arrears division, but should personal disaster strike and you fall behind on your payments resulting in an arrears amount on your account, these are the people who will advise and assist you in getting back on track with your repayments.
- Underwriter: An underwriter in relation to a mortgage application is basically the boss. He/she will ultimately decide whether or not you get your loan, after carefully preparing and analysing all of your financial circumstances. With a little more information such as is provided here you can get ahead with the basics and craft your application accordingly in order to stand your best chance at a successful application.
- Mortgage Adviser: Mortgage Advisers are commonly used to provide a service similar to the one we are providing here although with the added benefit of specialist training, they will break down jargon helping you to best understand what can be a lengthy and complicated process, as well as acting as a “middle-man” between you and your loan provider. Although instructing an adviser is not a compulsory part of the process, you may find that they have specific skills and know-how that you find useful, particularly in relation to the bank or building society they work with.
This covers the basic terms that are most commonly used in the mortgage industry, and a brief overview of who you will be dealing with throughout the process. Now let’s get a bit more detailed.
Let’s talk one of the most important aspects of your mortgage...
Rates: There are many rates to choose from and they can seem more complex than perhaps they need to, here is our take on each available rate, its’ purpose, and its’ basic pros and cons.
- Fixed Rate: The most commonly chosen option of rates, due at least in part to its’ simplicity. A fixed rate is just that; fixed. Your rate of interest remains the same throughout your repayment term, the amount only changing with inflation.
PROS: Simple to understand, reliable, easily planned for.
CONS: Lacks the potential benefits and rewards of other rates.
- Tracker Rate: Another reasonably simple rate to choose, the tracker rate much like the fixed rate does not change too much under normal economic circumstances, your interest rate will simply track (or copy) the Bank Of England Base Rate of interest, be that up or down.
PROS: Simple, effortless, generally better value for money than a fixed rate.
CONS: Ineffective for people with set spending goals due to its changeability (although minor).
- Offset Rate: A highly beneficial arrangement but exclusive to those with savings, this mortgage offers the same basic principal as a fixed rate mortgage (or variable, but this is less common) but with the added perk of using your savings to offset the interest you pay on the capital you borrow. For example if your home is worth £100,000, you deposit £20,000 leaving you with a 80% LTV, and if you select an offset mortgage and hold £10,000 in savings, you will only pay interest equivalent to a 70% LTV, or £70,000 capital loan. The more you have in offset savings the less interest you will pay.
- Other Variable Rates: There are a wide variety of variable rate loans on offer from a hoard of reputable banks and building societies out there, although most will use some variant or combination of those listed above to work out your final rate. For example many high-street banks offer an initial tracker rate, which is followed in 2/3 years on average with a fixed rate. This can be useful to people who have some expertise in economics and potentially foresee a sharp shift in the Bank of England Base Rate, which can be “beaten” ahead of time with such an arrangement.
There is obviously a lot more to know about mortgages than just the terms and basic rates, but this is where most people become sufficiently overloaded with new information that they instinctively run to a professional mortgage adviser (ignoring the additional fees associated), without giving themselves time to adjust to what is ultimately one of if not the biggest investment of your life.
Take some time to yourself, get to grips with the basics and we promise you that the rest will fall in to place, potentially saving you thousands.