Real Estate

Guide to mortgages

A mortgage is a loan that is guaranteed by a property. At its most simple that means, if you can’t pay back your loan the lender can force you to sell your home so they can get their money back.

Typically you can borrow three to three and a half times your income, or two and a half to three times the joint income of you and your partner. These are known as income multiples.

The amount you can borrow will also depend on the value of your home. Most lenders will allow you to borrow up to 95% of the value of a property. The loan rate is set by the lender, and is called the standard variable rate (SVR).

Always shop around for the best rates. However you must be careful to ensure you are comparing like with like. To do this check the annual percentage rate (APR) of the loan. You also need to bear in mind that the interest payments in respect of fixed rate mortgages can rise steeply once the initial ‘fixed’ period ends. Therefore your planning should always include the possibility of sharp changes to future interest payments.

There are two basic species of mortgage, repayment and interest-only. The option you choose is determined by the way you want to repay your loan. Depending on the type of mortgage you choose, your monthly repayments will be made up of either capital and interest or interest only.

A repayment mortgage requires you to pay back both interest and loan capital, so at the end of your mortgage period there is no money owing. With a repayment mortgage you make the repayments monthly for an agreed period (the ‘term’) until you’ve paid back all the loan and the interest. A typical term is initially 25 years, although it can be any amount of time – the shorter the term the higher your monthly payments but the less you’ll pay overall.

An interest-only mortgage allows you to repay just the interest on your loan, but you have to take out an investment that will mature to pay off the outstanding amount. With an interest only mortgage you’ll normally also have to pay into another savings or investment plan that’ll hopefully pay off the loan at the end of the term.

A lender might require you to take out life insurance to pay off your mortgage should you die. You can choose from basic ‘term assurance’ with low monthly payments that stop when your mortgage term ends. You can also get insurance to protect your income or just your mortgage payments if you become ill or disabled, or lose your job.

If you cannot meet your mortgage payments you should contact your lender as soon as you realise that you have a problem. Although your mortgage is secured on your home, lenders see repossession as the last resort: they stand to make more money from your mortgage than the sale of your home.

Lenders will work out a plan with you to reduce your payments for a time or stop them temporarily, and work out a new term for your mortgage. It is wise to remember that your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it.

About the author
John Mussi is the founder of Direct Online Loans who help UK homeowners find the best available loans via the website.