General Information on Mortgages

A mortgage is a loan which is usually for the purchase of a home but it could also be used for improvements to your home . Most mortgages are for 25 years but it can be for a shorter or longer period depending on your circumstances and your agreement with the lender.

The loan is secured against your home and this means that if you do not keep up the repayments or if you do not have sufficient to repay the capital at the end of the term (Endowment, ISA, Pensions mortgage) the lender can sell your home to get the money back from you.

As a first step when you apply for a mortgage, the lender or mortgage broker will provide you with a document detailing the key facts about their mortgage services. Lenders will usually only sell their own services but mortgage brokers can offer mortgages from one or more lenders. At this stage you will be made aware of fees for their services.

How much can you borrow? Use a loan calculator to work out how much you can afford to repay each month, taking into account your current and foreseeable outgoings. Lenders may offer you up to 100% of the valuation (or more) if they believe you can afford the repayments. But the higher the percentage of the value of the property you are asking to borrow, the higher will be the risk to the lender. You will usually be asked to pay a premium for this.

In general the offer will not exceed about three times your income, or about two-and-a-half-times the joint incomes for a joint mortgage. The offer generally depends on your net income (how much you have left every month after your outgoings). The lender will want proof of income. If you are not able to prove your income (with payslips, P60 or audited accounts), you may still be able to get a mortgage, but the interest rate will usually be higher because of the increased risk, and the lender may offer a mortgage of no more than 75% or 80% of the value of the property.

Although there are many types of fixed and variable and mix-and-match interest rate deals offered with mortgages, there are two ways of paying the loan back: regular (or flexible) payments of both interest and capital, or interest only with a lump sum at the end of the term of the mortgage. Or you could go for a combination of the two, e.g., start of with an interest-only mortgage and then convert to a repayment mortgage.

With interest-only mortgages, as the name suggests, you pay only the interest on the loan every month. At the end of the agreed period of the loan you would pay off the capital to the lender in a lump sum. You would normally have to put regular amounts into a savings or investment account (ISA, endowment, pension mortgages) that would raise enough to meet the final payment. Unless you have reduced that capital (by paying some off some of the capital during the term of the loan) the amount you owe at the end of the mortgage will be the same as at the beginning. There may be early repayment charges if you do pay off some of the original loan. You should be aware that - depending on how these savings and investments have performed on the stock markets - the lump sum from these savings and investment products may not cover the amount you owe and the lender can sell your home to recover the loan.

With repayment mortgages, the monthly payments to the lender are higher because you pay both the interest on the loan and the capital (original loan amount) every month. This means that as the loan reduces there should be less interest to pay each month on the loan, until the end of the term when the loan should be completely settled. If interest on your loan is calculated on a daily or monthly basis then the lower interest payments will be seen immediately. If interest is calculated on an annual basis then the benefit will be gained from the start of the next year. Settlement of the loan is guaranteed if you have kept up with all your repayments.

If you are self employed or have income which can very from month to month, then you could consider a mortgage which lets you make more or less payments in some months, or have payment-free months. Many types of mortgages give you this flexibility but the cost of flexible mortgages could be more.

If you want to pay off your mortgage sooner, without penalties, you can do this with some types of flexible mortgages by overpaying in some months, or you could try an offset mortgage which links your savings amount to your mortgage debt amount. You then pay interest on the difference. Although it does not affect the monthly repayments, it does mean that you pay off your debt sooner.

With a buy-to-let mortgage the loan is for a property you intend to rent for an income. The property you intend to buy is usually used as security for the loan. But you can use your existing home as security if there is little or no mortgage on it, or if there has been an increase in value which exceeds the mortgage such that the extra value can be used for a second charge on the new property.

As with a standard mortgage you can pay back the loan in two ways, with an interest-only mortgage or a repayment mortgage. Most lenders will usually try to ensure that the rental income will exceed the interest payments by at least 25% to 30%. However you can find lenders who will lend at 100% of rental income if you pay a fee. However this leaves you no room for error if there is a rental income shortfall.

You should be aware that if you have a variable rate mortgage and the interest rate increases, your outgoings will increase. Should you sell the property for a profit, the profit may be subject to tax. Depending on the circumstances, buy-to-let mortgages may not be regulated by the FSA.