Mortgages explained

mortgages explained

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Buying a home is a significant milestone for many people, and for most, it is only possible with the help of a mortgage.

But with so many different types of mortgages and lenders available, it can be overwhelming to understand the process and find the best option for you. In this article, credicus breaks down the basics of mortgages in the UK, providing you with the information you need to make an informed decision.

What is a mortgage?

A mortgage is a loan that is used to purchase a property. The borrower or home buyer agrees to pay back the loan, plus interest, over a set period of time. The property itself serves as collateral for the loan, meaning that if the borrower fails to make payments, the lender has the right to repossess the property.

How does a mortgage work?

When you take out a mortgage, you will typically make a down payment, which is a percentage of the property’s value. The remaining amount is then borrowed from a lender, such as a bank or building society.

The lender will charge interest on the loan, which is the cost of borrowing money. The interest rate can be fixed or variable, and the loan is typically paid back over a period of 25 years, although this can vary.

Each month, the borrower makes a mortgage payment, which includes both the interest and a portion of the loan amount. As the loan is paid off, the borrower gains more equity in the property until the mortgage is fully repaid.

Types of mortgages

There are several types of mortgages available in the UK, each with its own features and benefits. Here are the most common types of mortgages you may come across:

Fixed-rate mortgages

A fixed-rate mortgage is a type of mortgage where the interest rate remains the same for a set period of time, typically 2-5 years. This means that your monthly payments will remain the same during this period, making it easier to budget and plan for the future. After the fixed-rate period ends, the interest rate will usually revert to the lender’s standard variable rate (SVR).

Variable-rate mortgages

A variable-rate mortgage is a type of mortgage where the interest rate can change at any time. This means that your monthly payments can go up or down, depending on the lender’s SVR. There are two types of variable-rate mortgages: tracker mortgages, where the interest rate is tied to the Bank of England’s base rate, and discount mortgages, where the interest rate is a set percentage below the lender’s SVR.

Interest-only mortgages

With an interest-only mortgage, the borrower only pays the interest on the loan each month, rather than paying off the loan itself. This means that the monthly payments are lower, but the borrower will still owe the full loan amount at the end of the mortgage term. Interest-only mortgages are less common and are typically only available to those with a high income or a large deposit.

Buy-to-let mortgages

Buy-to-let mortgages are specifically designed for those who want to purchase a property to rent out. These mortgages usually require a larger deposit and have higher interest rates, as they are considered a riskier investment for the lender.

How to choose the right mortgage

When choosing a mortgage, it is essential to consider your financial situation and long-term goals. Here are some factors to consider when deciding on the right mortgage for you:

Deposit

The amount of deposit you have will affect the type of mortgage you can get and the interest rate you will be offered. Generally, the larger the deposit, the better the mortgage deal you can get.

Interest rate

The interest rate is a crucial factor to consider when choosing a mortgage. A lower interest rate means lower monthly payments, but it is essential to consider the overall cost of the mortgage, including any fees and charges.

Mortgage term

The mortgage term is the length of time you have to repay the loan. A longer mortgage term means lower monthly payments, but you will end up paying more in interest over the life of the loan.

Fees and charges

When comparing mortgages, it is essential to consider any fees and charges that may be associated with the loan. These can include arrangement fees, valuation fees, and early repayment charges. Make sure to factor these into your decision to get a clear picture of the overall cost of the mortgage.

How to apply for a mortgage

To apply for a mortgage, you will need to provide the lender with information about your income, employment, and credit history. They will also require details about the property you wish to purchase, such as its value and location.

To speed up the application process, it is helpful to have the following documents ready:

  • Proof of income (payslips, tax returns, business accounts)
  • Bank statements
  • Proof of identity (passport, driver’s license)
  • Proof of address (utility bills)
  • Details of any outstanding debts or loans

Mortgage rates

Mortgage rates in the UK can vary significantly depending on the type of mortgage, the lender, and your financial situation. It is always a good idea to shop around and compare rates from different lenders to find the best deal for you.

How to find the best mortgage rates for you

To find the best mortgage rates for your needs, credicus’ experts are on hand to help; it’s quick and easy to book a call with one of our specialists, who can take you through the process and ensure that you get the best options based on your requirements.

Key takeaways

A mortgage is a significant financial commitment, and it is essential to understand the process and your options before making a decision. By considering your financial situation, long-term goals, and working with the right mortgage broker, you can find the right mortgage for you and achieve your dream of homeownership.

Property finance made simple.

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