Unless you’re one of the lucky few who have a spare zillion dollars tucked away, a mortgage is likely to be the biggest debt you’ll have in your lifetime. The key to borrowing potentially hundreds of thousands of pounds is to know exactly what you’re getting yourself in for, so we whipped up this article to take you through the essential info, interest charges, and some different types of mortgages and payment schemes available.
The loan is secured against your house which means that if you fail to make your repayments, your bank or lender could seize your property and sell it to recover the money they lent you. Typically, you’ll have to stump up a standard deposit amount of 10% of the property’s value before the bank will give you a loan-to-value mortgage for the rest.
LTV (Loan To Value)
Loan to value or LTV is a term used to compare the value of your mortgage compared to the price of the home. So, let’s say the house you want to buy is £100,000. You’ll need to save up a 10% deposit amount of £10,000 and the bank will give you a 90% LTV mortgage for the rest worth £90,000.
How Much Do I Need To Pay For My Deposit?
The amount of deposit you need to pay will vary depending on the type of mortgage or mortgage scheme you have. For example, if you take advantage of the government’s 95% mortgage scheme, you’ll only be on the hook for a 5% deposit – and then obviously the rest of the mortgage.
How Long Is The Mortgage Period?
Unlike your phone contract, which you’d expect to pay off after a few years, mortgages tend to be repaid over 25 to 35 years. And you can choose one of two options to repay it. Interest-only repayments are when you just pay off the loan interest over 25 years.
Your monthly repayments are likely to be much lower, but you will still have to pay off the full amount you borrowed at the end of the term so make sure you factor that in. With a repayments style mortgage, you will pay off both the interest charges and the mortgage each month.
Your monthly payments are likely to be more expensive, but you will have cleared the entire debt by the end of the 25-35 years. Because your bank or lender has the added safety net of securing the loan against your house, mortgage interest rates tend to be much lower than, say, your credit card.
Types Of Mortgage
Although, because you’re borrowing so much money and typically paying it off over a 25-year period, this still adds up to a fair amount. Interest charges come in one of two forms. A fixed-rate mortgage means that your interest will stay the same for an agreed period of time, usually between 2 and 5 years, although some lenders will go up to 10 to 15.
A variable rate mortgage, you guessed it, will have interest rates that fluctuate over the life of the mortgage. This could be due to changes in the Bank of England’s base interest rate, the lender reevaluating your risk or changes in the economy.
Both have unique pros and cons that should be weighed up against your personal circumstances. Helpfully, these are just two of many options for working out and paying back the interest on your mortgage, so it could be worth speaking to a mortgage advisor to figure out the right one for you.
Depending on what you plan to do with your property, you will need a different type of mortgage. For example, if you plan on renting out the property, you will need a buy-to-let mortgage. Similarly, if you plan on buying and selling the property as a flip, you would want to look at buy-to-sell mortgages, otherwise known as bridging loans.
Mortgage Schemes
There are also a bunch of mortgage schemes available designed to help people get on the property ladder sooner, even if you haven’t yet saved up enough funds. These include the government’s 95% mortgage scheme, where you only need to cobble together a deposit worth 5% of the property’s value, shared ownership, where you buy a percentage of the property and pay a lower rental amount on the rest, and help-to-buy where the government tops up a percentage of your mortgage.
This can be up to 40% for those living in London. Many of these schemes are only available to first-time buyers and may have additional restrictions such as being limited to properties below or above a certain value.
Stamp Duty
Stamp Duty, official title Stamp Duty Land Tax or SDLT, is a tax that applies if you buy a property or land worth over a certain threshold in England and Northern Ireland.
Freehold Vs Leasehold
Freehold is when you own both the house and the land it is on, with no time limit on your ownership.
Leasehold is when you own the building but not the land it is on. A common example of this is when you own a flat in a building. Essentially, you lease the land from the landlord for a limited time (although this could be upwards of 100 years) and may have to abide by some rules set by the landlord like no pets or subletting.
If the market crashed and your house suddenly was only worth £80,000, you would be in negative equity as you still owe £90,000 to your mortgage lender. For more information on mortgages and to start comparing the right options for you.