A mortgage is like any other kind of loan – you borrow money to buy a house, and you pay it back with interest over a period of time. But it’s important to be aware that a mortgage is secured against your home. So if for any reason you can’t repay it, the lender can sell your home to recover their money. The average price of a house in Greater London in May 2020 was £478,900 (source) and the national average was £231,855 (source)
VIDEO- Good, clear introduction to mortgages.
How much can you borrow as a mortgage?
Lenders require proof of income and outgoings such as credit cards, and other debts as well as household bills, child maintenance and personal expenses when deciding how much to lend to you.
They’ll also look ahead to check you can continue to afford your mortgage repayments if interest rates rise, and ask you questions about whether you know about any future changes which could have an impact. For example, if you are planning to retire or have a baby, this could affect your ability to pay your mortgage in the future.
How long does a mortgage last?
Usually 25 years but it can be shorter or longer than this – the quicker you repay the less interest you’ll pay overall.
Fees and costs
There are a range of fees that have to be paid for a mortgage. The most significant is a deposit that needs to be at least 5% of the purchase price. There is also stamp duty which is 0% to 7% of the purchase price of the property. In addition, there are also set-up fees that range from £99-£250, arrangement fees from £0-2,000, valuation fees from £150-£1,500, mortgage account fees from £100-£300, search fees from £250-£300, legal costs from £500-£750, survey fees from £250-£600+, and estate agent fees which are usually 1-3% of the sale price plus VAT of 20%. Older or non-standard buildings may incur even higher costs.
VIDEO- Good video on repayment vs interest only mortgages
Types of mortgage
A mortgage has two parts- the capital (the money which you borrow) and the interest (the charge made by the lender based on the outstanding loan amount until it is paid back).
- Most popular mortgage repayment option and preferred option for most people
- Every month, your payments to the lender go towards reducing the amount you owe as well as paying the interest they charge – so each month you’re paying off a small part of your mortgage.
- Monthly repayments are made for an agreed period of time until the capital and interest has been paid back.
- Your monthly payment only pays the interest charges on your loan – you’re not actually reducing the loan itself. Your monthly payments will therefore be lower than an equivalent repayment mortgage.
- So while you’ll be paying out less than with an equivalent sized repayment mortgage, you will still owe the amount you originally borrowed at the end of the mortgage term.
- You must have a suitable repayment plan that will involve paying regularly into savings and investments and could include pensions and other properties.
- Lenders review value of the mortgage at least once during the mortgage term.
Buy to let mortgages
- A buy-to-let mortgage is a loan you take out to buy a property which you intend to rent to tenants. The mortgage is secured against the property to be let.
Sharia-compliant home purchase plans
- Helps people buy their homes in a way that doesn’t involve interest.
- They are complex products: a bank, building society or other provider offering the plan will buy the property and become the legal owner, but with the agreement that at the end of a fixed period the property will be bought from them for the same price they paid. The property can still be sold by the owner.
- Since the bank or building society owns the property, the buyer will take out a lease to rent the home from them.
- The monthly payments will therefore be a combination of rent and of money that goes towards buying out the stake from the bank, building society or other provider. No interest is payable.
Types of interest rate
There are lots of different types of interest rate deals you can get on a mortgage but broadly you can either choose to fix the interest rate for a certain period, or let it vary in line with market rates.
VIDEO- This 4 minute video clearly breaks down the Help to Buy scheme
Help to Buy – This is a Government-run scheme designed to help people get on the property ladder. There are four versions of the scheme.
1. Mortgage guarantee- you can buy any property under £600,000 with a 5% deposit. The Government then offers a mortgage guarantee for the remaining 95%. It’s open to both first-time buyers and home movers for new-build and older homes in the UK. Houses cannot be sub-let or be a second home.
2. Equity loan- With this scheme you buy your newly built home with at least 75% of the cost met by a mortgage and a deposit of at least 5% of the purchase price. The rest (20%) is paid for by the government through an equity loan that is interest-free for first 5 years. Help To Buy equity loans are open to both first-time buyers and home movers on new-build homes worth up to £600,000. You won’t be able to sub-let your home.
3. Shared ownership schemes- provided through housing associations. You buy a share of your home (between 25% and 75% of the home’s value) and pay rent on the remaining share that the landlord still owns.
You’ll need to take out a mortgage to pay for your share of the home’s purchase price. Shared ownership properties are always leasehold. You can only buy through shared ownership if:
-your household earns £60,000 a year or less
-you’re either a first-time buyer or you used to own a home but can’t afford to buy one now -you rent a council or housing association property
This tool highlights how as your rent decreases as your percentage of ownership increases.
4. NewBuy: lets you buy a newly built home with a deposit of only 5% of the purchase price. New homes must be a new building being sold for the first time and priced at £500,000 or less. They are not allowed to be second homes or buy-to-let properties, and must be built by a builder taking part in the scheme.