Everything You Need to Know about Mortgages in Spending

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Mortgages can seem confusing but they don't have to be!

Mortgages are loans that you can get from a bank or building society to pay for property. They come in many forms and are meant to be tailored to your lifestyle but a mortgage is a major commitment, you need to make sure you are ready and are getting the right one for you.

The Mortgage Checklist

The government has given home-buyers a list of vital checks to help them find the right mortgage for them.

Ask yourself...

  1. How much can I afford to borrow?
  2. How can I tell which mortgage rate is best for me?
  3. What is the best type of mortgage for me?
  4. How should I repay it?
  5. Can I make lump sum payments to reduce the size of the loan?
  6. Are there any redemption penalties?
  7. Does this mortgage come with compulsory insurance?
  8. What other charges will I have to pay?
  9. What happens if I can't pay?
  10. What about the small print?

There are lots of different kinds of mortgages, so it's good to explore all your options before committing yourself to any deals.

You can get advice on mortgages from the Money Advice Service, which explain the different options available and you can also visit an Independent Financial Adviser (IFA) who can provide you with financial info which is relevant to what you can afford and your lifestyle. Speaking to an IFA is free and they should be able to tell you the best deal out there for you.

Additional Costs

Before finally deciding how much to spend on a property, you need to be sure you will have enough money to pay for all the additional costs.

You May Have to Pay For...

  • Stamp duty
  • Fees charged by the mortgage lender or someone who arranges the mortgage (e.g. mortgage broker)
  • Solicitor’s fees
  • VAT
  • Removal expenses
  • Any final bills, for example, gas and electricity, from your present home which will have to be paid when you move

You should also take into account the running expenses of the property you wish to buy, which may include:

  • Heating bills
  • Council tax
  • Insurance - building, contents and life
  • Repairs

You should be aware that you may still have some costs even if your bid for a property is not accepted, for example, you may already have paid for a valuation and/or survey. Also if your solicitor has started any legal work you may also have to pay for the work that has been done.

Mortgage Rates

You have to pay interest on any debt, and mortgages are no different. Mortgage lenders offer different interest rates and also different types of interest rate deals and these tend to move in line with the Bank of England base rate, which is reviewed monthly. 

You have two important decisions when choosing an interest rate deal: whether to choose a fixed or variable rate mortgage, and whether to choose a short-term deal or one over a longer term. Both have advantages and disadvantages and the most appropriate for you will depend on your particular needs and circumstances.

Variable Rates

This means you pay the going rate on your loan. The mortgage rate changes every time interest rates change or, as in most cases, the overall effect of any interest rate changes is calculated once a year and payments are altered accordingly.

Whatever kind of mortgage you start with, it is likely to change to variable rates at some point.

Fixed Rates

The interest rate is fixed for the period agreed - often two to five years. These are ideal for budgeting or if you think rates might increase. You do not benefit if rates fall, and will face penalties if you try to quit.

Very low rates may tempt you, but they can be used to trap you into paying over the odds. Check how long you will have to stay with the lender before you can switch without penalty. 

Capped Rates

These are fixed, but if rates fall you pay the lower rate. Such deals can be good for budgeting.

Cash Back Deals

This is when lenders offer money back if you take out a particular product.

Discounted Rates

Under this type of mortgage the borrower is offered a discount off the lender's variable rate. The rate paid will fluctuate in line with changes in the variable rate. The discount applies over a set term.