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Mortgages: What You Need to Know

Apr 2, 2013

Crucial to understand before you even think of buying a house, a mortgage is one of the most long term financial commitments that anyone can make. The current housing market means that banks and other lenders are cautious about issuing high loan to value mortgages, and chances are you’ll have to pay a high deposit, and accept that property prices are unlikely to significantly increase in the next few years and bump up your equity. Before considering these factors, though, it’s necessary to briefly review the essentials of a mortgage.

A mortgage loan is a secured loan, which involves a bank or other lending giving you money towards your purchase of a property; the house then acts as collateral, which means that if you cannot make your repayments, the lender can make their money back of its value. Mortgage loans are based on the assumption that you can pay off monthly amounts towards the loan - how long you have to repay a mortgage can vary depending on your credit history and deposit.

Lenders will also charge interest on your mortgage, which can include standard variable payments that can go up and down, as well as fixed rates, which can be low, but can then drop below inflation and real wages. You can, however, renegotiate your mortgage at different times, or try to get a better mortgage from another lender if they’re willing to take over the costs of the loan from a rival.

Some buyers prefer fixed rate mortgages, which is typically linked to the base rate of inflation; at the moment this is 1.5 per cent, and is being kept low by the Bank of England to try to stimulate lending and borrowing. Tracker rate mortgages are directly tied to this rate. Variable rate mortgages change depending on the lender, but can be more flexible, and you have the option of switching to a fixed rate for a longer term repayment plan.

Always look to settle on a mortgage that’s suitable for your financial needs, and remember that you’ll need to pay a deposit - banks are wary about issuing large loans where the buyer only needs 5 to 10 per cent of their own money; in most cases you might be paying 20 per cent upfront. However, the Government have recently launched a Help to Buy scheme that will offer buyers an interest free loan for 5 years, which should allow a 5 per cent personal deposit to be increased to a 20 per cent loan. The Government are also stepping in as guarantors on mortgage loans for those that have poor credit and not enough funds for deposits.

What kind of interest rates you’ll be offered on your mortgage will depend on your credit score, and whether you’ve repaid loans in the past. If you have a poor credit rating, you’ll likely be viewed as more of a risk for lenders, unless you’re willing to front a larger deposit for a property. It’s worth trying to improve your credit score by paying off any outstanding loans before you apply for a mortgage.

It’s similarly worth remembering that buying a house includes extra fees on top of your mortgage, which include stamp duty, property tax, and insurance - agency and surveying fees are also high, and you’ll need to put aside a large amount of money before you even move into a new place. Remember, though, that if you can get a decent mortgage and then wait out the current financial recession, you may be able to sell a house for more than you paid for it, and pay off the remainder of your mortgage. 

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