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Borrowing

Mortgages- What are they?

  • There is a lot of talk about mortgages, but what exactly is a mortgage? I will try to give you a broad overview of what they are all about and what the terms mean.

In a nutshell, what is a mortgage?

A mortgage is a loan to buy a property. The loan is secured on the property. The security (sometimes called the lein) means that if the borrower fails to make payments to the lender, usually but not always a bank or building society, the lender can take possession of the property, sell it and recover their loan plus the costs of doing so. There are several different types of lenders from high street lenders to specialist lenders. You can either apply direct or go through a mortgage broker. If you have a bad credit history or difficult circumstances then there are specialist mortgage brokers you can go to who are specialists in helping clients get mortgages with bad credit

Terms you will come across.

The term– This is how long the mortgage is set to last. Most mortgages certainly for first-time buyers are set-up to run twenty-five years the term can be different though.

Advance– This is the amount of money the lender puts forward to help with the house purchase.

Deposit– Usually, the lender will want the buyer to put forward at least some of the money, this is known as the deposit usually a minimum of five percent.

Valuation/ survey– The lender will require that a local surveyor independently values the property you want to buy, so they know the loan can be recovered if they need to repossess.

Repayment Mortgage– with this sort of mortgage both the interest on the loan and the loan itself re repaid over the course of the term.

Interest Only Mortgage– With an interest-only mortgage, only the interest on the loan is repaid over the term the loan is paid off at the end.

Fixed-rate– The interest rate on the loan is set for a period of time usually two to five years, though it can be more. This means your payments are fixed and you know where you are.

Variable-rate- The interest rate will go up and down as the interest rate set by the bank of England changes. Sharp rises can cause money problem as the payment will go up.

Discount- This is when the lender offers a discount on their normal ate of interest for a set period of time as an incentive to use them. This gives smaller repayments at the beginning  the mortgage

Tracker- they promise to follow an interest rate for a period of time e.g. base rate plus 2% means the rate of interest set by the bank of England plus two percent. They come in various terms up to the life of the mortgage.

Capped- there is a ceiling on the level of the rate so even if the base rate goes very high the maximum you have to pay is set.

Capped and Collared As but combined with a minimum level of interest you would pay.

Offset Mortgage– If you have savings, you can offset the savings interest you receive from the mortgage interest you need to pay, saves tax if you have the money.

Interest Rate– this is the amount the lender wants you to pay back for them to lend you the money you need. The rates generally revolve around the bank of England base rate.

Fees– some lender charge fees for you to borrow from them i.e. arrangement fees, they can be expensive so check them out.

Conveyancing- This is how the ownership of the property is passed from the current owner to you, check that the property is free from problems is part of the conveyancing. Carried out by either a solicitor or licenced conveyancer.

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