An Overview of Mortgages
A mortgage is a loan that is used to purchase or re-finance a property and is repaid with interest over a term. The lender will add a charge to your property and this will act as security for the borrowing.
If for any reason you can’t repay the mortgage, your property may be sold to recover the lender’s money. This is why you may have noticed this message when searching for a new mortgage:
Your home (or property) may be repossessed if you do not keep up pay repayments on your mortgage.
At Creative Lending Solutions we arrange mortgages to help you buy your first home or move property, to purchase a second home or a property to let, and to repay an existing lender with a remortgage.
A purchase mortgage will bridge the gap between the purchase price of a property and your deposit, whilst a remortgage may be taken to the maximum you require, providing that this is within the criteria of the lender. In both cases, a lender will restrict the size of the mortgage to the value of the property.
Whilst some lenders may agree mortgages up to 95% of a property’s value on a purchase, this is restricted to 90% on remortgages, and further still depending on the purpose of borrowing. The rate of interest you may achieve with a lender is improved when the mortgage represents a lower loan to value (LTV) against the property. For this reason, it can be beneficial to provide a higher deposit on a purchase, or to limit the borrowing on a remortgage to leave more equity in your property.
If you are considering a new mortgage on a property that will be let, we need to make you aware that some forms of Buy to Let mortgages are not regulated by the Financial Conduct Authority.
Mortgage Affordability
A key factor in taking a new mortgage is demonstrating the required income for the borrowing you require. Your mortgage payments vary over time with changes in interest rates and it is therefore important that the loan is deemed affordable not only now, but also in the future. For this reason, lenders will be looking at a maximum multiple of your annual income and certain stress factors will be applied, such as the deduction of credit commitment payments or factoring in cost-of-living increases.
Each lender works to their own maximum income multiple and affordability model and there are often large differences in what one can lend over another. We can help locate the right lender when you wish to maximise your borrowing potential, usually up to a maximum income multiple of 5, or 5.5 where higher income criteria is met.
Repayment Types
When taking a new mortgage, you will need to decide whether you wish to pay this using a Capital Repayment method or an Interest Only method or perhaps a combination of the two (Part and Part).
On a Capital Repayment mortgage, you will be paying back a portion of the amount borrowed every month as well as the interest charged by the lender. If all required payments are made you will have repaid the mortgage by the end of the term.
With an Interest Only mortgage you will only be paying interest to the lender and the loan amount will not reduce. Instead, you will need to repay the capital balance by other means such as selling your property at the end of the term, a pension lump sum or a suitable investment vehicle. With a Part and Part mortgage, a portion will be on a Repayment basis and the remainder will be on Interest Only. The Repayment element of the mortgage will reduce over time, whilst an outstanding balance will be left to repay on the Interest Only portion.
Mortgage Term
The maximum term over which a mortgage may be taken now sits at between 25 and 40 years depending on the type of mortgage which you take, and on the lender’s own individual criteria.
On a Repayment mortgage the term may be varied to suit a particular budget, with shorter terms resulting in a higher amount of capital being repaid each month and a lower amount of interest paid over time. A longer term will reduce the amount of capital paid each month, making for a lower monthly payment, but the higher number of years will mean more interest is paid in the long run.
With an Interest Only mortgage, the term will have no impact on how much you pay every month as you are not paying capital instalments. However, the term you take is still important because this will determine how long the mortgage may run before you need to repay lender in full. You may wish the term of your mortgage to coincide with a life event, when there may be changes to your financial position, such as retirement. Many lenders do now lend to a later retirement age if your occupation and plans to continue working meet this criteria, whilst others specialise in lending beyond retirement, where a suitable pension income is in place to support the mortgage.
Mortgage Rates
A rate of interest will be applied to your mortgage and this will influence how much you pay over a set time.
A fixed rate of interest, as the name suggests, remains stable over a defined period and gives you the certainty of knowing what your payments will be every month during this time. The typical term of a fixed rate is between 2 and 10 years, and whilst you will be protected against any increases in interest rates, you will not benefit from any reductions.
A variable rate, on the other hand, may fluctuate with movements to a lender’s underlying rate of interest or, more specifically in the case of a tracker, with changes in the Bank of England Base Rate. These tend to run for a shorter period of between 2 and 5 years. A discounted product and a tracker product are examples of a variable rates. With a discounted product, your payment is determined by a reduction in a lender’s Standard Variable Rate, whereas a tracker rate is set above the Bank of England Base Rate. Variable rates tend to offer a lower initial payment than those that are fixed and they may even reduce, but equally they may cause your payment to increase if circumstances dictate this.
In most cases your mortgage term will run for a longer period than the initial product rate you take, and it is therefore important that you review your options when your current deal expires. We recommend that this review is undertaken at least 3 months prior to expiry of your rate as this is generally the window an existing lender will permit a product transfer to be secured, whilst also allowing plenty of time for a remortgage to be arranged with a new lender if this is required.
With all of the decisions you’ll face when taking a new mortgage, it’s beneficial to obtain impartial advice from a trusted adviser who understands what is most important to you.
At Creative Lending Solutions that’s exactly what you will receive, coupled with a friendly and professional service.
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