Mortgages |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Get the right mortgage for you By Hannah Ricci
A house is the single most expensive purchase most of us will ever make, so getting the right mortgage is essential to ensure you're not paying over the odds.
All you need do is follow our step-by-step
How to repay your mortgage There are two repayment options: Capital repayment and interest-only. "Capital repayment is the only way to guarantee that your mortgage is repaid in full by the end of the term, assuming that you make your repayments in full and on time each month," explains Katie Tucker, technical specialist at mortgage broker John Charcol. Your repayments will cover the interest on your mortgage and chip away at your loan. Interest-only, as the name suggests, means your repayments just cover the interest on your loan. Your monthly payments will be much smaller, but as Tucker warns, it offers little security: "It's a high-risk strategy as there's no guarantee that your mortgage will be paid off." To ensure you can repay your loan at the end of the term you will need to set up a separate investment vehicle. The risk here is that you will be relying on stockmarket performance to repay your debt, so it's important to base your investment calculations on a conservative level of return, otherwise you could end up not having enough money to repay the loan. Some borrowers, particularly first-time buyers, take out interest-only loans in order to get a foot on the property ladder and then switch to capital repayment after two or three years when money isn't so tight. This is a popular option, but it's still important to be aware of the risks in case circumstances change and you cannot afford to switch repayment methods. Monthly repayments There are several types of mortgage and the one you choose will determine whether you want the size of your repayments each month to be fixed at the same rate for a set period or to fluctuate in line with the Bank of England base rate. "With a fixed rate mortgage your monthly payments will not change for the duration of that product," says Tucker. "This is good if you think that interest rates are going up, or if you want to budget and don't want your monthly payments to change." Other mortgage types such as trackers, discounted and capped rates are variable and will change in relation to movements in the base rate or your lender's standard variable rate (SVR). The length of your deal While your mortgage could be set with a term of anything up to 25 to 30 years, the rate you pay will often be set for a limited period, typically two to five years. When you come to the end of this period your mortgage will usually be converted to your lender's SVR. You need to think carefully about how long you want the deal to last because most lenders levy a charge if you switch before the end. Tucker says a good rate is worth holding on to for as long as possible, but two and three-year terms are generally favoured for longer deals because the rates are lower and you aren't tying yourself into a long-term commitment. Flexible mortgages Many lenders offer flexible products which allow you to tailor the repayment of your mortgage to suit your financial circumstances. Flexible options generally include the ability to make overpayments or underpayments and take payment holidays. Some even allow you to offset your mortgage against your savings or current account to save on interest. However, these features may come with a higher interest rate or arrangement fee. Being able to overpay is often the most popular choice, as it means you can use a windfall such as a bonus or inheritance to reduce your mortgage - although many mortgages now offer this option anyway. Extra costs In addition to the rate of interest you will pay on your mortgage there are further fees to take into account when comparing deals. First, your lender will charge you an arrangement fee, which can vary considerably between providers - from £500 to as much as £2,000. But you shouldn't necessarily be put off deals with high fees. If you have a big mortgage, the savings you make from having a lower interest rate could easily cover the cost of your fee. And if you don't have the money to spare you can always add the fee to the loan and - so long as your deal allows overpayments - repay it when you have the money. In the vast majority of cases, lenders charge a flat fee, although some have introduced percentage-based fees, which can be enormous for larger loans. If you only have a small deposit you may also have to pay a higher lending charge (HLC). This is basically a form of protection to cover the lender in the event of you being unable to repay the mortgage, forcing them to repossess your property and sell it. The HLC is normally applicable if you want to borrow more than 75% of the property's value, so it can be avoided if you have a sizeable deposit or existing equity. First-time buyers who need to borrow up to 100% of the property's value often get stung. Your lender will also require a valuation of the property before it makes a mortgage offer to ensure that it forms sufficient security for the loan. You'll have to pay for the valuation, with costs starting at around £150, depending on the size of the property and the purchase price, and it will be required upfront with your mortgage application. Some lenders, however, do offer to pay the valuation fee or refund it when your mortgage completes, so keep this in mind when comparing deals. Early repayment charge You will usually have to pay a fee if you want to leave your lender or repay all or part of the loan within the initial special rate period - this is called an early repayment charge (ERC). "ERCs are normally charged as a percentage of the loan, such as 3% of the amount you repaid," explains Katie Tucker. ERCs are not easy to see in the best buy tables, but it's important to find out the cost of tying into a mortgage deal before you commit. Fortunately, many mortgages are portable, which means that you don't have to pay a charge if you move house. When you remortgage you may also have to pay a mortgage exit fee of anything up to £300 to close your account. Lenders have been guilty of hiking fees over the past five years and charging up to 50% more than the figure quoted in their mortgage contract. So if you've remortgaged recently and were hit with an inflated fee it's worth getting in touch with your lender - thousands of borrowers have managed to reclaim their fee.
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Send Article by Email