Mortgage is a common term everyone has heard but few actually understand the basics of how they work. This easy to-understand guide will help you appreciate what a mortgage is, what type of mortgage deals are available, how to compare them, how long a mortgage offer is valid for, and the function of a mortgage broker.
Mortgage: The Definition
In simple words, a mortgage is a loan that is used by an individual or group to buy a residential or commercial property. For example, when you purchase a home, you will put down an initial cash deposit, generally 10% of the property price, and the rest of the amount comes from either a local bank or a building society in the form of a mortgage. One has to pay the mortgage plus interest back in monthly instalments over a predefined number of years.
Types Of Mortgage Deals
Almost all mortgages are classified into two categories:
◉ Repayment Mortgage
◉ Interest-Only Mortgage
In Repayment Mortgages, the borrower pays back a fraction of the loan and a fraction of interest every month, while in Interest-only Mortgages, the borrower just pays interest monthly and the original borrowed amount is paid back at the end of the mortgage term. Within these two categories of mortgages, there are various types of deals one can choose from.
The most popular are:
◉ Fixed-rate Mortgages
◉ Tracker mortgages
◉ Discount mortgages
◉ Offset mortgages.
We will discuss the various types of mortgage deals in greater detail in another blog soon.
Every type of mortgage is usually valid for a fixed number of years – between two (02) and ten (10) – called the deal or introductory period. Upon completion of the introductory period, every mortgage deal is moved onto a standard variable rate mortgage. This standard rate is usually higher and moves up or down with the Bank of England base interest rate. That is why most people generally opt for a new deal (re-mortgage) when the fixed term is over.
Factor Affecting Choice of Mortgage
Some key factors that affect your choice of mortgage and the deals available to you include:
◉ The size of your deposit
◉ Your desired mortgage term
◉ Your monthly budget for mortgage payments
Comparing Deals
Mortgage deals are never compared based entirely on interest rates. Another important factor to consider is the arrangement fee. The arrangement fee is the amount paid by the borrower to set up the mortgage deal. The lower rate mortgage deals almost always have higher arrangement fees. As a borrower, you must compare multiple deals based on the overall/net cost rather than just the interest rate.
What is a Mortgage Agreement In Principle?
A Mortgage Agreement In Principle (AIP), also known as Decision In Principle, is a statement from a bank declaring that they are, in principle, willing to lend a certain amount of money to you, subject to completing affordability checks. This is sometimes, but not always, requested by estate agents when a home buyer starts viewing properties. Estate agents in your area can guide you better on whether you need an AIP before applying.
Limited Time Mortgage Offer
The mortgage offer from a lender is usually only valid for a certain amount of time. Mostly the offers last for three (03) to six (06) months, but longer offers are available for new-build homes. If anyone fails to complete the purchase in the given time, they will have to request an extension that might require going back through the entire bank’s affordability assessments.
Mortgage Broker
A mortgage broker is a professional adviser who can find and apply for a mortgage deal on their client’s behalf. Hiring a mortgage broker makes the otherwise complicated process a lot simpler, and can save the borrower plenty of effort, time, and money. Some mortgages are only available through mortgage brokers also known as Intermediaries, while others require you to apply yourself.
Brokers usually charge a fee and might also get a commission from the mortgage provider, so once again, check your net mortgage costs. Generally, because they have access to better deals your net costs will be lower than if you applied yourself – but always, always check.
Now that you know the mortgage basics, its types, and how you can apply for one, you can confidently step into the house buying arena and ensure you’re getting a good deal.
