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A Guide to Mortgages

Buying a property can be one of the biggest decisions you can make. It can also be the most expensive. A mortgage is a loan that you can take on to finance the purchase of a property, and will probably be the largest debt that you will ever take on. Like other loans, mortgages carry an interest rate, and are repaid over a set time period (often 20-30 years), but they also come with associated costs and fees that you will need to account for in your planning.

 Types of Mortgages

For such a large and important financial commitment, it is vital that you understand what type of mortgage will suit you best. There are thousands of different mortgage deals, but they largely fall into two categories, fixed rate, and variable rate.

A fixed rate mortgage means that you are locked in at a certain interest rate for a number of years (usually 2, 3, 5 or 10 years). This can be highly attractive as you'll be able to easily budget for your mortgage repayment costs without worrying about fluctuating interest rates.

However, this also means that if interest rates fall, you won't be able to take advantage, and your payments won't drop. In addition, starting rates are usually a little higher than variable rate mortgages, and you will have to pay high fees if you wish to leave the deal before the fixed rate period ends.

A variable rate mortgage means that your interest rate will change based on Bank of England base rates (tracker mortgages) or your lender's standard variable rate (discount mortgages).  Trackers are linked to the Bank of England base rate and move in line with these changes. For example, if the Bank of England increases the rate by 0.5%, then your interest rate would also rise by this amount. Discount mortgages are quite rare, and are linked to your lender's standard variable rate. As these are set independent from the Bank of England, the rate can rise or fall even if there has been no official base rate change.

Variable rate mortgages can be cheap under certain circumstances but come with the risk of uncertainty and possible financial difficulty if interest rates rise beyond what you have planned for. Sometimes lenders may offer a guarantee that a variable rate will not rise above a certain rate. Be sure to consider all your options and understand the terms of your mortgage to avoid nasty surprises!     

How to get a Mortgage

   
You can apply for a mortgage directly from a bank or building society, or choose to use a mortgage broker or independent financial advisor who may be able to help you compare different mortgage possibilities and give you access to mortgages not directly offered to the public. While an advisor may be useful in finding you a suitable option and guiding you through the process and paperwork, they do charge a fee, which, on average, is around £500, so do consider this when making your decision as well. Comparison websites are also often a good way to start, and can give you an overview of the options that different lenders are offering.

When buying a property, you will also need to pay an initial deposit, which is usually at least 10-20% of the property price. The larger your deposit, the lower your interest rate could be, as lenders take on less risk with a smaller loan. The best deals are usually reserved for those who are able to pay a 40% deposit.

Whatever route you go down for your mortgage, always remember to factor in extenuating circumstances - will you be able to maintain your repayments if interest rates rise unexpectedly or there is a change in your personal circumstances? Remember: if you are unable to pay your mortgage, your home may be repossessed.    

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