Mortgages: a quick guide
Trying to buy your own home is a difficult and stressful time and one of the most important purchases you’ll make in your lifetime. With so many different products on offer and different types of mortgages to understand, it’s no wonder that getting the right mortgage can be a time consuming and lengthy task.
comparethemarket.com is here to help, we have put together this quick guide to outline some of the important things to know and look out for when making the big commitment that is getting a mortgage.
What is a Mortgage?
A mortgage is a secured loan you apply for that covers the amount you wish to borrow in order to pay for the house you wish to buy. Like all loans, a mortgage has a repayment term, interest rates and monthly repayments to be met and paid for. A mortgage is a financial commitment. You can also remortgage your property without moving home if you want to change lenders or move to another product.
Different Types of Mortgages
There is a variety of different mortgage products available, below are the most common:
Fixed Rate Mortgage
A fixed rate mortgage has a fixed interest rate applied to the loan for a set period, this means that you pay the same amount each month for the duration of your fixed rate making your repayments easier to balance with your finances.
Flexible Mortgage
A flexible mortgage gives you the opportunity to vary your monthly repayments to suit your budget, you can repay more of your mortgage than the set monthly repayment subsequently meaning that you could potentially clear your mortgage earlier. Some flexible mortgages are free of early redemption charges, so you can move to another provider or more suitable product.
Interest Only Mortgage
With an interest only mortgage your monthly repayments cover the interest charged on the loan only. The repayments will be lower than that of a repayment mortgage, however to pay off the final balance at the end of the term an alternative method of repayment will need to be arranged. The capital borrowed does not decrease over the mortgage term, only the interest is repaid. Once the term of the mortgage is over, the full balance of the loan will need to be repaid. This is usually from an investment vehicle.
Capped Mortgage
A capped mortgage gives you security of knowing that your monthly repayments cannot exceed a set amount but can also benefit from interest rates and your monthly repayments going down. The capped mortgage products are usually linked with the Bank of England base rate and typically include an early redemption charge.
Tracker Mortgage
With a tracker, your mortgage rate is set at above or below the Bank of England base rate and is designed to move in line with it - so your monthly payments could go up or down (within one month) depending on how the base rate moves. A tracker rate makes it more difficult to budget for future payments and can include early redemption charge.
Fee’s, Interest & Equity
Many mortgage products will be subject to an early redemption charge which is applied if the mortgage is paid off in part or full within a shortened specified time, this includes remortgaging or moving lenders. Mortgages can also be subject to arrangement fees, booking fees and a high loan to value charge. (This means when you borrow a very high percentage of the property value)
The more you pay off your mortgage and if the value of your property increases you begin to accrue equity. This equity can be released by selling your current property or by remortgaging. Negative equity is when the value of your property reduces to below the amount you have borrowed.
The interest applied is influenced by the type of mortgage you decide upon. If you go for a fixed rate mortgage, the interest will be set at a competitive rate at that time. If you go for a variable rate, the interest can go either up or down with changes in the economy and housing market.
Insurance
When you take out a mortgage you also need to consider the different types of insurance that you will need and that is where we come in.
Buildings and contents insurance is usually required so your property and its contents are protected against damage like fire, flooding and storm damage.
Life insurance policies in some cases will be required by the lender before a mortgage can be accepted to secure that the repayment of your loan will be made in the event of your death.
Mortgage payment protection insurance can help you to keep up with your mortgage repayments if you were unable to work due to accident, illness, injury or redundancy.
Make sure you get some of the best prices on the market today by using comparethemarket.com mortgage comparison service. Compare all your mortgage and insurance needs for your new home. It will save you time and could save you money.
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Data is provided by lovemoney.com Limited who are an appointed representative of lovemoney.com Financial Services Limited, authorised and regulated by the Financial Services Authority.
Advice is provided by MoneyQuest Mortgage Brokers Limited who are an appointed representative of Legal & General Partnership Services Limited, which is authorised and regulated by the Financial Services Authority for advising on and arranging mortgages and insurance. Lovemoney.com Limited and MoneyQuest Mortgage Brokers Limited are not part of BGL Group Limited of which BISL Limited forms part.