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Mortgages explained


If you are buying a home, a mortgage is crucial. A mortgage is a loan that people take out to buy land or property and while many mortgages run for 25 years, the term of the mortgage can be adapted to best the applicant’s needs.


The mortgage is secured against the property’s value until the mortgage has been paid off. Anyone that is unable to make the repayments on their mortgage will find that the lender can take back the property (repossess it) and then sell the property to ensure they receive their money back.


The fact that your home is at risk if you don’t maintain repayments ensures it is vital you only take out a mortgage that you can afford. This means applicants need to consider how much they can afford to pay. When considering what level of mortgage is affordable, a buyer must also consider the costs of running their home and associated costs of obtaining a mortgage.


What can you afford to pay?


When applying for a mortgage, the lender will request information relating to your income and monthly bills. Before approving of a mortgage, the lender is looking for proof that the borrower will be able to maintain repayments. No one can predict the future with respect to people’s jobs or interest rates, so the lender will be looking for a degree of flexibility with respect to the level of mortgage payment an applicant can afford to pay each month.


While it is possible to obtain a mortgage directly from a bank or building society, many buyers prefer to deal with a mortgage broker or an IFA, an independent financial adviser. This should ensure that you get to choose from a wider selection of the market or the entire market. Some advisers only look at mortgages from certain companies and some charge fees or commission so make sure you choose an advisor that meets your needs or expectations.


Raise as big a deposit as you can


When it comes to receiving the best mortgage possible, many factors will influence what you obtain but the bigger the deposit you can raise, the better. A higher deposit amount means your Loan To Value (LTV) rate is lower, and a lower LTV results in a lower APR. If you are looking to reduce the level of interest you pay, it is sensible to focus on raising a sizable deposit. There are a number of government backed schemes which can help you increase the level of deposit you have at your disposal.


How does a mortgage work?


The money that is borrowed in the mortgage is the capital amount and then interest is placed on top of this until it is repaid. Some lenders will provide people with the choice of repaying only the interest of their mortgage or capital and interest. Interest-only mortgages are less common these days as many providers and regulators are concerned about property owners being left with sizable debts and no way of repaying it, which means that capital and interest mortgages are the most common mortgages.


There are a number of different types of mortgage but they will fall under the fixed interest rate or variable interest rate mortgage types. A fixed rate mortgage provides you with confidence in how much you will pay each month for a fixed period of time. A variable rate mortgage can see the mortgage payments changing every month, depending on interest rates.


Some variable interest rate mortgages include:


  • Standard Variable Rate

  • Discount Rate

  • Tracker Mortgages

  • Capped Rate Mortgages

  • Offset Mortgages

Mortgages explained Tags: Mortgages, property, finance, advice Posted on Apr 06 2016 | by Andrew Snell
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