Mortgages
From Personal Finance
A mortgage is a debt instrument in which the borrower gives the lender a lien on property as security for the repayment of the loan. When most people think of a mortgage, they think of a home mortgage, though other property may be used as collateral as well. Mortgages may be originated (started) by a party other than the party that eventually holds or services the mortgage. This is particularly common when a mortgage broker is used.
Paying a mortgage is your ticket to owning your own home. In essence, a mortgage is a loan that you take out to buy a property over a certain amount of time. The mortgage market is a fiercely competitive business, with many high street banks and building societies all vying for your custom. Taking out a mortgage is a major commitment and an important decision - get it right and you’ll be laughing, get it wrong and it could prove to be a costly mistake.
Before you begin
Think about how you want to pay your mortgage. The most popular method is a repayment mortgage, but an interest only mortgage may be for you if you will be able to pay the full amount once your mortgage term ends.
Then consider what type of interest rate structure is best for you? This is the most important question that you need to answer before you can choose a mortgage that best suits your needs. Read our brief guide on mortgage types first to help you understand the different mortgage types available.
Asscociated costs Arranging a mortgage can be an expensive business, and you have to take into account a range of associated costs that you may need to pay: Arrangement fee Many lenders will charge an arrangement fee for booking the mortgage. You could book a mortgage for six months in advance, but be aware that it could end up eating into your deal. You can see these clearly in the mortgage best buys. Higher Lending Charges Essentially, this protects the lender if you are unable to pay back the mortgage. Charges range between 7 and 12% over and above the mortgage threshold (this is typically anything above 75% of the total mortgage amount). You can filter these out in the mortgage best buys. Brokers’ fees If you are arranging a mortgage through a broker, they may also charge you a fee for their service either before or after you mortgage application has been completed. All brokers are required by law to show you how much commission they will earn from the lender in a Key Facts document, so make sure you get this up front. The mortgage broker business is extremely competitive, so get some quotes from a variety of brokers before you sign on the dotted line. Survey / Valuation fees A lender has to be sure that their mortgage offer is based on a sound property. For this they will require a survey of the property, which will usually be paid for by you. Redemption penalties A redemption penalty may be payable if you pay back your mortgage early or switch lenders before your deal has expired. You can filter this out in the Best Buys too. What to avoid
This is a tough question when it comes to mortgages because it all depends on the type of mortgage you choose. However, there are five golden rules that can apply to all mortgages:
BEWARE of headline-grabbing interest rates – if it’s too good to be true then it probably is. Remember, mortgage lenders want to make money, so wont give something away for nothing. Watch out for hidden catches and other strings attached. Don’t just look at the interest rate look at all of the associated fees too. This will help you work out the true cost of the mortgage. Watch out for extended tie-ins that will force you to stay with the lender for a longer period of time. Be wary of higher lending charges; if you can avoid them then do. That’s because if you fail to keep up with your mortgage payments and your home is repossessed, you’ll still be liable to pay any shortfall once it is sold. And finally, don’t stick with your existing lender just because it’s easy. Make the effort to shop around when your deal comes to an end, you could save yourself a small fortune. What to do next
Search for a mortgage that suits your needs Find the best mortgage rates currently available Use a mortgage calculator to work out monthly repayments
