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Mortgages


What are they?

A mortgage is simply a big loan that you take out to buy a property, usually your home. The payments are typically spread over 20 years or more using either a variable or fixed rate of interest.

However, unlike most bank loans, a mortgage is a 'secured' loan. This means the lender uses your property as security for the loan, if you can't keep up the mortgage payments they can reclaim then sell the property in an attempt to recoup the money it's owed (known as a 'repossession').

The most common scenarios for taking out a mortgage are to buy a new property or changing from an existing mortgage to get a better deal and/or release equity (known as 're-mortgaging').

You have the option of either repaying the mortgage as you go along, so that it's guaranteed to be paid off at the end of the term (provided you make all the monthly payments), or paying just the interest, meaning it's up to you how you pay off the mortgage at the end of the term.


What types are there?

Standard Variable RateTrackerOffsetFixed RateDiscountedCashback

A standard variable rate (SVR) mortgage is a plain vanilla type of mortgage. If you have one you could almost certainly get a better deal by re-mortgaging elsewhere.

The rate of interest is charged at the lender's SVR, typically a percent or two above the Bank of England Base Rate (although currently higher due to the 'credit crunch'). While a SVR tends to follow the base rate, it may not do so exactly - some lenders drag their heels and may not pass on the full extent of a base rate cut.


Features & Issues

OverpaymentsCapsCollarsInterest FrequencyMoving Home

Got spare cash and want to payoff your repayment mortgage faster? Most lenders allow you to pay more than your usual payment, reducing the term of your mortgage and saving you money. Find out how much you could save using our Mortgage Overpayment Calculator.


Should I go for repayment or interest only?

The safe option is to go for a repayment mortgage, as this guarantees your mortgage will be paid off at the end of the term provided you make all the monthly payments.

If you opt for an interest only mortgage then you'll still have to pay the full mortgage amount at the end of the term. It's up to you how you do this, but the most common route is to make a monthly saving into some type of investment (e.g. an Individual Savings Plan (ISA)). The dilemma is that this involves risk, depending on investment performance you could have more than enough or to little to repay the mortgage at the end of the term.

Candid Example Mr Hopeful takes out a £150,000 interest only 25 year mortgage and saves £225 a month into an ISA over that term. After 25 years his ISA would be worth £152,906 if annual investment returns were 6%. However, if annual returns were 5% he'd have just £132,327, not enough to repay the mortgage.

Interest only mortgages benefit more than repayment from inflation. For example, a £200,000 mortgage today would be worth £108,759 in today's terms after 20 years assuming 3% annual inflation. However, this is of little consolation if you still don't have enough money to pay it off!


Should I go for variable or fixed?

The simple answer is fixed if you think interest rates will rise and variable if you think they will fall (below the fixed rate on offer in both cases).

However, accurately predicting where interest rates will go in future is very difficult, so it's something of a gamble. What's more important for many is 'could you afford an interest rate hike?' If you'd struggle to cope with higher mortgage payments then a fixed rate at least offers you peace of mind over the period the rate is fixed. You might lose out versus a variable rate if interest rates fall, but at least you won't lose your home if interest rates rise.


What's re-mortgaging?

Re-mortgaging means switching from your current mortgage to another (with your current or a different lender). There's a number of reasons why you might want to do this:

  • Switching to a better deal.
  • Swapping your property's value above your current mortgage for cash now (known as 'releasing equity').
  • Flexibility - you might want to make extra repayments not allowed by your current mortgage.
  • Consolidating other debts into your mortgage - the rate might be lower but beware that you'll effectively be 'securing' these debts against your home.

Find out whether re-mortgaging might leave you better off using our Mortgage Switch Calculator.


How much can I borrow?

This really depends on how much spare cash you consistently have available each month to make mortgage payments. It'll also depend on how much a lender is willing to give you, as a rule of thumb this is typically 3-4 times your annual income.

To find out how much you might be able to afford to borrow, use our Mortgage Affordability Calculator.


What's LTV?

LTV, or loan to value, describes the size of a mortgage in proportion to the value of the property being purchased. For example, a £100,000 mortgage on a property valued £200,000 is a 50% LTV.

Lenders like low LTVs, as it reduces the risk they'll lose out should they need to repossess the property. Some of the best mortgage deals are only available to borrowers with lower LTVs, e.g. 60% or lower.

When buying a property you can reduce the mortgage LTV you require by borrowing less, usually through having a larger deposit.


I can't afford a mortgage!

Don't overstretch yourself by trying to take out a mortgage you can't afford, you'll simply risk entering a world of spiralling debt and could lose your home. It's generally better to wait until you can afford a mortgage to buy a property.

However, if you're desperate you could consider asking your parents to help out, if they're in a position to do so. They could give you cash to increase your deposit, reducing the size of mortgage you'll need, or help out with mortgage payments. Alternatively, you may be able to club together with one or more friends, although a written agreement is essential to reduce the likelihood of a future fallout.


What costs can I expect?

Booking FeeValuation FeeMortgage Indemnity GuaranteeRedemption PenaltyExit Fee

These upfront fees are increasingly common as lenders use them to manipulate their interest rates, helping them look competitive in 'best buy' tables. A high initial fee means they can cut the headline interest rate without affecting their profit.

Fees can range from £100 to over £1,000. Don't be put off by initial fees, especially if you're taking out a large mortgage, but check the impact of the fee by looking at the APR, not the headline interest rate. Also check whether they're refundable if the property purchase falls through.


Watch out for 'extras'

When you take out a mortgage the provider/broker selling you the mortgage might also try to push other products at the same time (to boost their commission/profit). Be very wary about saying yes to any of these. Even if you do want or need them you'll probably get a better deal by shopping around.

Life InsuranceInvestmentsMortgage Payment Protection Insurance

Life cover makes sense if your family or other financial dependants would struggle to pay the mortgage should you die. Term assurance is almost always the most sensible and cost effective option. However, premiums vary widely between providers and shopping around for the best deal could save you hundreds of pounds over the term of the policy. Find out more about term assurance here.


How much commission do they pay?

If you buy a mortgage through a broker, salesman or other third party they will normally receive a commission from the lender for the sale. Because mortgage commissions tend to be fairly standardised there's less risk of it causing biased advice than in most other areas of finance, but it's wise to be cynical nonetheless. A few mortgage brokers will share this commission with you, but you'll need to know what you're doing as they don't provide any advice.

If you decide to take advice ensure the broker covers the 'whole of the market', otherwise they may not be able to offer you the best deals in the marketplace. Some brokers charge fees on top of the commissions they receive - these are best avoided where possible.

Typical mortgage commission
Product Type Initial Commission Ongoing Annual Commission
Mortgage 0.35% (up to 1% if you have poor credit) None

To find out more about commissions and how they work, read the Candid Money guide to financial advice here.


Jargon

Here's some of the more common mortgage jargon you might come across:

JargonMeaning
Booking FeeA fee charged by many mortgage lenders when you apply for a mortgage. Common, as it helps them make their interest rate look more attractive.
Bridging LoanA bank loan enabling you to buy a property before selling your existing home.
CapThe maximum interest rate above which your mortgage cannot go.
CollarThe minimum interest rate below which your mortgage cannot go.
Discounted MortgageA mortgage that offers a discount on the lender's SVR or a tracker rate, usually for up to three years.
Fixed Rate MortgageA mortgage whose interest rate is fixed for a period of time, usually up to five years.
Interest Only MortgageA mortgage where your monthly payments are used to pay interest only. The amount borrowed will still be outstanding at the end of the mortgage term.
MortgageA type of loan used to purchase a property. It will normally run for 20 - 25 years and be secured against the property being purchased.
Mortgage Indemnity GuaranteeAn insurance designed to protect mortgage lenders if they repossess your home and are left out of pocket when the property is then sold.
Negative EquityThe difference between your home's value and your mortgage when the home is worth less than the mortgage.
Offset MortgageA mortgage that is linked to a bank account, with any savings offsetting the balance owed, hence interest payable, on the mortgage.
Redemption PenaltyA charge applied by some mortgage lenders if you want to repay your mortgage early.
Re-MortgagingSwitching from your current mortgage to another.
Repayment MortgageA mortgage where your monthly payments are used to pay interest and repay the outstanding balance.
SVRStandard variable rate. A mortgage lender's plain vanilla mortgage rate, usually a few percent above the Bank of England Base Rate.
Tracker MortgageA mortgage whose interest rate is variable and follows the Bank of England Base Rate exactly, usually by a fixed amount above or below.
Valuation FeeMost mortgage lenders charge you to carry out a valuation, making sure the house is worth at least what they're lending you.