HOW TO ARRANGE A MORTGAGE
For most of us, buying property is going to be the single biggest expense of our lives. In this regard, unless you have recently won the lottery, funding of the purchase price for the property is going to be needed. Arranging this funding, surveys inform us, is one of the top three most stressful things that’ll happen in our lives. So, to try and make your process a little less stressful, here are some of the basic things you need to know.
WHAT IS A “MORTGAGE”
In its purest form, a mortgage is a right over property (sometimes called a charge or lien) that you grant to someone who is willing to lend you money – in most cases, to purchase the property. However, as with borrowing issues elsewhere, mortgages can be technical and more than one type of mortgage is available. [Note, however, that it is you granting a mortgage over the property in favor of the lender, not the lender granting you a mortgage; which is the commonly held belief.]
TYPES OF MORTGAGE
Essentially there are two types of mortgages available. The first, a straightforward “repayment” mortgage. The second, what is known as an “endowment” mortgage.
* Repayment mortgages
A repayment mortgage is where you borrow money from the lender and you agree to make periodic repayments (ordinarily monthly) to the lender over a fixed period of time (usually 25 years, but this can be less, depending on the age of the borrower). With a repayment mortgage you’re repaying both the interest accruing to the loan and the principal of the loan at the same time. At the end of the loan period, you’ll have nothing more to pay.
* Endowment mortgages
An endowment mortgage is similar to a repayment mortgage, in that you agree to borrow money over a pre-determined period of time; however, instead of repaying principal and interest at the same time, you only repay the interest. Residual money from the periodic repayments are then used to invest in an endowment policy, which will mature on the day your loan matures. In theory the amount in the endowment policy will equal the principal amount owed and the two sums will set-off each other. If you’re lucky, you’ll actually have excess cash in the endowment policy and you have a bonus! However, as endowment policies can go down, as well as up, if you’re unlucky you’ll not have enough in the endowment policy on loan maturity date and you’ll need to add to this sum to make your (what is known as) bullet-payment (one-off) repayment of principal.
More traditionally building societies used to act as the main mortgage lenders in the UK. However, today there are a large number of mortgage lenders and so the best way to determine whether one is authentic or not is to check whether they are a member of the Council of Mortgage Lenders. The Council of Mortgage Lenders is a trade association of organization who lend money to fund property purchases. If your lender is listed in the Council of Mortgage Lenders register, it’s a fair bet they are authentic.
INTEREST RATES AND MORTGAGES
Interest accruing to a mortgage loan can either be fixed or floating.
* Fixed Rate Mortgages
With a fixed rate mortgage interest is fixed throughout the period of the loan. Many borrowers like the concept of a fixed rate mortgage, as it allows them to calculate with some certainty how much they need to repay each month. However, as interest rates can go up or down, and because a mortgage is usually arranged over a long period of time, most borrowers don’t want to be locked-in to an interest rate for the entire life of a loan. Consequently, they try to arrange a fixed term interest rate for the first few years, until they’re on their feet, an then apply a floating interest rate.
*Floating Rate Interest
Essentially a floating rate interest is Base Rate plus basis points. Although the basis points (which is a percentage figure) are fixed, Base Rate is a floating rate set by the Bank of England from time-to-time; hence the overall interest rate floats.
MORTGAGE AND INSURANCE
Insurance is a precaution against an unexpected event. As the term of a mortgage can be fairly lengthy, most lenders ask the borrower to take-out insurance against one, or all, of these unexpected events. Usually this means the lender asking the borrower to insure against any fire, flood, or other event (such as death or unemployment) that could cause the borrower to be in a position where they could not repay the lender. Be careful here though, if you don’t think the event that you’re insuring against is going to happen, then don’t take out the insurance.
MORTGAGES AND BAD DEBT
A number of us, in our younger days, take advantage of credit card other debt financing offers and then fail to make repayment of the monies we owe in the time and manner required. Consequently we become known as “bad debtors” and it can take time to recover our “credit rating”. It is a commonly held belief that any person who falls within this bracket of borrower will not be able to apply for a mortgage – or they can apply, but it will be declined. If you happen to be one of these people, the reality is that there’s every chance you’ll be able to apply for what is known as a bad credit mortgage. You do, however, need to be aware that the standard terms and conditions of a mortgage agreement will be more onerous on you. Notwithstanding that, with approximately one in every four people in the UK having a bad credit history, this can be a competitive market – so shop around.
THINGS TO THINK ABOUT
Finally, here are some things to think about:
1. is my mortgage lender a member of the Council of Mortgage Lenders;
2. is a repayment mortgage or endowment mortgage more suitable to my needs;
3. how will interest accrue on the loan;
4. will I be required to take out insurance on the loan/property.