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Mortgage & Remortgage Facts
As a mortgage is probably the largest financial commitment you will ever make and one that cannot be taken lightly, whilst intimidating it does not need to be difficult and there are many advantages of getting a mortgage over other available financial products.
A mortgage is a loan to buy a property, but it has two special characteristics. The first being that it takes a long time to repay, it is designed to be paid back over several years with interest, typically 25 years. Secondly the mortgage is secured on your home, therefore, in return for the bank lending you the money they use your property for security so if you do not have the money make your monthly payments the bank has the right to repossess and sell your home to get their money back. If this does happen, and they sell; you still owe money, and you are liable to pay them the difference back, so it is crucial that you only borrow what you can afford.
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Once you have decided that you want to obtain a mortgage or remortgages there are several things that you should do prior to your application. Check to see that you are on the electoral roll; if not then make sure you register as without being on this, you will be unlikely to get credit. Apply to get a copy of your credit file, this is important as errors such as debt that you have repaid could show on your file and mean you will be rejected, if there are individuals shown linked to you that no longer have relevance write and ask the credit agency to remove the association. This stops anyone else’s credit history making an impact on your application. Make sure that all the information shown is correct and if not ask the lender to correct it. Excessive credit, even unused will have a negative effect so make sure that you cancel any credit cards that are not in use.
Lenders no longer offer any deposit cheap mortgages and to get a mortgage you will need to have a good deposit. The lender will want to ensure that you have a good financial education and that the property is worth more than you want to borrow should be unable to make your payments. To get offered a good mortgage you will upwards of 25% of the home’s value. You still get a mortgage with less but, the rate you have to pay will be higher.
Third and final Step
Check your finances, do a full budget to calculate what you can realistically afford for your monthly payment, think about how much cash you currently have at the end of each month when you have everything paid. Check what deals are available. As a guide, lenders will normally multiply your income to work out what they will lend; if you are single, expect the calculation to be 3.5 times salary and for a couple 2.5 times joint salary.
Which type of mortgage is right for you?
With mortgages there is no one deal suitable for all, the choices available will depend on your financial situation. Finding your way through the plethora of mortgages available can seem daunting; however it simply boils down to making some choices.
Interest or Repayment
Interest only mortgages do not pay the actual debt; all you pay is the interest; for example, if you took a mortgage over 25 years for £50,000 on an interest only mortgage you will still owe £50,000 after paying for 25 years. Repayment although more costly, it is a much better scenario as it pays the interest as well as the original debt, meaning that, at the end of the term, you will owe nothing.
What type of deal?
The two main mortgage deals offered are fixed or variable.
With a fixed rate regardless of what interest rates do, your repayment will stay the same for as long as the deal lasts. If the interest rate falls though your payments still stay the same. Most fixed rate mortgages will revert to standard variable on expiry.
Variable rates mean that the mortgage rate can change over time; this seems to be determined on the economic conditions. When things are good the interest rates will be higher to discourage spending and encourage savings, but when times are bad the rates will be lowered to encourage people to spend. Predominately there are three different types of variable rate deals available.
Trackers a regulated in line with the UK Bank of England Base Rate, if the bank rate rises by .5% so will the mortgage and the same applies it the rate decreases.
Standard variable rates (SVRs)
This is the simplest and most straightforward option, but this may not be an option for a new customer. However, many introductory fixed rate or trackers revert to the SVR on expiry. Each lender offers an SVR which roughly follows the base rate. SVRs normally run at two or more percent above the base rate.
When the base rate moves either up or down the lenders will move their SVRs not always by the same amount.
A discounted rate will normally offer a reduction off a tracker or standard variable rate (SVR). This type of deal will normally last for only 2 – 3 years.
Capped deals are part variable rate; part fixed. The rate you pay moves in line with the base rate or SVR but there is an upper ceiling or cap to provide some protection. These are a popular option amongst borrowers as they do protect from sudden rises.
Mortgages should never be entered into lightly, and you should research all options thoroughly prior to entering into an agreement.