Need to know: mortgages
TheSite.org looks at the basic facts you need to know when you're buying your own place.
Mortgages, just how confusing can they be? Find out as much as you can before you sign on the dotted line.
How do interest rates affect my mortgage?
Interest rates will affect repayments on any mortgage, sooner or later. Once you have decided what type of repayment option you would like to take up, you must then decide the interest rate option you want to work to.
- Variable rates: Most mortgage repayments are based on a variable rate. This means that your repayments will fluctuate, usually according to the current interest base rate. In previous years this has been over 15% and as low as 5%. Some lenders arrange an annual review mortgage that means your mortgage repayments change once a year to bring them into line with the current interest rate.
- Fixed rate: A fixed rate means exactly what it says. The lender will give you a mortgage with a fixed interest rate for a certain amount of time. This is a good thing if you think the mortgage rate is going to increase but beware of a big increase in your repayments when the fixed rate term ends. If the mortgage rate goes down below the rate that you are fixed at you will not benefit from the decrease in interest rates.
- Capped rate: If the mortgage rate goes above your capped rate your repayments will not increase with it. However, if the interest rates fall below the capped rate your payments will decrease accordingly. After a set period of time your mortgage will revert to the standard variable rate.
Should I repay my mortgage early?
If you come into a considerable amount of money or your financial situation changes for the better, you may consider the option of paying off all or part of your mortgage early. This could save you thousands of pounds in interest, leave you debt free and give you security and peace of mind. You could pay off a lump sum, usually known as a capital repayment, or make regular additional payments.
However the amount that the lenders accept for lump sum payments varies, and with fixed-term and discount mortgages you may suffer product related charges for making lump sum repayments. Some lenders do not credit extra monthly repayments until the end of the charging year and give no allowance on interest payments in the meantime.
There are other options which should be considered, before making a capital repayment of part of your mortgage. Depending on the type of mortgage and investment returns, your money may work harder in a high-paying savings account or investment scheme.
What if I want to change/move my mortgage?
You may find that after the initial special interest deal is over, your monthly repayments could actually be cut if you moved lenders. If you want to change your mortgage but stay with the same lender, you should seek advice about whether there are any options available to switch to a different product. If you want to change banks, check what fees your old mortgage lender might charge for early redemption (paying off your loan). You may also have to pay a new set of arrangement fees with the new lender.
Coming off a fixed rate mortgage
If your fixed rate mortgage is coming to an end, it's important to consider the financial implications. When coming off a fixed rate mortgage your monthly repayments will usually go up, sometimes by a large amount. It's therefore important to plan ahead to make sure you can afford the higher payments. Check when your fixed rate mortgage term will end and find out how the new interest rate will be calculated so you can start saving early. If you're worried about financing the increase in repayments, talk to your lender, as they may be able to offer a better deal.
Other fees to consider
Buying a house or flat is not a cheap process. You should be careful when you arrange your mortgage and take into account various other fees that you are going to incur. These include:
- Solicitors fees; which normally include the searches and cost of recording the change of property ownership at the Land registry;
- Estate Agent's fee;
- Valuation fees - if you are buying an older house, the cost of a more detailed survey;
- Stamp Duty - this is a government tax on the purchase price of the building. Until the end of 2009, stamp duty is suspended on properties costing less than £175,000. This is a temporary suspension, up from the previous threshold of £125,000, and has been welcomed by many as it will save eligible homebuyers up to £1,750. Homes costing from £175,001 to £250,000 have 1% of their value payable. If you're going for something that's worth £250,001 to £500,000 (we wish) you'll get stung for 3%, and anything over this is charged at 4%.
- Mortgage arrangement fees;
- Building and contents insurance;
- Removal costs;
- Mortgage.
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