Need to know: mortgages
TheSite.org looks at the basic facts you need to know when you're buying your own place.
Since the credit crunch, it's more difficult to qualify for a mortgage - you will need a clean credit history and at least a 10% deposit. Then, if you are accepted, you'll need to find out as much as you can about every detail 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: This means that your repayments will fluctuate, usually according to the current interest rates, which is called a base rate tracker. A discount mortgage is also variable but priced in line with the lender's Standard Variable Rate (SVR), which is loosely linked to the base rate but ultimately can be pitched at any level. In recent history, base rate has been over 15% and as low as 0.5%.
- 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 and you revert onto your lender's SVR. 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. Again, after a set period of time your mortgage will revert to the SVR.
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 all overpayment varies, and with fixed term and discount mortgages you may suffer product-related charges. Flexible mortgages do not impose any early repayment charges at all.
Bear in mind, also, that 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. This is called annual interest calculation and it won't work in your favour.
If your fixed rate mortgage is coming to an end, it's important to consider the financial implications.
There are other options that should be considered before making a capital repayment of part of your mortgage. If you come into a significant sum of money, it's best to visit and independent financial advisor.
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. This is called remortgaging. When changing lenders, check what fees your old mortgage lender might charge for early redemption if you are still within the deal rate period. You may also have to pay a new set of arrangement fees with the new lender. If you want to change your mortgage but stay with the same lender (which is known as a product transfer), you should seek advice about the different options available.
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 might go up if the lender's SVR is now pitched higher than the rate you were paying.
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, valuation fees, Stamp Duty, land Registry and building and contents insurance and valuations, as well as the overall costs of moving house.
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