The Mortgage Guide
Since we mainly work just in order to be able to afford our daily expenses, and that is the cycle most people are stuck into, it makes sense that one should want the best possible living conditions they can afford, which includes advancing on the property ladder. One of the methods frequently used by homebuyers nowadays in order to pay for the house they want is through a mortgage, which basically means borrowing a large amount of money from a bank, for the specific purpose of buying a property, and repaying the loan gradually, over a predetermined period of time, with interest and guaranteeing for it with the property itself. If you are planning on getting a mortgage but are unsure with regards to the type and amount you can borrow, there are a few aspects to go through in order to make that important decision.
Before you select a type of mortgage, you need to evaluate your financial situation in order to assess whether a mortgage would not put too much stress on your income, meaning whether or not you can afford it without risking that the situation develops in a negative direction overtime. There are many factors you need to consider, such as the stability of your income, your current and estimated future outgoings, the number of people you will be supporting while paying the mortgage and the additional costs involved in purchasing the home you have decided on. You might want to look into getting an income protection insurance policy as well, to safeguard your mortgage payments in the event of suddenly losing your source of income. Then, if you reach the conclusion that you definitely want to go ahead with this plan, the process itself of obtaining the mortgage will naturally follow.
The next step is deciding the type of mortgage most suitable for you. According to the process of repaying the loan, there are two distinct categories, namely repayment mortgages and interest only mortgages, the latter coming with three different policy options: endowments, pension plans and ISAs (Individual Savings Accounts).
Repayment mortgages involve an uncomplicated, straightforward payment method, which is made monthly, is a fixed sum and encompasses both capital and interest, payments being recorded onto a mortgage statement to be received at the end of each year. Although the monthly payment is established at the beginning of the term and does not change overtime, (except certain circumstances involving rising interest rates, where that applies) one is allowed to make larger payments in order to reduce the remaining amount owed, yet there are penalties for doing so. A life insurance is not mandatory, however it is recommended, as in the unfortunate event of the owner’s death before the loan is repaid, the successors are still required to repay it, which might result in the property being put back on the market if that proves too difficult. A large number of people consider repayment mortgages safer, due to the unambiguous conditions regulating them.
Interest only mortgages differ from the first category in terms of the capital and interest not being paid simultaneously, as the monthly payments will only cover the interest, while the capital itself will need to be paid through one of the three financial plans, the vast majority of people opting for an endowment, as the other two variations require specialised financial advising and that is of course another complication and another expense for the average costumer. The plans differ in accessibility and conditions yet they all have one thing in common, namely they are forms of investment, and whilst some deem this type of mortgage advantageous due to the flexibility it offers and lack of constraint to start repaying the capital straight away, others consider it risky, as the proceeds of the financial plan used might not cover the capital owed at the end of the term and that would mean not only having to generate extra funds at that time but also living in incertitude whether this will be necessary or not.
Pension plans are slightly more complicated and it is mandatory that you seek professional guidance before taking this route. Basically, this variation consists of the applicant using a pension fund instead of a savings account, making monthly payments into it until the end of the term, when the loan has to be redeemed, which is done, of course, by using the capital gathered overtime. After the loan has been repaid – provided that the proceedings suffice - the plan holder can then draw a pension from the remaining funds.
Like pension plans, an Individual Savings Account is reserved to those who are knowledgeable about financial matters or those who seek advice from experts in this field. It involves tax free saving, but the downside is this plan cannot always be tracked, which is essential to anyone getting an interest only mortgage, so they could check the evolution of their investment.
By far more widespread than ISAs and pension plans are endowments, which work on a relatively simple system, namely making fixed monthly payments expected to generate a certain amount of capital through investment, by the time the loan needs to be repaid. At that point, there should be enough capital in the savings account to repay the loan, and perhaps even an extra amount, which would of course belong to the policy holder. This method sounds clear-cut and more advantageous than a repayment mortgage in terms of making smaller monthly payments and the rest just taking care of itself – yet it is still very risky as there is no guarantee the money invested will generate enough additional funds to repay the loan.
There are several similarities and differences between these three financial plans. For instance, both the endowment and the ISA provide life insurance, whilst both the pension plan and the ISA are variations of tax-free saving. It takes pondering and great cautiousness to decide which is the ideal option for your financial situation and lifestyle. It is also worth mentioning that when the new mortgage regulations are in place, interest-only mortgages will be greatly limited and inaccessible to a large segment of the population.
Mortgages are also differentiated according to the type of interest rate you choose, which affects the monthly amount of money you will have to pay. Interest rates fluctuate independently of the borrower’s or the creditor’s will and usually affect the borrower the most, as interest rate rises are more strongly felt on an individual level. There are two more commonly used options, in the form of fixed rate mortgages and tracker mortgages, yet three more are available, namely the variable rate mortgage, capped rate mortgage and discounted rate mortgage.
The fixed rate mortgage is deemed to bring more peace of mind, as the monthly interest the borrower pays is “cast in stone”, namely unchangeable, for the whole duration of the term. It is a popular choice with first time buyers but the security provided does come at a price, as fixed rate mortgages are always more expensive than other types. In terms of being unaffected by interest rate fluctuations, the downside is that when interests are very low, you will not benefit from that periodic opportunity to pay less.
The tracker mortgage is the complete opposite of a fixed rate mortgage, meaning the borrower has to adapt to the changes brought on by the base rate the mortgage is linked to, whether it remains as it was when taking on the mortgage or suffers significant modifications, either rising or decreasing, it doesn’t matter by how much. It is regarded as somewhat of a gamble, as whilst there will be times of undoubtable advantage, namely when interest rates are low, there will be other times when borrowers might need to overstretch their finances or even when their mortgage becomes unaffordable.
The variable rate mortgage is a variation of the tracker mortgage, although the vice versa would be a more appropriate evaluation, as the variable rate mortgage is a bit more comprehensive. It basically refers to an interest rate adapted by the mortgage provider in concordance with the base rate of the market, where as the tracker mortgage is more specific.
The capped rate mortgage is deemed by many the most advantageous as a maximum rate is fixed at the beginning of the term, and in a similar manner to the fixed rate mortgage, no matter what happens to the base rate in time, the borrower will not have to pay more than initially agreed, but can instead pay less if the rate drops. However, for such an ideal system, as always, there is a catch, residing in substantial initial charges as well as early repayment charges.
And finally, the discounted rate mortgage is another subdivision of the variable rate mortgage, as monthly payments increase or decrease according to the fluctuations of the Standard Variable Rate. The unique trait of this financial plan is that it includes a discount on this rate for a predetermined period of time, which might result in considerable savings if the base rate is low. This type of mortgage is particularly useful for borrowers who need the payments to be as small as possible at first, in order to deal with other expenses.
When you plan on getting a mortgage, the recommended steps are usually as follows:
- Evaluating your current financial situation and estimating its evolution overtime.
- Selecting a type of mortgage to best suit your requirements.
- Making sure you qualify by analysing all conditions imposed by prospective creditors.
- Considering other features you would like your mortgage to include, such as life insurance or various benefits some mortgage providers offer.
- Preparing your documents, ensuring you have everything ready, as any omission could result in an undesired delay. An emphasis needs to be put on documents proving your income and providing creditors with a clear picture of your revenues and outgoings. If you are self-employed, additional care and effort must be put into this.
- And finally, get a mortgage quote, professional input is always advisable, in order to make the right move.