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How mortgages work
A mortgage is a loan to buy your home. You borrow money and pay it back with interest over
a period of time (the mortgage term) that you agree with the lender, usually a bank or building society.
The loan is secured against your home so if for any reason you are unable to repay it, the
bank or building society can sell you home to get its money back.
HOW MUCH CAN YOU BORROW?
This depends on your personal circumstances, such as you income and expenditure and whether
youre buying alone or with a partner.
Its not a good idea to have a mortgage term that continues past retirement age unless you are sure that you will be able to afford the payments then.
How much can I borrow?
KEY THINGS TO THINK ABOUT.
How much you can borrow:
Lenders should lend responsibly. This means they should consider whether you can afford the
mortgage repayments now and throughout the mortgage term. For example, some lenders offer
a discounted rate to start with, but will you be able to afford the repayments when the
discounted rate ends??
Mortgage lenders have in the past offered to lend a sum based in a multiple of your salary (before tax) or your income if you were self employed.
If you have other money coming in such as bonuses, overtime or commission, lenders may take account of only half of this because it isnt guaranteed income.
It is more common now for lenders to make an affordability assessment when calculating how much they will lend you.
Each lender has its own method, but generally they all try to calculate your disposable income, taking account of:
Your total income.
Any money you owe, such as loans and outstanding credit card balances.
Any household bills and living expenses.
As well as considering whether or not you can afford the mortgage payments, the lender sets a limit on how much you can borrow as a percentage of the property's value (the loan to value or LTV).
HOW TO REPAY YOUR MORTGAGE.
You can choose to pay your mortgage back in one of the following ways:
The payments you make to the lender every month reduce the amount you owe as well as paying the interest on the loan. So each month you pay off a small part of your mortgage.
Its a simple, clear approach-
However, in the early years your payments will be mainly interest, so if you want to repay the mortgage or move house, you'll find that the amount you owe wont have gone down by very much.
As the name suggests, your monthly payment only pays the interest charges on your loan-
If you are thinking of getting an interest-
Types of mortgages available
Mortgage Features and Interest-
As well as choosing between a repayment and an interest-
With an Offset Mortgage, your bank current account, savings accounts, or both are linked to your mortgage. Your accounts are usually, but not always, held with the mortgage lender. Each month, the mortgage lender reduces the amount you owe on your mortgage by the amount in these accounts. It then works out the interest due on the balance of the mortgage. So, as your current account and savings balances go up, you pay less interest on your mortgage. As they go down, you pay more interest.
An Offset Mortgage can be tax efficient if you pay tax on your savings. This is because you don't earn any interest on your savings and so don't pay any tax on them. Instead you pay less interest on your mortgage.
The interest you save on your mortgage is usually more than the interest you would have earned after tax on your savings. This benefit is greater if you are a higher rate taxpayer.
This type of mortgage offers a number of flexible features. You can change your mortgage payments to suit your ability to pay.
Several flexible features are becoming more common, and they are not confined to loans that have flexible in their name. Consider which of the features are important to you.
Your lender may offer this with any of the interest-
If you move to another lender in the early years, you must repay some or all the cashback you received.
Whichever mortgage you choose, youll then need to look at the interest-
Mortgage lenders offer different interest rates and also different deals.
Here are some of the most common types available:
You have two important decisions when choosing an interest-
Whether to choose a fixed or variable rate mortgage.
Whether to choose a short-
Each one has advantages. The best for you depends on your practical needs and circumstances
TYPE OF INTEREST RATE
HOW IT WORKS:
Your payments are the same every month for a certain period, say, two, five or ten years or longer. At the end of the deal period, the lender usually charges you its standard variable rate (unless the rate is fixed for the whole term).
Tracker (changes in line with a specified rate)
With this variable-
Your payments are variable, but they are set at less than the lenders standard variable rate for a period of time. At the end of this period, the lender usually charges you its standard variable rate.
Your payments are variable and often linked to a base rate, but fixed not to go above a set level (the cap or ceiling) during the deal period. At the end of the period, the lender usually charges you its standard variable rate.
This may be used un combination with either, or both capped rate or a tracker. Your payments are variable but will not fall below a set level (the collar or floor).Standard Variable Rate
Standard Variable Rate
Your payments go up or down at the lenders discretion. Their decision may be influenced by changes in the Bank of England interest rate.
SIMPLY MORTGAGES 62 HIGH STREET, BANGOR, GWYNEDD, WALES
HOURS MON 9AM -
A combination of repayment and interest only
Before taking out the mortgage, you agree with the lender how the loan will be split between the two ways of paying it back.
Fees that I need to take into account
Estate Agency Fees
FEE OR CHARGE
WHO TO AND WHAT FOR?
To the Estate Agency, for marketing and selling your home.
Stamp Duty and Land Tax
To the Government, as a tax on buying property.
Varies depending on the purchase price. You can find out more information on the governments website at www.direct.gov.uk.
To the Solicitor for searches, land registry fees and so on.
To the surveyor, if you want a more in-
Varies according to the surveyor and the type of report-
Budget for at least 1,000 pounds.
Always ask for a quotation.