How much do you really know about mortgages? Having overheard several mortgage-related conversations recently, it appears that many people who are hoping to buy their own home in the not-too-distant future are a little unclear on various aspects of mortgages.
A mortgage is a large loan that enables you to buy your own home. It is secured on the value of the home, which means that if you are not able to make your mortgage repayments, the mortgage lender could eventually repossess your home. But if all goes according to plan, over the duration of the mortgage, you gradually repay more and more of the value of the mortgage, and eventually you will completely own your own home.
In this article we give a quick overview of:
What different types of mortgage are currently available?
How much deposit do you need to be able to get a mortgage?
How much money would you be able to borrow with a mortgage?
How long do you have to repay a mortgage?
What changes to mortgages are likely during 2022?
The two main types of mortgage are variable rate and fixed rate.
A variable rate mortgage will fluctuate with interest rates. So if interest rates fall, the amount of interest charged on the mortgage may also fall, leading to a reduction in the amount of your mortgage payments. Conversely, if interest rates rise, mortgage payments are likely to rise, leading to an increase in the amount of your mortgage payments.
There are three main variable rate mortgages available:
The rate of interest on your mortgage is set by your mortgage lender and is likely to respond to rises and falls in UK interest rates.
The rate of interest on your mortgage is set at a value relative to the Bank of England base rate and ‘tracks’ it. So for example, if you have a tracker mortgage of base rate plus 2% you will always pay a rate of interest 2% higher than the base rate.
The rate of interest on your mortgage is set at a percentage below your lender’s standard variable rate. So for example, if your lender’s standard variable rate was 5% and your mortgage had a 2% discount, you’d pay 3%.
With a fixed-rate mortgage, your mortgage payments will be fixed at the same interest rate for the duration of the mortgage deal, usually between 2 and 5 years. Whatever happens to interest rates during that time, your payments will be unaffected.
At the end of the deal period, your mortgage will either move onto your lender’s standard variable rate or you can enter into another fixed rate deal.
Many people prefer the security of a fixed-rate deal, as they know exactly how much they will have to pay despite whatever else is happening in the economy. But on the other hand, if interest rates are low, monthly payments could work out cheaper on a variable rate mortgage.
In his March 2021 Budget, Chancellor Rishi Sunak announced new 95% mortgages that will be available until the end of 2022. This means that buyers who obtain one of these mortgages will only need to provide a 5% deposit on their home, compared to a minimum 10% that has been the case until recently.
This can make a significant difference to borrowers. The average cost of a home in the UK is around £340,000. A 10% deposit on a property of this price would be £34,000, whilst a 5% deposit would reduce this amount to £17,000.
Also be aware that some mortgage lenders may have certain restrictions about where the money for the deposit comes from. For example, if you are being loaned or gifted money from family as part of your deposit, the lender may want to see proof of where that money has come from and may also possibly want a signed declaration that they have no legal interest in the property. If your donor were to die within seven years of handing over the money, there may even be inheritance tax to pay.
So when looking for a mortgage, make sure you get information from the lender not only about how much deposit they require but any terms and conditions about the sources of that deposit.
When looking for a mortgage, you also need to be aware that mortgage lenders will carry out a series of affordability checks on you. The purpose of these is to ensure that you will be able to afford the mortgage repayments and that lending to you is not a risk for the lender.
The exact amount a mortgage lender will be prepared to lend you also depends on your individual circumstances. They will want to look at various different aspects of your finances, including:
Your employment status;
Your income and outgoings;
Your credit history and current score;
Your current level of debt;
The amount of money you want to borrow.
Different mortgage lenders also take different approaches as to the maximum amount of money they will lend you. In general, you could hope to borrow up to about 4.5 times your salary, but some lenders may consider lending as much as 7 times your salary.
If you have an income of £40,000 – either as an individual or with a partner – you would be able to borrow £180,000 if you were offered 4.5 times your salary, and £280,000 if it were 7 times your salary. Add to this the deposit you are paying, and you can get an idea of the value of the home you would be able to buy.
Also when buying a home, don’t forget that you will need money for other things such as solicitors fees, removal expenses and any new fixtures and fittings you want for your home.
Buying and moving home can turn out to be a very expensive process! Remember that Munzee offers low apr loans if you find yourself temporarily short of money during this time.
Traditionally, mortgages have been over a period of up to 25 years. But during 2021, an increasing number of borrowers took out mortgages on terms longer than this, and there was a 70% increase in mortgages of 35 years or more as compared with 2019.
A longer mortgage repayment period means that monthly payments are smaller, but the overall amount of interest you have to pay over the lifetime of the mortgage will be bigger.
The main anticipated change is that interest rates will go up. The recent base rate move has added a relatively small increase to mortgage payments for some variable rate mortgages. But there could be more rises to come during the year, which may make fixed rate mortgages an attractive prospect.
The other area to watch is the future of the 95% mortgages. In the March 2021 budget, they were introduced for a limited time – until December 2022. This is being kept under review, and it remains to be seen whether 95% mortgages will still be on offer after the end of this year. However, if you are a first time buyer, it could make sense to do all you can to secure your mortgage before the end of this year, to avoid the possibility of a huge hike in the amount of the deposit you will be required to pay.
We hope that this article provides helpful information about mortgages, and some key things to be aware of if you are hoping to obtain a mortgage during 2022.
For more financial and lifestyle tips visit us again soon at Munzee Loans.
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