what is a mortgage | Mortgages explained UK

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What is a mortgage | Mortgages explained UK

 

Understanding Mortgages

Unless you’re one of the lucky few that have a spare zillion dollars tucked away a mortgage is likely to be the biggest debt you’ll have in your lifetime.

the key to borrowing potentially hundreds of thousands of pounds is to know exactly what you’re getting yourself in for so we whipped up this article to take you through the essential information interest charges and some different types of mortgages and payment schemes available

there’s also a short section busting open some mortgage jargon terms you need to know a mortgage is a secured loan that is specifically designed to help you buy a property

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Firstly, what is a mortgage? 

 

the loan is secured against your house which means that if you fail to make your repayments your bank or lender could seize your property and sell it to recover the money

they lent you typically you’ll have to stump up a standard deposit amount of 10 of the property’s value before the bank will give you a loan to value mortgage for the rest loan to value or ltb is a term used to compare the value of your mortgage compared to the price of the home.

 

so let’s say the house you want to buy is a hundred thousand pounds you’ll need to save up a 10 deposit amount of 10 000 pounds and the bank will give you a 90 ltv mortgage for the rest worth 90 000 pounds the amount of deposit you need to pay will vary depending on the type of mortgage or mortgage scheme you have

 

For example if you take advantage of the government’s 95 mortgage scheme you’ll only be on the hook for five percent deposit and then obviously the rest of the mortgage unlike your phone contract which you’d expect to pay off after a few years mortgages tend to be repaid over 25 to 35 years

So, what are the different types of mortgages?

 

typically you choose from one of two options to repay it interest only repayments are when you just pay off the loan interest over the 25 years your monthly repayments are likely to be much lower

 

But you will still have to pay off the full amount you borrowed at the end of the term so make sure you factor that in with a repayment style mortgage you will pay off both the interest charges and the mortgage each month

your monthly payments are likely to be more expensive but you will have cleared the entire debt by the end of the 25 to 35 years because your bank or lender has the added safety net of securing the loan against your house mortgage interest rates tend to be much lower than say your credit card although because you’re borrowing so much money and typically paying it off over a 25-year period

 

Do you want a fixed rate or a variable mortgage?  

 

this still adds up to a fair amount interest charges typically come in one of two forms a fixed rate mortgage means that your interest will stay the same for an agreed period of time usually between two and five years

 

although some lenders will go up to 10 to 15. a variable rate mortgage you guessed it we’ll have interest rates that fluctuate over the life of the mortgage this could be due to changes in the bank of england’s base interest rate the lender reevaluating your risk or changes in the economy both have unique pros and cons that should be weighed up against your personal circumstances helpfully

 

these are just two of the many options for working out and paying back the interest in your mortgage so it could be worth speaking to a mortgage advisor to figure out the right one for you depending on what you plan to do with your property

 

you’ll need a different type of mortgage for example

 

if you plan on renting out the property you will need a buy to let mortgage similarly if you plan on buying and selling the  property as a flip you would want to look at buy to sell mortgages otherwise known as bridging loans

there are also a bunch of mortgage schemes available designed to help people get on the property ladder sooner even if you haven’t yet saved up enough funds these include the government’s 95 mortgage scheme where you only need to cobble together a deposit worth five percent of the property’s value shared ownership where you buy a percentage of the property and pay a lower rental amount on the rest and help to buy

 

where the government tops up a percentage of your mortgage this can be up to 40 percent for those living in london many of these schemes are only available to first-time buyers and may have additional restrictions such as being limited to properties below or above a certain value stamp duty official title stamp duty land tax or sdlt is a tax that applies

 

if you buy a property or land worth over a certain threshold in england and northern ireland freehold is when you own both the house and the land it is on with no time limit on your ownership leasehold is when you own the building but not the land it’s on a common example of this is when you own a flat in a building essentially you lease the land from the landlord for a limited time although

 

this could be upwards of 100 years and you may have to abide by some rules set by the landlord like no pets or subletting negative equity is when you owe more on your mortgage repayments than the value of your property

 

For example if we go back to that 100 000 pound house you bought earlier with a 90 ltv loan of 90 grand if the market crashed and your house suddenly was only worth 80 000 pounds you would be in negative equity as you still owe 90 000 pounds to your mortgage lender for more information on mortgages and to start comparing the right options for you.

 

What is a mortgage | Mortgages explained UK


 

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