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Buying property tips: Mortgages

The range of mortgages can at a glance be confusing. As the property market continues to expand mortgage lenders are turning up the heat in the competition to attract your business. For the buyer this mean that if you are prepared to shop around and learn the jargon a good mortgage term can be obtained. Choice Homes are not in any capacity a financial adviser but we hope the guide below sets out the basic mortgage options available to you.

Mortgage type
Mortgages can generally be divide into two categories according to how they are repaid:

: This type of mortgage requires you to pay off the amount borrowed and the interest on that amount over the full term of the mortgage.

Interest only
: As the name suggests you pay the interest accumulated on your mortgage loan each month, this is also known as an endowment, pension or ISA mortgage. At the end of your mortgage term you are required to pay the entire amount of the loan. To be able to achieve this you invest the loan at the start in a separate ISA, pension or investment concern. The money that is paid into this separate concern is invested for the length of your mortgage term. With this type of mortgage the risk is that the final pay-out from your investment may not cover the amount of capital borrowed initially.

Interest rates
Your next decision is what type of interest rate to have for your mortgage.

Variable rate: This rate is correlated with the Bank of England?s base rate. Your repayments depend on the move in interest rates, which if they rise so do your repayments, and if the rates fall then your repayments should also drop. This is the most common rate offered by mortgage providers but is unpredictable and depends entirely on rates of interest. Your repayments could stand to change from one month to the next, even so this type of mortgage is still the most popular. Generally, there are no penalties for paying off the mortgage earlier than agreed.

Fixed rate: As opposed to a variable rate the interest rate on your repayments are fixed at one rate for a fixed number of years ranging between two and five. Each repayment made in this time frame will be exactly the same. After this period the rate then returns to the standard variable rate. As the fixed rate is an introductory rate there may be penalties to pay by switching to a new mortgage provider at the end of the fixed term.

Capped rate: A capped rate is much like a fixed rate, the difference being that the mortgage lender will not move the interest rate above a certain limit, they will put a ceiling on interest rate growth. When the interest rate falls below this, you pay the standard variable rate. Because of this, capped rates tend to be higher than fixed rates, so a capped mortgage may be more expensive than a variable rate mortgage.

Discount rate: At a discounted rate you will still be moving in line will the rise and fall of the interest rates of the Bank of England. The difference being that initially the lender will set your interest rate a couple of points below their standard variable rate, but the difference between the discounted rate and the standard variable rate will remain the same.

Borrowing limits
The maximum amount you can borrow is calculated against a set of basic criteria for most mortgage providers, typically the factors influencing the what you can borrow are:

Your income
Your employment status
Your other financial commitments
The size of the deposit you can secure

Typically most mortgage lenders will lend you up to three and a half times your salary as an individual. As a couple you can normally borrow slightly more, depending again on employment status and salary, but you should be able to borrow:

Up to three times the income of the main earner, added to which is the income of the second earner or,
Up to two and a half times your combined salary

Proof will be asked for as to your annual earnings and up to six months worth of pay slips may be required to prove you are able to repay the loan. For those who are self employed you will be required to submit at least three years worth of accounts to check the stability of your business.

Also taken into the equation are your other monthly financial commitments such as other existing loans, hire purchase payments and credit card repayments. The size of the deposit you are able to secure will also have an impact, by putting down a larger deposit the mortgage lender should be more willing to agree to a mortgage.

Mortgage terms
The interest you repay on your mortgage loan will depend on the length of time you borrow the money for. Typical mortgage terms will last 25 years but the longer you take to repay the mortgage the more the interest will be. The positive side of this means that if the mortgage term is longer then although it will take longer to pay off your repayments each month will be lower.

Cost of financing
Aside from the capital cost of the mortgage there are other fees that need to be taken into account and taken into consideration when arranging a mortgage.

Arrangement fees: Some lenders may charge arrangement fees in the range of £300 although many now waive these.

Valuer's report: All mortgage providers will insist on a valuation as it is the property that acts as the security of the loan. The provider will want to make sure that the property is worth the sale price, any valuation or services carried out will be at an added cost.

Indemnity guarantee fee: This is basically an insurance policy in the event that you cannot afford to pay the mortgage, or in the event of a interest only mortgage that the eventual sale price of the property does not cover the initial cost of the loan.

NOTE: Remember to read the small print

Carefully consider all aspects of your mortgage policy, in the event of missing a payment there may be large penalties to pay or if you repay the entire sum early there may also be an added penalty. If you are self employed or your income is affected by seasonal tourism be sure to check whether you are able to take a break from your repayments. This allows you to take a break from paying the capital cost of the loan although you will still have to pay the interest accumulated during this time, however this interest may be transferred over to your next payment.

At the start of your mortgage term the title deeds of the property will go to the lender, as in effect it is the lender that owns the property. Only when you have fully repaid the entire mortgage will you be the legal owner of your home.

Problems may arise getting a mortgage in the following areas:

Properties with a short life. The expected life of a property from the time of the mortgage loan is generally 60 years.
If buying a leasehold property with a short lease. Lenders will require that the lease should run for at least 20 years after the mortgage has been completely repaid.
Converted flats. As long as the construction is structurally sound and complies with local authority building regulations most mortgage providers will lend on converted flats. You will need to check with your lender concerning the maintenance of the common or shared parts of the building.
Freehold flats may not be acceptable due to legal difficulties in keeping the building in repair. Again, you should check with your lender.

If in any doubt be sure to check with your lender before your make a commitment.

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