A mortgage is a loan, similar to a car or other loan, with the main difference in that it is what’s know as secured on your home.
That means that the lender’s name is registered on the deeds, and if you, for some reason are unable make the monthly payments, they can take you to court and possibly even force you to sell your property. This is called “repossession” which of course, nobody would want. That’s another reason to make sure that you are financially protected as much as possible.
Every mortgage has a start date and an end date, that’s what’s known as the “term” of the mortgage. I’ll be talking about that on another video.
In regards to rates…
The best way to think about this is that each lender has one rate. This can go up or down, so it’s known as a variable rate, and because it’s standard to each lender, it’s called the Standard Variable Rate. Hopefully you don’t actually pay that rate, unless there’s a good reason to do so.
Lenders will generally give you two options.
The first is another variable style of mortgage, which can again be separated into two types.
The first is a “Tracker” mortgage. A tracker mortgage follows the Bank of England Base rate. If the base rate goes down, then your payment would go down, but if the base rate goes up, your payment goes up, so as you see, you have no security of knowing what your payment will be.
The second is what’s known as a “discounted” rate. This is very similar to a tracker rate, but follows the lender’s Standard Variable Rate, rather than the Bank of England Base Rate.
So a tracker follows the Bank of England and a discounted rate follows the lender.
So, “why on Earth would someone want such a mortgage?” I hear you ask.
Well, in some cases, there are some lenders that will allow you a lot of flexibility with a variable rate, for example you can make unlimited overpayments or even pay off the while mortgage with no Early Repayment Charge if you want.
Let’s say for example, you’re a City Banker. You’re on about £100,000 per year and you might get a bonus of about £50,000. You’ve only borrowed £50,000 on your mortgage, so if you monthly payment goes up, it’s not the end of the world, but if you get your bonus, you might want to either repay a huge chunk of your mortgage off, or even all of it. That’s just one of many cases where such a mortgage might suit you.
You might feel that rates will be coming down soon and take advantage of that situation. As long as you’re aware that they could also go up, then again, a tracker rate might be suitable for you.
Most people, however go for what’s known as a “fixed”rate. It does what it says on the tin. A lender will “fix” that rate for a period of time. two years, three years five years and even ten years are pretty standard, although other fixed terms are available.
The longer that you fix a rate for, then the longer you have the security of knowing what your payment is going to be. It does come at a price though, and if you want to repay large chunks or even all of the mortgage, then you will usually have to pay what’s known as an Early Repayment Charge to do so and that could run into the thousands.
Most lenders however will allow some form of smaller overpayments and most lenders will even allow you to take the deal to another property (known as “Porting”), but there are often terms and conditions attached, so it’s a trade off on security versus restrictions.
At the end of the fixed rate, you will automatically go onto the lender’s Standard Variable Rate, which could mean a big rise in payments. At that time, we could look at changing the product with the same lender or even changing lenders, but again, we have to look at all of the costs and timescales involved.
When you find a property, I recommend that you have a good long think about how long you see yourself living there. If it’s a flat or an area you don’t know, perhaps a shorter period would be better, or if it’s a long term “forever home” then perhaps we should explore longer term fixed rates, although always keeping in mind your monthly budget and possible life plans.