Bad Credit Mortgages - The Basics
A mortgage is a loan you take out to buy property. Most banks and building societies offer mortgages, as well as specialist mortgage lending companies. If you change lenders but don't move home it's referred to as a 'remortgage'.
Except for those lucky few the vast majority of us need a mortgage if we are to buy a house - it's usually the biggest financial transaction we will ever make and so it's really important to get it right.
These days the world of mortgages just seems to get more and more confusing with an ever increasing range of products with fancy names that none of us may fully understand. We, at MoneyUnmuddled, hope we can make it just a little clearer.
You can get a mortgage direct from the lender (banks, building societies and specialist mortgage lenders), or you can use a mortgage broker. You can buy based on 'information' only or get advice and recommendation on a mortgage that suits your particular needs.
What is a mortgage ?
In it's very simplest terms a mortgage is a loan secured against a property and, as with any loan, a mortgage needs to be paid back to the lender over an agreed period of time and comprises of:
....... the basics are really as simple as that.
A mortgage uses your property as security for a loan. This means that, if you don’t keep up repayments on the loan, the lender can go to court for a possession order and force the sale of your home.
How do I repay a mortgage ?
The two main ways to repay your mortgage are 'repayment' and 'interest only'. With a repayment mortgage
Repayment Mortgage: With a repayment mortgage, you pay off part of the capital each month, as well as the interest. This guarantees that your mortgage will be repaid in full at the end of the term, as long as you keep up the repayments. You make monthly repayments for an agreed period (the 'term') until you've paid back the loan and the interest.
Interest Only Mortgage: With an interest only mortgage, you only pay the interest on the amount you borrowed each month for the agreed term of the mortgage. This means that at the end of the mortgage term you will still owe the same amount you borrowed, so you’ll need an additional plan to enable you to pay this off, normally another savings or investment plan that'll hopefully pay off the loan at the end of the term.
You'll also find a range of interest rates to choose from. For example, 'variable' and 'tracker' rates change in line with Bank of England rates, 'fixed' rates are fixed for a set number of years, and 'capped' rates have a variable interest rate with a ceiling so your payments won't go above a set amount.
A mortgage is usually the biggest financial transaction we will ever make - it's important therefore that we get it right !
A lender may require you to take out life insurance to pay off your mortgage should you die. You can also get insurance to protect your income or just your mortgage payments if you become ill or disabled, or lose your job.
How much can I borrow ?
Mortgage lending has tightened significantly of late but most mortgage providers will lend up to 75% of the property value, many will still offer you a mortgage up to 90% or even 95% of the value of the property and a few still offer the 100% mortgage.
If the lender you choose will only lend up to 90% of the value this would mean that if you're looking to buy a property for £150,000 you will only be able too borrow £135,000 and will need to find a deposit of £15,000 yourself. Work out the maximum deposit you can afford to put down on a property and take this into account when shopping around for the right deal.
In money terms, just how much the lender will be prepared to loan you is dependant on your salary and how much you can afford to repay each month. Banks and Building Societies used to base the criteria solely on salary - usually around 3 x a single salary or 2.5 x a joint salary. Nowadays though deposit size and monthly commitments are taken into account to a greater degree.
As a guide though, if you want a rough idea work as to how much you should be able to borrow, work on the following:
Single Salary: 3.5 x Salary - if you earn £30,000 you could therefore borrow around £105,000
Joint Salary Option 1: 2.5 x joint salary - Salary 1 is 30,000, salary 2 is £15,000. Joint salary is therefore £45,000, maximum mortgage approx £112,500
Joint Salary Option 2: 3.5 x main salary + 1 x second salary - Salary 1 is £30,000, salary 2 is £15,000. Maximum mortgage therefore would be (3.5 x £30,000) + (1 x £15,000) £120,000
This just gives you an idea and is not set in stone - I've just done a very quick internet search to find a lender thats still even advertising a mortgage up to 6 x salary !!!! so shop around to find a deal to suit you but make sure you can afford the repayments.
The basic options:
Every lender has a different range of mortgages but these are the most common options:
Fixed-Rate: A fixed rate can help you budget, because the interest rate you pay - and your monthly payment - will be fixed until a set date. This means you will know exactly how much you will need to pay each month.
Tracker: the interest rate tracks the Bank of England base rate by a set percentage until a set date. Every time the base rate changes, so will the payments on your mortgage. It is slightly different from a standard variable rate, where the lender has the flexibility to choose the rate.
Standard variable: Most lenders have a standard variable mortgage rate, which can move up or down at their discretion. This is normally the rate your mortgage will switch to at the end of any special deal e.g. fixed-rate or tracker. C&G’s Standard Variable Mortgage Rate is guaranteed to be no more than 2% above the Bank of England base rate.
Capped: These mortgages guarantee that your interest rate – and your monthly payment – will never go above a set figure within the capped-rate period. Below that set figure, the rate will move up and down in line with the lender’s standard variable rate.
Discount: This type of mortgage gives you a discount of a set percentage off the lender’s standard variable rate until a set date. Your rate will reflect any changes in the lender’s standard variable rate, which changes at their discretion.
Cashback: These offers give you a cash lump sum when your mortgage completes, to spend as you wish. The mortgage is usually arranged at the lender’s standard variable rate.
Offset: These mortgages give you the chance to offset your savings, or those of your family and friends, against the mortgage balance. You don’t receive any interest on your savings, but do not pay interest on the equivalent amount of your mortgage loan.
The world of mortgages is getting bigger and bigger and more and more complicated - we aim to exp;ain the basics but it's unlikely we could ever cover everything here, so if you’re considering getting your first mortgage, moving house or remortgaging, then the golden rule is to talk to a qualified expert for advice on the right mortgage product for you. |
Mortgages
