Mortgages – A beginner’s guide.

Buying a home is the largest purchase you’re likely to make. Before you arrange your mortgage, make sure you know what you can afford to borrow. Find out where to get a mortgage, the different types and how the process works. This is where a jem mortgage adviser can help.

What is a mortgage?

A mortgage is a loan taken out to buy property or land. The term can run from 5 – 40 years depending on your circumstances. The loan is ‘secured’ against the value of your home until it’s paid off. If you can’t keep up your repayments the lender can repossess (take back) your home and sell it so they get their money back.

Your deposit – size matters

When buying a property, you will need to pay a deposit. This is a chunk of money that goes towards the cost of the property you’re buying. The more deposit you have, the lower your interest rate could be. When talking about mortgages, you might hear people mentioning “Loan to Value” or LTV. This might sound complicated, but it’s simply the amount of your home you own outright, compared to the amount that is secured against a mortgage. For example, with a £20,000 deposit on a £200,000 property, the deposit is 10% of the price of the property, and the LTV is the remaining 90%. The mortgage is secured against this 90% portion. The lower the LTV, the lower your interest rate is likely to be. This is because the lender takes less risk with a smaller loan. The cheapest rates are typically available for people with a 40% deposit.

How does a mortgage work?

The money you borrow is called the capital and the lender then charges you interest on it till it is repaid. The type of mortgage you are able to apply for will depend on whether you want to repay interest only or interest and capital.

• Repayment Mortgage – With repayment mortgages you pay the interest and part of the capital off every month. At the end of the term, typically 25 years, you should manage to have paid it all off and own your home.
• Interest Only – With interest-only mortgages, you pay only the interest on the loan and nothing off the capital (the amount you borrowed). These mortgages are becoming much harder to come by as lenders and regulators are worried about homeowners being left with a huge debt and no way of repaying it. You will have to have a separate plan for how you will repay the original loan at the end of the mortgage term even if it is only to sell your home and down-size.
• Part & Part – With part and part mortgages you have a combination of both the above. Again, these are becoming hard to obtain as there is still the interest only part that is not being repaid with your monthly premiums.

Different types of mortgage

Once you’ve decided how to pay back the capital and interest, you need to think about the mortgage type. Mortgages come with fixed or variable interest rates.

With a fixed-rate mortgage your repayments will be the same for a certain period of time – typically two to five years. Regardless of what interest rates are doing in the wider market. If you have a variable rate mortgage, the rate you pay could move up or down, in line with the Bank of England base rate, in line with the lender’s standard variable rate (SVR) or in line with LIBOR (London Inter-bank offer rate).

There are various types of variable rate mortgages. It is best to speak with your jem mortgages adviser to help you decide.

Mortgages – Definitions

On any given day in the UK, there are approximately 13,500 mortgage products to choose from, which is why it is best to use a mortgage broker to navigate the market and find the best possible product for your circumstances.  There are different types of mortgages, which we have explained below;

First Time Buyer

Put very simply a first-time buyer is a person buying a property for the first time who has not owned a property before.  At jem, we can give you advice to get you in the best position financially for your circumstances to take your first step on the property ladder.

Home Movers

A home mover is someone who already owns a residential property, and is looking to purchase a new one, also known as a Next Time Buyer.

Impaired Credit Mortgages

Impaired credit is where you have a poor credit repayment record.  This could be missed/late payments on mortgages, loans, credit cards and other agreements such as utilities, (gas/electricity/water), or mobile phone contracts.  It also includes any defaults, county court judgements, IVA’s, bankruptcies and Debt Management Plans.  All these are classed as impaired credit.

All lenders use information held by credit referencing agencies such as Experian or Equifax to make a decision on whether to lend to you.  Your credit file shows your last 6 years history of your ability to take out credit and repay it.

There are mortgage lenders who will lend to Impaired Credit customers, but the interest rates and criteria varies greatly from lender to lender.  At jem we have the experience and knowledge to get you the best mortgage product for your circumstances.

Re-Mortgage with Capital Raising

Capital raising is where you borrow more money against the equity in your home.  For example if you have a current mortgage of £100,000 and you want to borrow an extra £20,000 to carry out home improvements, you would require a re-mortgage with capital raising.

Many lenders allow capital raising for any legal reason, however there can be restrictions on how much you can borrow and the maximum Loan to Value.  Where you want to consolidate/clear unsecured debts with your re-mortgage, some lenders also have restrictions on this.  We can help find you the most suitable mortgage for your needs.

Buy to Let Purchase/Re-Mortgage/Capital-Raising

Buy to Let mortgages are specifically for landlords who rent property out.  They are similar to residential mortgages but have some key differences.  The minimum deposit/equity for a buy-to-let tends to be higher than a residential mortgage.  The affordability for the mortgage is usually calculated using the market rental figure that can be achieved each month.

There are some different types of Buy to Let mortgages such as consumer buy to let; where the owner used to live in the property, and regulated buy to let; where you intend to let the property to a family member.

There is lots of different affordability and criteria issues to navigate when you are looking for a buy to let mortgage, which is why it is always a good idea to let us do the hard work for you!

If you own more than 4 buy to let properties, in many lenders eyes you are classed as a Portfolio Landlord, which opens another lot of criteria to think of, and can restrict the lenders/products available to you.

Older Borrowers/Lending into Retirement

Historically most mortgages were expected to be paid off by your retirement age, however in this day & age, many more clients are either working longer/retiring later or require a mortgage in later life.

We have many lenders who can assist with this, including those that have no maximum age at the end of the mortgage term, and those who will also lend on an interest-only basis, to keep the monthly payments as low as possible.