Mortgage Guides

Mortgages: The basics

Thursday 19 May, 2011

By Martin Fagan news@consumerchoices.co.uk

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A house is probably the most expensive thing you’ll ever buy, so avoid being caught out by learning the basics of mortgage lending.

If you’re a first-time buyer then it’s essential that you know the basics of mortgages, from making repayments through to potential penalty fees and interest rates.

it’s advisable not to overstretch the amount you’re planning to borrow

This guide can help you avoid a financial pitfall by explaining the two main ways that mortgage repayments are made and the questions you should ask before singing on the dotted line.

How to repay a mortgage

There are two main ways of repaying your mortgage:

Repayment - Make monthly repayments for an agreed period of time until you’ve paid back the loan and interest. This is considered the least risky mortgage type, as well as the easiest to understand
Interest-only - Make monthly repayments for an agreed period, but which only cover the interest on your loan. You’ll still need to make monthly payments into a savings account, the sum of which is then used to pay off your mortgage at the end of its term.

Our mortgage comparision service helps you find the most suitable mortgage.

Our mortgage calculator can also help work out your monthly repayments.

Chris Eagle, commercial manager at Creditchoices.co.uk says: “Given the current financial climate, it’s advisable not to overstretch the amount you’re planning to borrow.

“You should budget for higher interest rates, so you’re prepared for the worse. And it’s always worth speaking to an independent mortgage adviser because buying a house isn’t something you should rush into.”

Mortgage FAQ

Before you apply for any mortgage always ask your potential mortgage lender, and ideally an independent mortgage broker, the following:

What is the best type of mortgage for me?

The best way to guarantee you pay off your mortgage is a repayment mortgage, but other types of mortgage could be better for your financial circumstances both now and in the future.

How can I tell which mortgage rate is best for me?

The lower the better, but watch that the opening rate won’t rise sharply afterwards as this could cause you to struggle with monthly repayments.

How much can I afford to borrow?

The standard is three times your annual gross salary and although some lenders may relax the criteria slightly, they will have scrutinised your finances so they’ll know how much you can afford.

What kind of repayments should I make?

All mortgages are repaid monthly, but some will accept lump sums and some are flexible enough to allow overpayments and payment holidays.

Can I make lump sum payments if I need to?

Depositing a lump sum will reduce your mortgage and lower your monthly interest payments. Check that the mortgage calculates the interest daily to ensure that your overpayment takes immediate effect on the outstanding sum.

Are there penalties for paying off the mortgage early?

If you want to pay the mortgage off before the term or if you remortgage to another lender, there will be a number of fees - amounts vary from a percentage of the outstanding to a specified number of months’ interest.

Does the mortgage come with insurance?

Some lenders insure the property against it being worth less than the mortgage secured on it and so insist you pay a “Mortgage Indemnity Guarantee”. But beware as this only protects the lender against financial loss - not you.

What other charges will I have to pay?

You could be charged a raft of things, including arrangement Fees, valuation fees, early redemption fees and early exit fees.

What happens if I can’t pay?

If you miss a few months’ payment, the lender will require you pay interest on – and make good - the missed payments. But if your miss payments persist then a repossession order could be issued.

What about the small print?

Read it. A mortgage is the biggest financial commitment you’ll ever undertake and you owe it to yourself to know what precisely you’re signing up for.

Read our guide to the seven most common mortgage types.

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