Mortgage basics (From Dudley News)

Mortgage basics

6:50am Saturday 16th August 2008

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WE have all recently heard, if not experienced the "credit crunch" and one very prominent area that has been affected the most, is residential mortgages.

In Britain, the saying "An Englishman's home is his castle" is still very relevant, as a high percentage of us want that feeling of owning our own "castles". Is this becoming out of reach for more of us, as the crunch tightens?

In very simple terms, only a year ago a young couple with very average wages of perhaps £18,000 per year each, with a fairly good credit history, could go in to any financial high street branch and ask for a mortgage to buy their first home. It was even possible to not have to pay a penny towards a deposit and you could add any fees on to the total loan.

Twelve months on, the lenders have not got the pots of money that they were dishing out Willy nilly, so their answer is to be a bit more picky about whom they give their much smaller pot to.

The average first time buyer now has to have a joint salary of nearer £40,000, very good credit history- this means no late payments on credit cards or bills unpaid, and a deposit of 10% of the value of the house, 25% deposit will secure a more reasonable rate! Where is this all leading to? Firstly, we all have to go back to basics and save up for that much needed deposit, or ask "The bank of Mum and Dad". Then get some good advice on all of the mortgages in the market.

Why do we actually have to have advice when we get a mortgage? If you are a first time buyer, who has never heard about mortgages, then how do you know where to start?

Repaying your mortgage can be done in 3 ways.

• Repayment is when you borrow the amount needed from the bank and repay it over 25 to 40 years every month repaying an amount of interest to the bank, plus a part payment of the amount that you borrowed. At the end of your mortgage, you will have paid off your debt completely.

• Interest only is when you borrow the amount needed from the bank and repay only the interest part to the bank. When your mortgage ends after 25 to 40 years, you will have paid lower monthly payments, but still owe the bank, the full amount that you borrowed!

• The third way, is to do a mixture of the two options. This can be a benefit for the first few years to keep your monthly payments lower, but you will still owe some of the amount that you originally borrowed at the end of the mortgage.

If you see an adviser, when you take out your mortgage, they can help you arrange affordable monthly payments, to suit your situation at the time. The main thing to remember is that, you DO have to repay the loan at some stage, so you should basically pay off as much as you can afford to, as soon as possible, as you pay interest on that money every year that you keep the loan. At the moment if you are paying 7% on your mortgage, this is just over £10,000 every year on a £150,000 loan!

There are also flexible mortgages which allow you to repay more of your mortgage if you have bonuses or overtime, or some take in to account your savings accounts and "offset" the interest you get on your savings against the interest you owe on your mortgage. Again a good adviser would help you to decide whether this type of mortgage is suitable for you.

Another problem to sort out is which type of interest rate to use to repay your mortgage. An image of the Nationwide man always comes to mind when I explain this to my clients, but there are fixed, trackers, variable, capped, collared, stepped and standard variable!!

What does all this mean?

There are basically two types, fixed or variable rates. The other types are variations on variable rates or what rate they are linked to. A fixed rate basically means that you can make sure that the rate you take stays at that rate for a set time scale, usually 2 or 3 years, it is possible to fix it for up to 25 years. You would know month on month what you were paying, the down side of this is that when that rate ends, your repayments may be very different. Again, this should be discussed and sorted out according to your personal circumstances.

Variable rates are just what they say; they may vary from month to month and can track Bank of England base rates or other rates like the Libor rate. Therefore you can't budget so easily from month to month.

Different lenders also have different criteria or guidelines that they use to decide who to lend to. This means that one lender may lend more than another because they will multiply your income by 4 times, whereas another may only multiply by 2.5 times. Some lenders do not lend money on certain types of property and they all have different ideas of what your credit history should look like!

This all leads back to the circle of asking for help when you take this mighty step, as good advice at the start can literally save you hundreds of pounds over the years. Try to find Independent advice as this means that the adviser should have access to a wide range of lenders. Many advisers can also help you protect the mortgage with life and income insurance. They can usually source these from a wide range of companies, not just the one provider in the bank! Again this can save you money.

JANE PRICE NASHELM

MORTGAGE SOLUTIONS

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