So, you’ve finally managed to save up your deposit for a house, and you’re ready to get onto that property ladder, you’ve even found a house you like with your local estate agents – but choosing which mortgage to go for can proof tricky?
With hundreds of thousands of various deals to choose from, and lots of jargon for you to try to get your head around, it can become very easy to get lost in the mortgage maze. We have created this guide to try to explain and help you understand all the basics you need to know about mortgages. This will hopefully help you in finding the perfect deal for you.
Fixed and variable rate mortgages
Mortgages will normally come with either a fixed or variable rate attached. As you can probably guess, a fixed rate won’t change for the length of your deal, so you will have peace of mind that your monthly repayments, will stay the same. As a result, this kind of deal is usually very popular with anyone needing to keep to a budget, and people who may not be able to afford an increase in payments, such as first-time buyers.
With a variable rate mortgage, however, the rate you may pay can vary, so if interest rates increase, then your mortgage payments are more than likely to go up also. But there are various types of tracker mortgages as we explain next.
How do tracker and discounted mortgages work?
With a tracker mortgage, your rate normally tracks the Bank of England base rate, plus a set percentage. These are known asvariable rate deals, so your rate will go up as the base rate rises, and down when it falls. Discounted mortgages are too variable, and you will usually be offered a discount off the lender’s standard variable rate for a certain length of time.
Loan to Values (LTV)
When choosing a mortgage, you will sometimes see the initials LTV, and then a percentage shown below it. LTV stands for loan-to-value, which means the amount of the property’s value that you are able to borrow.
So, if a mortgage has a 80% LTV, then you can borrow up to 80% of the value of the property, and you’ll only need to put down a 20% deposit. If the LTV shown is 60%, then you’ll only qualify for that mortgage if you have got a 40% deposit to place down – or if you have the equivalent amount of equity in your current property if you’re remortgaging. As a standard rule, the higher the LTV is, the higher the mortgage rate is going to be.
Repaying your mortgage
The two ways you can pay your mortgage are known as; repaying the capital and interest, which as also known as a repayment mortgage, or an interest-only mortgage where you only pay the interest.
With a repayment mortgage, you pay off the amount of money that you have borrowed, and the interest charged on it. By the end of the term, your debt will be cleared, and you own the property outright. With an interest-only mortgage, you only pay interest off, rather than repaying your debt. The amount you borrowed on the mortgage does not go down, and at the end of its life still owe all the money.