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Mortgages


Mortgages Every year it becomes more and more difficult to get a foot onto the property market and buy your own home , House prices appear to rise quicker than you can save the deposit required ( 5% - 10% ). And although the price of houses does appear to only keep going up (There have been periods where the opposite has happened and all the bad news comes at the same time.) If the following 3 things happen at the same time 1. Interest Rates rise dramatically 2. Inflation goes out of control 3. Unemployment increases Then the property market can take a downward spiral ( 1990 ) In the page below we have tried to provide some information on the jargon that surrounds the borrowing of money to buy your home. We have only given some description's of a few of the terms used when obtaining a mortgage always seek professional financial advice. What is a Mortgage ? A mortgage is the money you borrow to buy your home. A mortgage allows you to borrow large sums of money against the value of the property you are buying over a long period of time from Specialist institutions , building societies or banks. Because of the large amounts of money involved they have the right to reposses your home if you do not keep up with the Payments. How Much can I borrow on mortgage ? 1. Most lenders will not lend more than 95% of the value of the home you wish to buy , also remember that the higher percentage of loan required the higher the risk to the lender so you may pay a higher interest rate. 2. As a rule of thumb most lenders will currently lend a maximum of 3.25 times the first income plus one times the second income. As an alternative they will usually be prepared to add the two incomes together and multiply the combined figure by 2.5 times if this gives a higher figure than the first method. Interest Rates Variable interest rates mean you pay the payments can vary depending on current interest rate levels. The mortgage rate changes every time interest rates change or, as in most cases, the overall effect of any interest rate changes is calculated once a year and payments are altered accordingly. Fixed interest rates are what they say. The interest rate is fixed for the period agreed - often two to five years. These are ideal for budgeting or if you think rates might increase. You do not benefit if rates fall, and will face penalties if you try to leave early. What are the different ways to back the mortgage ? ( Capital is the actual amount you borrow ) Repayment Mortgage This is when you pay off the mortgage every month including the interest and the capital you borrowed over a set period of time E.G. 25 years. This will often mean in the first 10 years you will appear to pay off very little as most of your payments are paying for the interest on the mortgage Pay it all at the end Mortgage This is when each month all you pay on your mortgage is the interest , but you also pay into some other form of investment 2 most used are (Endowment Isa ) These increase in value and are then used to pay off the capital that you borrowed Most of these styles of investment are related in some way to the stock market and investment industry. Endowment Mortgages Endowment Mortgages use an endowment policy to provide life insurance and saving funds to repay the loan at the end of the term (usually 20-25 years). If the investment performs badly, you could face a shortfall on your loan at the end of the repayment period. Individual Savings Account (Isa) Mortgages Individual Savings Account (Isa) mortgages work on the same principle as endowments, but use an Individual Savings Account as the loan repayment method. If your investment performs badly you could face a shortfall at the end of the mortgage term. The UK government guidelines suggests buyers should ask these 10 questions before agreeing a mortgage with a lender. 1. How much can I afford to borrow? This deals with such questions as "What will the cost be each month?" and "What fees will I have to pay?" 2. How can I tell which mortgage rate is best for me? 3. What is the best type of mortgage for me? This deals with how to understand the jargon, such as "What do fixed rate, variable rate, discounted or low-start, and flexible mean?" and "Will this mortgage suit my circumstances now and in the future?" 4. How should I repay it? "Why are you trying to sell me an endowment policy, or a pension or an Isa?", "Why is it best for my circumstances?" and "What commission are you being paid?" 5. Can I make lump sum payments to reduce the size of the loan? 6. Are there any redemption penalties? 7. Does this mortgage come with compulsory insurance? 8. What other charges will I have to pay? 9. What happens if I can't pay? 10. What about the small print? Be aware if a deal that is offered is much better than any other available as there may be hidden penalties that are difficult to see by the untrained eye. A seemingly small clause which may appear to have little impact on repayments could be significant amount over 25 years ( 300 monthly payments ) This is for general information only and is not investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation. Below are some external links to what we believe are useful resources when trying to understand mortgages in the UK The BBC guide through the mortgage maze The UK Governments Financial Services Authority The Independent Newspaper Money and Mortages Section Monthly Mortgage Payments The BBC Mortgage payment calculator

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