Decisions on your home are possibly the biggest that you will face. Mortgages will also probably be the most amount of money that you ever borrow. This means it pays to shop around as a mortgage is a huge long-term commitment.

What is a Mortgage?
A mortgage is essentially a loan which is secured against your house. Usually, you can take a mortgage out of three times your annual salary and the term is commonly 25 years. However, with the current increase in house prices, and first time buyers struggling to meet the deposits necessary, more flexible mortgages are appearing on the market. Some lenders will now accept 100% mortgages, although these rates will generally be quite high as it is high-risk lending. The more you can put down as your deposit, the better. An important point to note is that if you fall behind in your mortgage payments, your house can be taken away from you by the lender to cover the amounts outstanding.

How do mortgages work?
There are two major kinds of mortgage – repayment, or interest only.
A repayment mortgage is one where you pay back the interest on the money owed plus some of the capital (the lump sum that you borrowed in the first place). If you can afford to, this is the better of the two mortgages to have.
An interest-only mortgage is one where you only pay off the interest on the mortgage and none of the capital. On the side of the mortgage, you must pay money into another investment policy. The money in this investment policy when the mortgage term is up is used to pay off the capital in the house – the investment policy may actually leave you with some cash left over, or it may fall short meaning you will have to find the remaining funds from other savings.

What type of mortgages are there?
There are many different deals out there, meaning there is plenty of healthy competition. Here is a rundown of the most common:

Variable: The interest on the mortgage is a variable rate changes in line with the Bank of England Base Rate. When you take out this mortgage, it is important to ask yourself – can I afford the repayments if the interest rates increase?
Fixed: The interest rate on the mortgage is at a fixed rate for a certain period of time. If the base rate increases, you will not be affected, however if the base rate falls, you will miss out on the savings from the lower interest rate. Fixed rate mortgages are usually only given for short periods of time – up to 2 years – before they revert to being variable.
Discount: These mortgages offer a discount off the normal variable rate. Although this might look good, it is variable and will change along with the variable rate ie it could drop as well as increase. After the discount period, your mortgage will revert back to whatever it is normally.
Capped: A capped mortgage has a variable rate with a fixed element. This means the interest rate is variable but it will not go above a set (capped) rate meaning you know what the largest amount a monthly payment might be.
Tracker: A tracked mortgage tracks the Bank of England base rate. A tracker usually offers a unit rate above the base rate and will move in accordance with the base rate.

Note that variable rate, discount and tracker mortgages mean that your monthly payment amounts may fluctuate. Also, some fixed and discount mortgages may look really attractive at first, however the rates are unlikely to last. Make sure you know when the discount or fixed rate ends and how much the interest rates will be after this period. Also watch out for the switching fees – these are likely to be quite high to stop you switching to another mortgage provider. Ensure you know what the APR of your mortgage is – this covers this interest that will be charged as well as any other charges.

Shop Around
If you are looking for a new mortgage, it pays to look around as you could save yourself thousands of pounds. If you have a current mortgage, moving your mortgage or remortgaging could mean big savings and free up some of your hard-earned cash. However, if you are switching mortgages, beware of Early Redemption Charges (otherwise known as Early Repayment Charges) – these are particularly prevalent on mortgages which have low introductory interest rates to stop you moving once the low-rate period has ended.
Mortgage lenders are not allowed to sell you a mortgage that you cannot afford, however it is your responsibility to be honest with the mortgage lender when declaring your personal circumstances. If you are not honest, and you are not able to pay back the money, you may end up without your house and with a criminal record for fraud.

Specialist Mortgages
There are a few other more specialised mortgages on the market.

Sharing with Friends: Some mortgage lenders are now offering mortgages which can be shared amongst four friends to help first-time buyers onto the property ladder. These often have higher rates of interest. If you decide to take this kind of mortgage, it is important that you have a watertight agreement between yourself and your friends in case one person does not pay the bills on time or there are differing opinions about what to do with the house in the future.

Offset Mortgage: This mortgage takes into account what is in your current or savings account. The balance of the mortgage is reduced by the amount of money in your current or savings account and the interest is worked out on this amount. For example, if you have a mortgage of £200,000 and you have £15,000 of savings, the interest will only be calculated on £185,000 rather than the full £200,000. This helps you pay less interest overall and helps you to pay your mortgage off faster

Flexible Mortgages: Flexible mortgages allow you to be more flexible with your mortgage payments – if you have extra money one month, you can put overpay and if you are short the next, they will allow an underpayment. This type of mortgage may also allow you to take payment holidays or show daily interest. Daily and monthly interest is becoming more common – it means that your monthly payments will have more of an impact on the interest that is calculated and if possible, this is the type of interest to take.

Buy to Let Mortgages: Many people are starting to buy a second home and renting it out. In fact, it is so common that the special ‘buy to let mortgage’ has been set up. The main idea is that the rent coming in pays for the mortgage payments, maybe with a little extra left over. Lenders will often lend up to 80% of the property value and you need to show that your income rental wil cover 130% of your mortgage payment – this is because you may have months where the house is empty and you need to be able to prove you will have the capital to cover this possibility. Buy to let mortgages cover the whole spectrum – from discount to variable.

Mortgage Fees
Different fees will be charged by different lenders. Common fees are booking, administration and arrangement fees – all of which are to do with the setting up of the mortgage. You may also need to pay a valuation fee when the lender assesses the value of your home or legal fees for when the solicitor makes the mortgage official. If you have a very small deposit, or no deposit at all, you may also be charged a Mortgage Indemnity Guarantee (MIG) fee. Keep an eye out for special offers as some lenders may refund or discount various fees at different times of the year.

You may be offered a Mortgage Payment Protection Insurance (MPPI) plan which covers you in case of accident, sickness or a period of unemployment. Shop around for this, as you may find it cheaper elsewhere. Before taking this insurance out, ensure that you are covered – often students and the self-employed are not eligible to make a claim.

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