Are you looking to buy your next home? If so, like most buyers, you’ll likely need a mortgage to fund your purchase.
Mortgages are essentially a loan to help you buy a property. After you’ve provided a deposit, which is usually at least 5% of the property’s value, you can borrow the remaining amount from a lender. The borrowed sum is repaid in monthly instalments over an extended period, often 25 years. These payments include both the principal and interest charges, which can be fixed or variable, depending on the mortgage deal you choose.
The loan is secured against your property until it’s been repaid in full.
Below, we’re sharing insights from our partners at L&C, one of the largest whole-of-market mortgage brokers in the UK, to explain how mortgages work.
From interest rates to repayment terms, we’ll also explore the options available when selling or moving house and highlight the importance of financial planning and considering various mortgage options.
Understanding Interest Rates
The interest rate on a mortgage is determined by the chosen mortgage deal. For example, a fixed rate mortgage maintains a consistent interest rate throughout a specified period. During this period, as a borrower you’ll pay a predictable amount of interest each month.
However, once the fixed-rate period ends, you’ll typically be transferred to the lender’s standard variable rate, which tends to be higher. Consequently, interest payments increase.
Nonetheless, you have the option to remortgage to secure a new deal which means you could potentially maintain lower monthly payments.
On the other hand, unlike fixed rate mortgages, variable rate mortgage deals have interest rates that fluctuate over time. If interest rates decrease, as a borrower you’ll benefit from reduced monthly payments. Conversely, when interest rates rise, you’ll face higher costs and experience increased monthly payments.
For more stability, many homebuyers tend to prefer fixed rate mortgages as they come with peace of mind that their interest rates and monthly payments will remain unchanged during their fixed period.
During the initial years of a mortgage, a greater proportion of monthly payments are allocated to paying your interest, whilst a smaller portion goes toward repaying the capital. Gradually, as your debt reduces, more of your monthly payments are applied to the capital, allowing for a gradual reduction in the outstanding loan amount.
How mortgages work when selling or moving home
When selling or moving home, various mortgage options are available. Some mortgages offer portability, allowing you to transfer your existing mortgage to a new property. However, as a borrower you must reapply and demonstrate to the lender that the monthly payments remain affordable. The lender then ultimately decides whether the current mortgage deal can be transferred. It’s important to note that there may be fees associated with moving the mortgage too.
If you need a larger mortgage to purchase a new property, you may choose to transfer your existing deal and request additional funds from the lender. It’s important to consider that the interest rate for the additional borrowing might differ from the original rate.
Alternatively, if you’re not tied to your current mortgage deal and don’t face Early Repayment Charges, you have the option to remortgage with a different lender to acquire the necessary funds for your new property.
Before applying for a new mortgage, you should make sure you can comfortably afford the repayments. Lending criteria has become stricter in recent years, with lenders thoroughly scrutinizing applicants’ finances. With this in mind, a thorough assessment of your financial situation is necessary to increase the likelihood of being approved for a mortgage.
In cases where there’s a gap between selling your existing home and purchasing a new one, some movers opt for a “bridging loan”. These loans bridge the gap between properties, allowing you to move into your new property before selling your current one. However, it’s important to recognize that these loans generally have higher interest rates and fees. Seeking professional advice is recommended, as it’s crucial to understand the associated risks, particularly since owning two properties simultaneously may be required for a period of time.
Remember to think carefully before securing other debts against your home. Your home or property may be repossessed if you don’t keep up repayments on your mortgage.
Content provided by OnTheMarket.com is for information purposes only. Independent and professional advice should be taken before buying, selling, letting or renting property, or buying financial products.