Your home is likely to be the biggest purchase you will ever make, so it is vital to understand the true costs. Not many people have the cash to buy a house outright. A residential mortgage is a long term loan to enable you to afford buy a property.
People like mortgages because it feels safer knowing what your mortgage payment is going to be rather than the vulnerability of renting where the bills are within your landlord’s control, along with how long you live there for.
While choosing a new home and putting your personal stamp on it is fun, mortgages are the necessary bit – but it is important to understand them.
A residential mortgage is secured against the home to secure the mortgage lender’s funds. If you default on your monthly repayments, you could lose your home – another reason to understand the nitty-gritty before you choose your mortgage.
There are three main types of residential mortgage:
- Fixed rate mortgages – offer fixed monthly repayments for a specified number of years, usually between 2 and 5 during the fixed rate. Your payments will not increase if interest rates rise, but in turn you will not benefit from lower payments as a result of falling interest rates
- Variable mortgages – your monthly payments will vary as the interest rate is set by the mortgage lender. The cost of your mortgage is likely to increase or decrease from the initial rate
- Tracker mortgages – repayments are aligned with the base rate of interest set by the Bank Of England
Each type of residential mortgage requires a cash deposit, which is usually around 5 – 40% of the property value.
First time buyers can often benefit from a lower deposit requirement of around 5%, through schemes such as Help To Buy.
Loan to value ratio (LTV)
The amount borrowed set against the value of the property, the LTV is key to a residential mortgage rate.
LTV is particularly important for newbies taking their first tentative step onto the property ladder. First time buyers may not have much of a deposit, so the LTV needed will likely be high.
If a property costs £200,000 and you have a deposit of £40,000, you will need a mortgage of £160,000. This is an LTV of 80%.
LTVs of 85% or lower are regarded as low, whereas 90% and above are considered to be high. The lower the LTV, the lower the risk for the mortgage lender, resulting in a better interest rate for the borrower.
Remortgaging with a residential mortgage
If you already have a residential mortgage, you can choose to switch to a new version by remortgaging. Mortgage lenders need to entice customers away from their competitors so they are are continuously introducing new deals onto the market to offer more mouth-watering opportunities. This could mean you get a better rate of interest and lower monthly repayments if you remortgage.
If you want to remortgage to a cheaper rate, start looking around 16 weeks before your rate ends.
You have to pay a fee for switching your mortgage, so check that this fee is less than any savings you may make before you sign the dotted line.