Back to basics: Everything you need to know about mortgages

Published:
12 September 2013
Topic:
News,Money,Mortgages

You've saved up your deposit and you're ready to get onto that first rung of the property ladder - but which mortgage should you go for?

With thousands of different deals to choose from and lots of jargon to get your head around, it can be all too easy to get lost in the mortgage maze. Here, we explain all the basics you need to know about mortgages, so you are well equipped to find the right deal for you.

Loan to Values (LTV)

When you are picking a mortgage, you will often see the acronym LTV and then a percentage figure shown below it. LTV stands for loan-to-value, which essentially means the amount of the property's value that you can borrow.

So, if a mortgage has a 90% LTV, then you can borrow up to 90% of the property value, and you'll only need to put down a 10% deposit. If the LTV shown is 60%, then you'll only qualify for that mortgage if you've got a 40% deposit to put down - or if you have the equivalent amount of equity in your property if you're remortgaging. As a general rule, the higher the LTV shown, the higher the mortgage rate is likely to be.

Fixed and variable rate mortgages

Mortgages usually come with either a fixed or a variable rate attached. As you would expect, a fixed rate won't move for the length of the deal, so you have peace of mind that your monthly mortgage repayments will stay the same. As a result this kind of deal is usually popular with anyone needing to keep to a strict budget and who might not be able to afford a rise in payments, such as first-time buyers.

With a variable rate mortgage, however, the rate you pay can vary, so if interest rates rise, then your mortgage payments are likely to go up as well. 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 usually tracks the Bank of England base rate, plus a set percentage. These are variable rate deals, so your rate will go up when the base rate rises and down when it falls. Discounted mortgages are also variable, and typically offer a discount off the lender's standard variable rate for a certain period of time. So, if the lender has a variable rate of 4.99%, a discounted deal might discount this by 0.50% to 4.49% for a couple of years or more.

If I want to fix, how long should I tie myself in for?

Most fixed mortgage deals run for either two, three, four or five years, although some lenders allow you to fix for a longer period, such as 10 years. Remember that although many of these deals will be portable, which means you can take them with you if you move to a different property, if you need to borrow any more money, then this will probably be at a different rate.
Ideally you should fix for as long as you can be certain you will remain at your current property, as even though you might be able to move your mortgage you will still effectively have to reapply for it, which could prove tricky if your circumstances have changed.

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Early Repayment Charge (ERC)

ERC stands for Early Repayment Charge. This charge is only payable if, as the name suggests, you want to pay your mortgage off early or remortgage to a different deal with another lender during the term of your deal.
ERCs normally only apply while you're on a special deal such as a fixed or discounted rate - if you're on your lender's standard variable rate (SVR) which is the rate these special deals revert to when they end, then you're usually free to move without penalty.

Always check whether any ERCs apply when you take out your mortgage and make sure you won't need to pay off your mortgage early or you could find yourself having to fork out thousands of pounds in charges.

What's the difference between an interest-only mortgage and a repayment mortgage?

With an interest-only mortgage, you only pay the interest you owe each month, and not any of the capital you've borrowed.

If you want an interest-only mortgage, you must be able to prove to your lender that you are saving each month so that you will have enough to repay the capital at the end of the mortgage term. If you opt for a repayment mortgage, you pay back both the interest and some of the capital at the end of the month, so at the end of the mortgage you will have paid back everything you owe.

Very few lenders now offer interest-only mortgages, and most people will be better off choosing a repayment mortgage as they won't then be left having to find a big lump sum when they mortgage finishes.

How long will my mortgage run for?

Most mortgages have a 25 year term, but when you apply you can choose whether you want to repay what you owe over a shorter or longer term. Remember that the longer the term you choose, the more interest you will end up paying overall, even though your monthly payments will be lower than if you'd chosen a shorter term.

Offset mortgages

An offset mortgage allows people with savings to offset their savings against their mortgage, reducing the amount of interest they pay. For example, if you had a £200,000 mortgage and £50,000 in savings, you could offset these savings against the mortgage and only pay interest on £150,000. You can still access your savings whenever you want to.

This kind of mortgage is often popular with self-employed people who save up over the year to pay their tax bill, but unless you have substantial savings you might be better off with a standard mortgage, as rates on offset deals tend to be slightly higher than on conventional mortgages.

Compare mortgage deals at our mortgage comparison channel and, if you are applying for a mortgage, read more here.

Please note:
Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct

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About This Author

Melanie Wright

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Financial journalist

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