Understanding Mortgages

For most people, buying a home is one of the biggest investment decisions in their lifetime. Irrespective of their income and savings, buying a home requires a lot of financial resources. For example, as of September 2014 the average house price in the UK is £273,000. Unless those who have inherited a fortune or those who have a lot of savings from their income, most people don't have enough funds for buying a house. Such homebuyers find help in mortgages.

Mortgages in detail

A mortgage is a loan, which is taken specifically for purchasing a property or a piece of land. For instance, you cannot buy a car or the iPad Air on mortgage. Typically, mortgages are for 25 years. You are required to make repayments for the mortgage on a monthly basis.

Mortgages can also be referred to as one type of 'secured' loan. In this scenario, the loan is secured against your property; if you don't make repayments on time, your mortgage lender can take the property and sell it off to recover their loan.

Where can I get mortgages?

In the UK, you can get a mortgage from banks or building societies. You can approach the lenders directly or contact them via mortgage brokers or independent financial advisors.

Example 1: Let's say you want to buy a property in England worth £273,000. You can find a mortgage provider for this amount using the mortgage comparison service of Money Advice Service, an independent body set up by the UK government for financial advice. After putting the desired mortgage amount, you will find many options for mortgages for different providers such as the Coventry building society, Hinckley and Rugby building society, First Direct bank, etc.

Can I borrow as much as the price of the property that I intend to buy?

You cannot get a mortgage for 100% of your property's value. You will be required to pay a deposit of a certain amount, and you can borrow the remaining amount from your mortgage lender. You will find lenders offering mortgages of up to 95% of your property value.

When dealing in mortgages, you are likely to come across a term Loan to Value (LTV). LTV is the percentage of the loan taken against the actual value of your property.

Example 2: Using the above example of a property worth £273,000, let's say you have savings of £73,000, and you want the remaining £200,000 as a loan. Your LTV in this example will be 73% (£200,000 is 73% of £273,000).

How much are the interest rates on mortgages?

Interest rates for mortgages are dependent on the prevailing interest rate charged by the Bank of England, the term of the loan, the amount of the loan, etc. For example, interest rates are higher for a longer loan term.

Example 3: As of November 2014, for a mortgage of £200,000 for a term of 25 years, Coventry Building Society is charging interest in the range of 1.98% to 2.80% for its different mortgage products.

Your monthly repayments will depend on the interest rates charged by the provider.

Use our mortgage calculator to calculate your monthly repayments based on different interest rates.

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