Mortgages

What is a Mortgage?
A mortgage in its simplest form is a secured loan on real estate by contract. It follows that an individual or company can purchase residential or commercial property without having to pay the full value upfront. The borrower (also called the mortgagor) uses a mortgage to pledge real property to the lender (also called the mortgagee), thus using the property as insurance against repayment of the loan. The different types of mortgages are wide spread so as to provide a diverse choice of loan patterns for the individual.

How long do you get to pay off your mortgage?
Payment of your mortgage is decided before the loan takes place during consultation between the lender and the borrower. Mortgage terms can vary in length but usually a 20 to 25 year period is set as standard.

What variations of Mortgages are available?
There are predominantly only two main types of mortgages that are suggested when a borrower is applying for the loan:
Repayment Mortgage
Interest Only Mortgage

A Repayment Mortgage is when the borrower pays back the loan of money over the agreed number of years, so that when the term is completed, final payment would have been made.

An Interest Only Mortgage tends to be more popular with first time buyers as it allows payments to be made in the form of interest only. Instead of paying off the loan with the intention of having wiped the debt by the end of the given time, the borrower can simply pay off the interest only and then at the end of the term pay the original loan off in full.

An Interest only mortgage can be paid back through different kinds of savings plans such as an ISA account, Pension mortgage, Endowment policy or through the sale of the property. All these saving plans allow the borrower to invest money into a scheme, sometimes tax-free whereby they save money to the amount of the original mortgage debt and thus pay it off in full. All interest only repayment policies are worth carefully looking into, as the payments may mature after the term of the mortgage, leaving the borrower liable to continue paying off the interest on the mortgage for as long as the debt remains.

What types of interest rates are available?
With both interest only mortgages and repayment mortgages you can choose to pay off the loan with a variety of interest rate schemes, the two most popular being either a fixed or standard variable rate. The former being a fixed rate of interest over a period of 2-10 years so the repayments you make do not change regardless of any fluctuation in the bank interest rate. With fixed mortgage rates you can run the risk of making huge savings (when the repayments are much lower than the current rate of interest) or a huge loss (when the repayments are higher than the current rate of interest). The latter being an interest determined by the Bank of England, thus every 3-4 months they complete a review and set the interest rate. If interest rates rise, so do your interest payments and vice versa when the rates fall.
Other interest rates out there are:

Capped rate mortgage: A borrower can also pay off the loan with a combination of the two, in the form of a capped rate mortgage. A capped rate mortgage is a mixture between fixed rate and a standard variable rate mortgage, whereby the mortgage lender can allow the rate to fluctuate as they see fit but then at a certain point, the rate will be capped so that it cannot go any higher. A capped rate mortgage is often used by mortgage lenders as a way to insure loyalty in its customers. Mortgage rates will always drop with the market thus they can always ensure a satisfactory repayment scheme.
Discounted rate Mortgage: A discounted rate mortgage is similar to a variable rate mortgage in the sense that you follow the rate of interest in repayments, however for the first year of repayments the lender will knock off 2% of the repayment rate. After the year is up the repayments revert back to the full rate of interest which is accountable at that given time. This kind of a rate is good for those borrowers who want to be gently eased into the mortgage game and give them some time to save money.
Cashbacks: A cashback allows you to acquire a mortgage for a property with an additional amount of money on top. For example if you wanted to buy a property for 100,000 then borrow a further 10,000 your overall mortgage would exceed the actual price of the property. So in effect it is a way of securing a loan and incorporating it in to your mortgage. Many people do this as part of property renovation schemes.
Flexible Mortgages: A flexible mortgage allows you to adapt your loan repayments to your current financial situation. A lender will allow the borrower to pay back by increasing and reducing the payments at different intervals, pay the loan in lump sums at certain times during the term and also take payment holidays; whereby the borrower can take a break of 1-3 in between payments. A flexible mortgage is most popular for borrowers who do not have a fixed income, for instance if you are self employed or between jobs. Full understanding of loan requirements should be met before undertaking a flexible loan (see below).

Which should I choose: an Interest only mortgage or a Repayment mortgage?
All mortgages are regulated by the FSA (Financial Service Authority) which is a governmental body that regulates all financial services. In November 2004 it was stated that all mortgage brokers must follow a code of conduct when initiating a mortgage exchange. Every broker and borrower has to apply Keyfacts Illustration, thus making sure both the lender and borrower have full details and knowledge of all aspects of the mortgage exchange.

Choice of mortgage is usually determined by your financial status, as mentioned earlier if your financial status is not as secure, an interest only mortgage can prove handy in keeping payments at an affordable price. However if you can afford to do so, paying off the mortgage through set repayments, could save you a considerable amount of money in the long run.

It is very important though that you assess what your individual circumstances will be for not just your current situation but for the next 25 years so that you can decide which repayment scheme will best suit your needs.

What if I have bad credit, can I still get a mortgage?
In the case of bad credit rating the borrower can seek a mortgage through a sub-prime lender, as these mortgage lenders are willing to accept people who have been refused from prime lenders i.e. banks. With sub-prime lenders you have the opportunity to simply declare your income rather than provide an income credit rating.

The downside of having bad credit is that costs for lending are much higher and thus in turn you may experience higher interest rates, as lenders have to cover the risk factor of lending to someone with poor credit rating.

Which ever mortgage type you choose it is extremely advisable to seek the best possible advice to make sure you cover all the facts, before going ahead with the deal.