Mortgages two decades ago were all very similar and you simply took out a loan at a standard variable rate and that was it. Nowadays there are hundreds to choose from.
Intense competition now means that borrowers can be overwhelmed by the choice from the banks, building societies and new lenders such as supermarkets and online operations, leaving the borrower with such questions as, fixed payments or variable, interest or repayment and calculating what percentage of deposit to put down.
By doing a little homework and taking it step by step you will find the mortgage maze no quite so daunting.
Work out how much you can borrow
As a guideline, the amount offered to a single borrower is three and a half times their salary. Where as if there are two people then it's usually two and a half to three times their joint salary, or four times the main salary and one times the lesser salary.
The size of your deposit will influence the lenders on the amount you will be able to borrow. The larger the deposit the more multiples they are likely to lend you, as it lessens their risk of losing out if for some reason you are not able to make your repayment, as there is equity in your house.
First time buyers will face the largest hurdles, but having a deposit of ten percent or more should offer a wide choice of payment options. The larger the deposit and less multiples of your salary, will offer you the largest most flexible deals. Hence the less the deposit and more borrowed against your salary, there will be a lot less offers and the rates and repayment options won't be so favourable .
Mortgages of 100% are offered but should really only be considered by professional people who expect their income to rise steadily.
Fix or variable
Discounted, fixed and variable rates are all popular among first time buyers because they cut costs in the early years, although they do not protect against rising base rates.
Before selecting this option a borrower should calculate whether they would be able to afford the payments should the interest rate rises. If it looks like it would be a struggle then going for a fixed rate would be more suitable.
As with everything you get nothing for free, although the fixed rate will offer piece of mind with the same payment in the coming years. The actual payment will be slightly higher, and the longer you want the fixed rate i.e. for five years instead of two, the more expensive each payment works out to be.
By to let
Not so long ago anyone hoping to buy a property with the sole intention of letting it out was forced to opt for an expensive commercial mortgage. However, with the continuing boom in the housing market, more and more high street mortgage providers now offer a variety of specialist buy to let mortgages. In the summer of 2003 the UK buy to let mortgage market was estimated to be worth more than £40 billion, as more and more people want to take the next step up the property ladder.
A buy to let mortgage is designed for people who buy a property with the intention of letting it out. They are largely similar to other mortgages, with respect to repayment methods. The main difference being the maximum loan-to-value (LTV) is usually lower, meaning that a larger deposit is required. The normal being a loan of around
75-80%. This means you will have to provide a deposit of up to 25 per cent. This is because they consider a by to let more risky than for example a first time buyer.
Other restrictions may also apply, such as minimum letting terms and rental income. Lenders will normally incorporate a proportion of the rental income when calculating how much money they are willing to lend you. see rentals for more information
Redemption Penalties
Most mortgages will have some sort of redemption penalties. These are applied when breaking out of the mortgage deal before the allocated time has elapsed. The redemption period can vary from three months to over five years after the start of the mortgage.
The penalties also vary, depending on the size of your mortgage the fees could be anywhere from £1000 to £5000+.
Repayment or interest-only
How to repay a loan is a key decision. Because of low inflation and uncertain stock markets, most borrowers now prefer repayment loans, where the repayments are aimed at paying off the loan at the end of the term which is usually 25 years.
Interest only loans will cost less in monthly payments, but borrowers must pay the original loan when it matures. This would suit someone who receives big work bonuses and who wants to repay capital in large chunks.
Applying for the loan
When borrowers make an application, lenders check to ensure they are able to meet the repayments. This will include asking for a minimum of three pay slips and a credit search.
The self-employed must show accounts for two to three years. Alternatively they can get a self-certification, which may be more expensive but means their accountant can verify that they can afford the loan.
Homebuyers with fluctuating incomes may be tempted by flexible loans, the interest rates may be slightly higher, but allows borrowers to overpay or underpay.
Mortgages for a foreign property purchase.
If buying abroad the two options available to you are re-mortgaging your UK home and releasing the equity, or taking out a local mortgage in the country you want to purchase the property.
The amount you can be loaned, the length of the loan, interest rate and terms and conditions will be all country specific.
If choosing a Euro loan, for a country like Spain or Portugal , the lenders will lend up to 80% of the value of the property, but 75% or less is more common. Along with only being loaned the smaller percentage the UK , you will also find that the numbers of different mortgages to choose from will be significantly lower.
If opting for a Euro mortgage, fixed rate and repayment mortgages will be the options available to you, although some specialist lenders may agree to an interest-only deal. Foreign mortgages will also in general tend to be shorter and more likely to be around the 15-20 years although yet again, some lenders will stretch to 25 years.
Even though interest rates are much lower in euro-land (ECB base rate is currently 2% compared to the UK 's 4.25%), the margin on Euro mortgages is much wider and the market less competitive, so the mortgage rate differential is not as large as you might expect. Also unless you are paid in Euros remember the payments will fluctuate with the sterling / euro exchange rate, and could make the difference in payments fairly substantial from month to month.
If you are going to take out a euro mortgage, shop around to make sure you are getting a good exchange rate. Specialist currency dealers are likely to give you a better rate than the high street banks.
It is also possible to 'forward buy' which means agreeing to buy all your euros for the next year in advance - this has the advantage of certainty but obviously means you can gain or lose depending on what the rate does during that period.
The cost of buying and selling property in euro-land tends to be much higher than in the UK - in France and Spain you are normally advised to allow 10% of the property's value to cover the extra costs. Also, be sure you know what the ongoing costs of maintaining the property are likely to be - service charges, community and local rates can be just as expensive as in the UK .
Assessing your application.
Slightly different to the UK , countries such as France , Spain and Portugal all assess your repayments by dividing your monthly net income by 3, then take off all outgoings and will offer you the remainder.
For example if your joint net monthly income is £3000 and you pay £400 on your current mortgage and £200 on another loan and bills, they will offer you a mortgage with repayments of £400 a month.
Lenders do not normally consider rental income for mortgage purposes, however if you can prove the property has a solid rental background they might be flexible.
If you choose to rent out your investment property / holiday home, check the tax position on rental income. It may be possible to offset the mortgage interest against the tax on this income, but you need specialist tax advice, as some countries have double taxation agreements with the UK .
Negotiating a re-mortgage on your UK property may well work out to be a cheaper option than a foreign loan in terms of set-up costs, especially if you stay with the same lender; you will not need any extra life insurance, and if you are on a fixed rate deal, then the cost of the loan will be far more predictable.
Before making any decisions, cost out both options for a UK re-mortgage or foreign mortgage, taking into account any future plans before making any final decisions.
