Making Sense Of Mortgages
A house is the biggest purchase many people will ever make and hence taking out a mortgage can be a major decision. Because of this, it is worth taking the time to understand the basics of them.
Mortgage lenders have to abide by the Mortgage Market Review
The Mortgage Market Review stressed the importance of looking in greater depth at affordability rather than simply looking at headline figures. This means that anybody looking for a mortgage can expect to be asked detailed questions about their overall financial situation. This applies to those remortgaging as well as to first time buyers.
There are three main types of mortgages: repayment, interest only and offset
Repayment mortgages pay off the loan and the interest thereon
Repayment mortgages are arguably the simplest form of mortgage to understand. You make a monthly payment which covers both the loan principle and the interest due and at the end of the term, you own the property.
Interest-only mortgages only pay off the interest on the debt; they do not reduce the principle
If you wish to keep the home you purchase, then you will need to have a clear plan in place to repay the loan principle at the end of the term. If you are happy to sell it, then you will still need to have a plan in place for a situation in which house prices drop to the point where you find yourself in negative equity. Interest-only mortgages aren’t actually banned in the residential mortgage market but they are subject to serious scrutiny regarding the borrower’s ability to repay them at the end of the term. They are still very much a feature of the buy-to-let mortgage market as landlord’s are buying property to let out rather than to live in, although there is always the risk of negative equity.
Offset mortgages work like giant overdrafts
Basically, the idea behind offset mortgages is that you put all of your cash into one place and thus give up the interest you would have earned on your cash savings in exchange for paying less interest on your mortgage. You still have access to your cash savings although there may be restrictions on how much you can withdraw since mortgage lenders have to keep in mind the need for the loan to be repaid by the end of the term. These are still niche products, but can offer a combination of security and flexibility.
Fixed rate mortgages can provide security but this may be at a price
It may be tempting to opt for a fixed-rate mortgage as a hedge against rate rises, but remember that your lender will factor in the prospect of rate rises in the deal they offer you. On the plus side, knowing what you will be paying each month will provide stability, which may be invaluable.
Residential mortgages are for the purchase of residential property
If you’re interested in purchasing a property to let out, then you need a buy-to-let mortgage.
Letting out your property via Airbnb may be against the rules of your mortgage
This goes back to the previous comment about residential mortgages being for residential property. If you are letting out your property in its entirety, by definition, you’re not living in it at the time. It is strongly recommended to check your lender’s policy on this.
Renting out a room may require consent from your mortgage lender
The government allows people to earn £1000 income from property without paying tax on it and there is also the “rent-a-room” scheme, which allows people to earn up to £7,500 from renting out furnished accommodation in their home. This may be fine with the government, but your mortgage lender may have a different view, it’s strongly advisable to check.