A Guide to Mortgages – The Basics

What is a mortgage?

• A mortgage is a loan taken from a lender (a bank or building society) to purchase or remortgage a property.
• The lender creates a legal ‘charge’ over the property for the duration of the mortgage.
• This charge stays on the property until the end of the mortgage term, or until the loan amount is repaid in full.
• If the mortgage isn’t repaid as agreed, the lender can take possession of the property and sell it to recoup the money owed, known as repossession.

What is a legal charge?

• A legal charge is the means by which lenders enforce their rights to a property.
• Charges are recorded at the land registry.
• There are various different types of legal charge and the type used will vary from lender to lender.
• A primary mortgage will normally be secured by a first charge.

Purchase a Property

• To become a homeowner (a main residence for themselves).
• To become a landlord or increase an existing property portfolio.
• To create additional income from rental properties.
• To gain a long-term investment.

Remortgage a Property

• To reduce monthly payments by finding a more competitive deal.
• To change the interest rate/mortgage term.
• To change the use of the property (from a main residence to a rental property).
• To release equity/capital. The reasons for this may include debt consolidation, home improvements, deposit for another property, transfer of equity, divorce settlement or family support.

How to repay your Mortgage

Capital & Interest Mortgage

• Also known as a ‘repayment’ mortgage.
• The borrower makes monthly repayments to the lender where the repayments include both interest charges and capital. 

If the customer has kept up with monthly payments throughout the whole mortgage term, the entire loan amount will be paid off at the end.

Interest only

• The borrower only pays the interest on the balance they have outstanding each month. None of the capital is repaid. 
• At the end of the mortgage term the initial amount borrowed will still be outstanding. 
• To qualify for this type of mortgage the client will need to have an acceptable repayment strategy in place i.e. raising funds through the sale of the property, an endowment, savings or investments. 

Part and part

• The mortgage is split into two parts.
• One part is paid back on a Repayment basis and the other on an Interest Only basis.

What is a Mortgage term?

• A mortgage term is the length of time that a mortgage will last/be paid back over.
• The traditional UK mortgage term used to be 25 years, but these days lots of people take out a mortgage for a longer or shorter period than this depending on their plans.

How does the term impact the monthly payment?

• On a repayment mortgage, the longer the term the lower the payments will be as the balance is being spread over a larger amount of payments. The shorter the term, the higher the payments will be. But as this’ll be paid back to the lender more quickly, the overall cost of the mortgage will be less.
• On an interest-only mortgage, the length of the mortgage term does not change the monthly payment. Whether the mortgage is over five or 25 years, you’re only paying the interest off each month.

What Mortgage products are available?

Fixed rate

• A borrower is able to ‘lock’ into a fixed interest payment for a specific term (usually 2-5 years).
• At the end of the fixed rate period, the rate will revert back to the lender’s variable rate at that time.
• Allows the borrower to budget for a set period of time.
• There tends to be early repayment charges during the fixed rate period if the borrower wishes to repay their mortgage early.

Variable rate

• The interest rate is variable, which means it will go up and down without limits.
• A disadvantage of the variable rate is that you can’t predict what your monthly payment will be.
• There’s no protection against increases in interest rates.

What is a Mortgage Broker?

A mortgage broker acts as an intermediary between the bank or building society and the customer. The mortgage broker will work with all parties involved in the transaction to ensure the mortgage is approved and completed. In addition to this, a qualified mortgage advisor will be able advise and recommend the most suitable mortgage products based on your needs and requirements. Arranging this yourself could result in you taking out a mortgage that isn’t suitable for you.

What types of Mortgage Brokers are there?

• Tied or Panel Brokers
  • The broker will have access to a limited panel of lenders. The broker will base his recommendations from these lenders only, which could result in your paying more than if a wider choice was available.

• Whole of Market
  • The broker is not restricted to a panel of lenders; however, this does not mean they can access every product on the market as the term suggests. The majority of Whole of Market brokers access circa 90-100 lenders. Because of this wide scope of choice, they can often offer broker-exclusive products not available directly through the bank. 

• Banks & Building Societies
  • These are only able to recommend their own products. In some instances, they will have exclusive products only available from their own portfolio, but most are also available via a broker and/or a bank/building society.

Customer Interaction Type

• Telephone
• Online or Digital-only
• Face to Face

Types of Property

• Detached
  • These homes are not attached to any other dwelling.
• Semi-Detached
  • These homes are attached – normally on the side of the property.
• Terraced
  • These properties have dwellings either side of the property.
• Flats or Apartments
  • This is a self-contained property that forms part of a larger unit of properties. Flats or Apartments are usually on one floor.
• Maisonette
  • This is similar to a flat or apartment but a maisonette is normally composed over two floors or more.

Listed Properties

Listed properties are recognised as special buildings across the UK and have been registered on a statutory list of interest. Listed properties will fall into three categories, depending on their age, appearance and historical importance:

• Grade I
  • The highest grading for buildings or structures deemed to be of ‘exceptional’ interest. 
• Grade II*
  • Important buildings or structures, more important than ‘special’ interest.
• Grade II
  • These buildings or structures are deemed to be of ‘special interest’. 

Freehold and Leasehold

• Freehold
  • Freehold is where the owner owns the property as well as the land the property is built on. As the owner of a freehold property you are responsible for maintaining the land. 

• Leasehold
  • If you are purchasing or own a leasehold property this effectively means you own the property but you do not own the land the property is built upon. Often there will be a ground rent charge payable annually to the ‘freeholder’, to maintain the land the property is built on. 
  • Leasehold tenure is common for flats, retirement homes or properties owned on large rehabilitation type sites where the freeholder has sold the properties on a leasehold basis.

Can I extend my Lease?

• The lease on the property is for a set period, it’s common for this to be up to 999 years.
• Leasehold agreements can be extended by legal agreement with the freeholder. 

Shorter leases are generally more expensive to extend

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.