Percy's Top Tip:

There are hundreds of different ways in which mortgages are packaged up and presented to borrowers, but all you need know at the outset are that there are just two main types - repayment and interest only.

 

Types of mortgage

A repayment mortgage means that each month the borrower is paying back both the capital sum borrowed and the interest obligation. This arrangement means that at the end of every year, the overall balance of your loan decreases.

 

Interest only mortgages differ from the repayment type in that each month just the interest owed is being paid back. This means that whilst the monthly payments will be much less than they would be on a repayment mortgage deal, the overall capital sum is paid back at the end of the loan's term via a bolt-on life assurance product - known as an endowment.

 

The biggest draw back to this type of mortgage as many recent borrowers have discovered lately is that the maturity sum of the endowment might not be enough to cover the capital balance owing.

 

Your monthly payments

Your monthly mortgage payments are determined by the rate of interest you pay on the amount you have borrowed. Interest rates vary depending on what type of mortgage package you go for. If you have a strong view on where interest rates are heading, you may be able to lock yourself into a good interest rate deal.

 

For example, if you think interest rates are going to go up drastically then fixing your mortgage rate for, say 5 years, could save you money over the long term. This is also a popular choice for people who prefer to know their mortgage commitments are not going to change for a certain period.

 

If you think interest rates will fall, then a mortgage that tracks the UK base rate, or tracker mortgage, could be a better option.

 

However, before you choose be clear on the differences and how they respond to base rates and what charges, fees and costs they incur.

 

Features and benefits aka bells and whistles!

Flexible, lifestyle, offset, cash-back, discounted, endowment - you name it and there's a name for a mortgage that a lender wants to persuade you to buy.

 

Borrowers need to keep an open mind about all such offers. It might be that one of these is just right for you and your borrowing circumstances and it might be that you sign up for one that leads you into years of debt misery.

 

In theory, each product will do what its label says, but that doesn't mean to say it's the best one for you. Concentrate on what you need, how much you can afford to pay back each month and then work out that whatever financial advantage you gain in the short term is not going to put you at a financial disadvantage in the long term.

 

The small print

Buried within the small print will be the vital terms and conditions you will be signing up to.

 

It is essential that you know what you are taking on with such a large loan. There will be repayment terms, penalty charges, lock-in obligations, lending fees, valuation fees, booking and arrangement costs.

 

There's an equally long list of more charges that could be incurred were you to alter the repayments in any way or request a change to name/s on the property's title deeds.

 

A good idea at the outset is to ask the chosen lender to provide you with a list of all charges, and the one question you must ask all would-be lenders about such a list is, "Are there any other costs?"

 

Another point to be aware of is that all lenders will insist your property is properly insured.

 

Buildings insurance covers against damage to the fabric of the property whether this is caused by fire, flood or storm damage. Whilst you don't have to take a buildings insurance policy from the mortgage provider, the lender will want confirmation that such insurance is in place.

 

The selling of mortgages is regulated by the UK's Financial Services Authority (FSA) and all providers and advisers should be checked out first.

 

If you've got a complaint about a product, or the way you've been advised, contact the consumer watchdog at the Financial Ombudsman Service.

 

The deal itself - how much can you borrow?

The total amount you'll be offered to make the property purchase is worked out in several ways but the principle offer will be based on the property's value and your financial capabilities to pay back the loan.

 

The property's worth is assessed by the lender and the amount offered to you is called the loan-to-value (LTV). This LTV is always expressed as a percentage. So if the LTV offer is 90%, it means you must find the wherewithal to pay the remaining 10%. It's always a good idea to inform the seller immediately of the price your lender has put on the property in the hope that you can negotiate the seller's asking price to match the lender's valuation.

 

Watch out for borrowing charges including what's called a higher-lending charge (HLC). This comes into play if your deposit is 25% or less and it's a charge made to buy insurance for the lender against you defaulting on your loan. Not all lenders charge a HLC but be aware that if it is added on the deal then if you have it added to your mortgage you'll end up paying interest on this for the entire duration of your loan.

 

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