thinkmoney's guide to mortgages
Published 2 July 2012 by Lucy Bower
The thinkmoney guide to mortgages gives you the basics of mortgages, but you should discuss your options in depth with a professional before you commit yourself to anything.
A mortgage is a loan for a property, which can either be your own home or somewhere that you rent out. There is more than one kind of mortgage, so if you're new to mortgages, read the thinkmoney guide to the basics.
Loan to Value
Also known as LTV, this is the ratio of the mortgage (loan) to the value of the property. A £70,000 mortgage on a property worth £100,000 would be a 70% LTV mortgage. The other £30,000 would be 'equity' (the part of the property's value that the homeowner has already paid for). In general, the higher the LTV, the higher the interest rate will be.
LTVs have generally decreased since the financial troubles began, as lenders want people to put up more of a deposit for their home before they can buy. Some see this as good evidence of responsible lending, but others have argued that it makes things more difficult for first-time buyers.
This is how you repay your mortgage and there are two categories - a 'repayment mortgage' or an 'interest-only mortgage'.
The difference between them is that with an interest-only mortgage, you only pay the interest every month - just like the name suggests - and you should invest or put money into savings at the same time with the intention of repaying the mortgage in the future. With a repayment mortgage, part of each payment would go towards interest and part would go towards reducing the actual amount you owe.
Whenever you borrow money (with a few exceptions, like interest-free credit cards), your lender will charge you interest. The same is true of mortgages, but the rate you pay may or may not change over time:
- Standard Variable Rate (SVR) mortgages come with interest rates that can go up or down, depending on the lender - and they can set their own rates of interest
- Tracker mortgages track the Bank of England's base rate - which is very low at the moment, but has been known to go into double figures.
- Fixed-rate mortgages 'fix' the interest rate you pay for a set period, so you have a fixed mortgage payment every month. There are often fees to pay if you pull out of a fixed-rate mortgage early.
Each type of mortgage has its own pros and cons, and it's vital you discuss your options with a mortgage adviser who can explain them in full.
Some mortgages let you vary your monthly payments from month to month, or take a 'payment holiday', or repay your mortgage early. Current account, flexible and offset mortgages can provide more control over what you pay each month.
A remortgage is when you move your mortgage onto another deal, with your current lender or with a new one. This can be an opportunity to find a better deal.
A remortgage can also be used to consolidate debts - if there's enough equity in the property, a homeowner might be able to take out a larger mortgage and use the 'extra' funds to pay off their unsecured debts. However, securing any debt against property can put that property at risk if they don't keep up with the repayments (plus, repaying a debt more slowly can cost more in the long run).