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In case you are thinking about buying a home or property in the UK, you will probably need to borrow a loan to cover the expense. The sort of loan you require for the security of your property is referred to as the mortgage. For the vast majority, getting preapproved for a home loan is recommended so you can completely focus on finding the property you need. This way, you can concentrate solely on the types of homes that fit within your budget whether you are looking for a single family dwelling, condominium, townhouse or tract of land and newly constructed home.
The reason mortgages are necessary is because most people do not have a large amount of available cash to purchase a home outright. As typical homes range from £100,000.00 and up, it is rare to have that much sitting about in your bank account. Therefore, a person will apply at a bank or lending institution to obtain funding. In order to get approved, you will generally need good or at least decent credit. The poorer your credit, the more difficult it will be to secure a loan. If you do obtain a loan, you will likely have a higher interest rate to compensate the lending institution for the increased risk.
Once a mortgage is approved, the bank will hold a lien on the property until the entire mortgage is paid off. This property is the collateral utilized to secure the loan. Payments on the mortgage are typically made monthly though there are some exceptions depending on the lending institution.
There are also different types of mortgages and different terms in the UK market today. However, finding the most appropriate mortgage can be a bit of confounding. These are some of the main differences between the types of mortgages.
Fixed vs Variable Mortgage
The first choice for mortgages is between fixed and variable mortgages. A variable mortgage will depend on the interest rate set by the Central Bank – Federal Reserve or Bank of England. Therefore, mortgage interest payments can be volatile; if interest rates rise, the cost of your mortgage will increase. A fixed rate, by contrast, gives you a guaranteed monthly payment for 2,5,10 or 20 years. Despite the advantage of fixed rates, many still choose variable mortgage because they are initially cheaper or people think interest rates will go down. It is a matter of personal choice, however, if you are on a tight budget then a fixed rate makes a good choice because you can budget and avoid the risk of being not able to pay your home loan.
Many standard mortgage products have strict criteria for making repayments; however increasingly mortgage products offer flexibility in making repayments. The advantage of flexible mortgages is that it enables you to make overpayments and help reduce the total cost of your mortgage. Similarly, in other months, you can take advantage of overpayments to have a payment holiday. Flexible mortgages are particularly good for the self-employed. The important thing is that they require a bit of self-discipline to make sure you do make the overpayments were necessary.
Current Account Mortgages
Current account mortgages are becoming increasingly sought after. They are an efficient way to make use of any savings in your current account. Current accounts are sometimes known as offset mortgages because savings are automatically used to reduce the mortgage debt, thereby saving your mortgage payments. Current account mortgages also save tax payments on current account interest. There is a usually a small premium for taking out a current account mortgage, but, if you have any significant level of savings a current account mortgage is highly desirable.
Interest Only Mortgages
For many first time buyers, the difficulty of getting on the property ladder has meant they have turned to products such as interest-only mortgages. Lenders have recently tightened lending criteria and so interest-only mortgages have become less popular. However, any interest only mortgage should have an alternative investment plan to pay off the mortgage capital. An interest-only mortgage gives lower monthly payments, but, without an effective scheme to pay off the debt they can be dangerous.
Designed for people who have difficulty proving their income, self-certification mortgages have also been misused by people seeking to borrow bigger amounts than they can really afford.
If the financing terms of the mortgage are not met, for example, if the homeowner is unable to make the required monthly payments, the bank that holds the mortgage may put the loan into default. During a default, the homeowner has a certain amount of time to bring the account current. If it is not done in a timely manner, the bank may seize the property and sell it to recoup their losses. This is called foreclosure.
There are various parts to a mortgage that you should be familiar with. When you get a mortgage you will likely see some or all of these terms on your financial documents so it is important to know just where your money is going and how it is being used to pay off your mortgage.
Down Payment – This is the amount of cash a buyer will put down on the home. Banks and lending institutions may dictate a required percentage or lump sum amount the buyer is required to have.
Principal – This is the gross dollar amount you are borrowing from the bank in order to purchase your property. For example, you may have a home that costs £500,000.00. If you have a down payment of £50,000.00 you will need to finance £450,000.00. The £450,000.00 is the start of your principal balance.
Interest – The bank offers loans to make money. They also want to mitigate risk so they charge an interest rate on the loan. This rate can vary depending on many factors including income, credit rating, and type of property. Shopping around to various financial institutions is also recommended because each one will have varying rates and may compete to get your business.
Taxes – Property taxes are assessed on the home that can vary from location to location. Sometimes the estimated property tax is added to your loan and that amount is held in escrow until it is due. This ensures there is no shortage and the taxes will be paid on time so no liens are added to the home.
Insurance – There are various forms of insurance that should be carried on a home in order to protect the investment. In addition to protecting the home, mortgage insurance may also be added to protect the bank in case of non-payment of the loan and this amount may be added to the mortgage payment.
The monthly payment amount is calculated using particular portions of the above components. Each component is broken up into detailed amounts to make the sum payment. The amount that goes toward principal and interest is called amortization. If you overpay your mortgage the additional amount goes straight to the principal and this has the possibility of reducing your loan and paying it off faster. Mortgages typically range from fifteen years to thirty so shaving some time off that by consistently making higher payments is recommended if possible.
Due to the home serving as collateral, the interest rate is at an all-time low on mortgages. Every time look for a mortgage from reputable loan suppliers in the UK. The quality of the mortgage bargains orchestrated by them is magnificent. Additionally, there is no worry of several additions to the mortgage as additional fees.