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17 September 2014
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Mortgages

Buying a house is the biggest investment you're ever likely to make, so it's important to get all the information you need on mortgages and legal matters before you start. Here we take a look at the basics, from how much you can borrow to choosing the right mortgage for you.


Borrowing

As a general rule, mortgage companies will allow you to borrow three times your salary, or two and a half times your joint salaries if you're buying with someone else.

However, in the current market there are many different types of mortgage available, some of which will let you borrow more than this. For example, some companies will allow two people buying together to borrow three times the greater salary and one times the lesser.

There are also many innovative schemes around, such as those that allow borrowers to add the rental income from letting one room to their salary before their income multiples are assessed.

It's worth seeking advice from two or three independent mortgage or financial advisers to find the best deal for you. Remember, though, that even if interest rates are low now, there's absolutely no guarantee they'll stay that way.

Never keep back any information on debts or county court judgements when securing a mortgage; it could come back to haunt you.

Deposits

It's worth trying to save as much as possible for an initial deposit, to secure the best repayment deals. With property prices as they are today, however, saving even a five or ten per cent deposit can be a real problem.

If your deposit leaves you flat broke, some mortgage companies will offer you the incentive of cash-back after completion, but you may have to pay a fee (redemption penalty) if you decide to pull out of the agreement.

If it's a choice between paying off expensive debts such as credit cards or personal loans and saving a deposit, it's often advisable to do the former and take out the best 100 per cent mortgage available. The choice and rates of such mortgages have become wider and more competitive in the past few years.

Mortgage terms

It's only natural when buying a property to be more concerned with its size than with studying the small print on the mortgage agreement. But the wrong mortgage can cost you tens of thousands of pounds more than it should.

Mortgage providers often offer special deals to encourage people to take out a mortgage with them, and these are usually in the form of short-term introductory benefits on your mortgage. These benefits might be a discounted rate, a fixed rate, or a capped rate for a certain number of months or years, known as a 'tie-in period'. Mortgage providers will want you to stay with them for as long as possible, and, because of this, many mortgages may contain a 'redemption penalty'. This means that if you want to pay off your mortgage early, or move it to another mortgage provider, you will have to pay a fee.

Basically, the longer you borrow the money for, the more interest you'll pay. The other side of this is that the longer you take to pay back the loan, the less you have to pay each month.

The typical mortgage is lent for 25 years, so you need to be in your first property for five years in order to reap the benefits. This is because, if you have a repayment mortgage, most of your repayments during the first years are spent only paying interest. Also the cost of moving (solicitors, stamp duty, and so on) means that it's uneconomical to move regularly.

For example, if you pay off a £40,000 mortgage in 15 years, rather than the normal 25 years, you'll have higher monthly payments for those 15 years, but you could save a staggering £20,000 in interest payments.

Do the same sums for your circumstances on the mortgage calculator - and think what you could do with £20,000.

Interest rates

Your other big decision is what type of interest rate to have on your mortgage.


Definitions of all the above rates can be found at news.bbc.co.uk

Types of mortgage

The basic decision you have to make is how you're going to repay the money you've borrowed. Don't be confused - there are only two basic types of mortgage:

  • repayment, where the capital is re-paid gradually over the term of the mortgage
  • interest only, which, as the name suggests, is where you only pay the monthly interest of the mortgage. However, your lender will stipulate that you set up a repayment vehicle, such as an ISA, an endowment policy, or a pension plan which, when it matures, can be used to pay off the outstanding debt. If you take out this type of mortgage, check regularly that you're on target to pay off the mortgage when it's due. If not, then increase your savings.

100 per cent mortgages

By taking a 100 per cent deal on a repayment basis, first-time buyers can begin to repay modest amounts of capital almost immediately. Choosing a deal that allows overpayments to be made without penalty can also accelerate the amount of capital that's repaid.

A good 100 per cent mortgage can offer a viable solution for some, although borrowers should try to avoid the mortgage indemnity premium (MIG). If you have no, or only a small sum to put down, a lender may charge you this premium in order to cover himself in case you're unable to keep up the repayments. On a 100 percent mortgage, MIG usually works out as an additional cost of about three per cent of the amount borrowed, increasing the overall borrowing to 103 per cent. It could be cheaper to find a loan that does not require this.

Joint mortgages

If you're buying a property with a friend or partner, there are a number of issues to consider and steps to be taken to protect your investment before signing on the dotted line:

  • Draw up a deed of trust with a power of sale. This means sale of the property can't be blocked by one party if you fall out or the person disappears without a trace.
  • Decide whether you'll be joint tenants (the property is then owned 50:50 and passes automatically to one if the other person dies) or tenants in common (each owns a different share, so the person bringing in the larger salary can take a bigger share of any gains - and losses).
  • Make wills. If one co-owner dies without having made a will (intestate), the remaining person will have no rights over that person's share of the property.
  • Put both names on the deeds. And if a new housing arrangement is set up by the individuals after one already owns the property, the lender has to be informed.

If you and your partner aren't married and decide to buy a house together, it's important to realise there's no such thing as a common law wife or husband (except in some extremely obscure exceptions). In the absence of any other legal agreements, if you're not married the law sees you as two distinct individuals with no call on each other's money. That means if the utility bills are in your name, you're ultimately responsible for paying them. And if you pay into a savings account in your partner's name, the money's legally theirs.

The solution is to draw up a living together agreement. Find out more at the Advice Now website.

For day-to-day concerns, such as paying utility bills, sit down and talk it through. If one of you earns more than the other, for example, will that person pay a larger proportion or will you split the bills 50:50, with the richer one paying for more of the treats?

It's a good idea to open a joint current account, but it's important you both agree what the money is to be spent on. Spending the money on an expensive box of Belgian chocolates instead of paying a gas bill is sure to start a row.

Small print

Finally, take time to read all the small print. Always ensure you know what you're buying and check dates for when any discount or fixed rate runs out. And be particularly careful to check for penalties for paying your mortgage off early, moving to another provider before the tie-in period expires, or for missing a payment.

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