Young Wrexham

Getting a mortgage

Once you have made an offer on a property, you will need to get a mortgage in place as soon as possible to avoid losing out to someone else.

• A mortgage is a type of loan used to pay for your home
• A mortgage is different from other types of loan because it is larger, normally borrowed for a longer period (the mortgage term - typically 25 years) and it is secured on your property. This means that if you don't keep up the monthly mortgage payments, the mortgage lender could take back or repossess your home and sell it to try to recover the money you owe them
• Companies which offer mortgages are banks, building societies, insurance firms, mortgage brokers and direct lenders

Types of mortgages

There are two main types of mortgages - repayment mortgages and interest only mortgages.

• Repayment mortgages mean that each monthly payment you make to the lender repays part of the actual amount you borrowed (the 'capital' debt), plus part of the interest charged on the loan. This means that, bit by bit, you pay off everything you owe and have the security of knowing that, by the end of your mortgage term, you will have paid off the mortgage in full. Repayment mortgages are likely to suit you best if you want the simplest, least risky type of mortgage arrangement
• With an interest-only mortgage, all you pay the lender each month is the interest on the loan. You don't pay off any of the capital debt as you go along, so the size of your mortgage stays the same right until the end of your mortgage term. This means that it is up to you to find a way of paying off the capital debt at the end of the term. There are a number of options for this, one is to make another payment each month into some kind of investment such as an Individual Savings Account (ISA) or endowment, which, at the end of your mortgage term can be used to pay off your mortgage. There is a risk, however, that your investment will not grow sufficiently to pay off all of your loan, so you have less certainty than with a repayment mortgage
• An endowment mortgage has two parts - a loan from a lender and an endowment policy with an insurance company, which is a type of life savings scheme. You only pay the interest on the loan in monthly instalments to the lender so you are never actually paying off the loan. However, the endowment policy is paid monthly to the insurance company and at the end of the mortgage this policy will give you a lump sum that can be used to pay off the lender. This type of mortgage always carries the risk that the lump sum may not be enough to repay the whole. mortgage and you should seek independent financial advice in this case
• A pension mortgage is usually for the self-employed. The monthly payments consist of both interest-only payments on the loan and a contribution to a pension scheme. When you retire, there will be a lump sum to pay off the loan and a pension
• An ISA mortgage means you pay interest only on the loan to the lender and a contribution to an ISA (Individual Savings Account) (See Types of Accounts). The sum in the ISA should then pay off the loan
• An Islamic mortgage. This is a mortgage in which none of the monthly payments includes interest. Instead, the lender makes a charge for lending you the capital to buy your property which can be recovered in one of a number of different ways, for example, by charging you rent
• There are a large number of other types of mortgage available within these categories too, so research all your options to find the best one for you. For example, some banks offer special mortgages for first-time buyers
• Mortgage providers often offer special deals to encourage people to take out a mortgage with them. These are usually in the form of short-term introductory benefits on your mortgage. The 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

There are a number of different interest rates that apply to mortgages, these are:

• Standard variable rate: Where the lender sets up the rate of interest you pay and changes the rate up and down as often as it thinks necessary to suit market conditions. The downside of this is that your monthly repayments vary and you cannot be certain of how much you'll be paying in the future
• Discounted rate: Where you pay the lender's variable rate minus an agreed discount for a fixed period such as one or two years. This can be useful if you are on a tight budget because your initial payments are lower, but your payments will still go up and down as often as the lender changes its rates
• Fixed rate: Where you pay a guaranteed rate of interest for a fixed period, so you have the budgeting security of knowing your payments won't vary. If you think that interest rates will go up, a fixed rate will protect you from rises in your mortgage payments. But if rates come down and if variable mortgage rates fall below your fixed rate, you will still have to pay the fixed rate
• Capped rate: Where the interest rate is variable but guaranteed not to go above a certain level or 'cap' for a fixed period, but it can fall. A capped rate deal will suit you if you want to be sure your payments will not go above a certain level, but do not want to have a totally fixed rate in case interest rates fall
• Cashbacks: (This isn't an interest rate option, but often combined with special interest rate deals) where you get a sum of cash back - often hundreds of pounds - when you take out the mortgage. They can be useful if you need some money up front for furniture, for example. But you can often find a cheaper interest rate if you go for a deal without cashback
• Don't worry if all this information seems like a lot to take in, the best way to get a mortgage that suits you is to speak to someone about your requirements
• You can make an appointment at your local bank to speak to their mortgage advisor or many estate agents also offer a mortgage advisory service. Some people choose to seek the advice of an independent financial advisor but you will have to pay a fee for this
• Different companies have different mortgages to offer so it is worth shopping around to find the best deal for you
• Always seek advice from an independent financial or mortgage advisor before signing up to any mortgage
• Remember - don't feel pressured into taking a mortgage until you are satisfied that it is the right one for you