Mortgages

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If you want to buy a house, you can borrow money in the form of a loan called a mortgage. It is fixed over period of time and you will pay interest on it until it is paid off. If you do not keep up repayments, you could lose your house.

Buying a house is likely to be the biggest investment ever so make sure it is the right decision.

Borrowing

As a rule of thumb, most mortgage lenders will lend you three times your salary or two and half times the joint salary of you and your partner if you are buying a house with someone else
However there are a huge number of mortgages out there and some will offer you more than this
Before you borrow anything, make sure you know how much you can afford to repay each month by putting together a list of your income and expenditure. Be realistic and don't forget to include every day expenses like bills, food, clothing and heating in the budget

Deposits

Before you can have a mortgage, many lenders will ask you to pay a deposit which could be as much as 10 per cent of the value of the house
If you don't have this money to hand over, you could always look at getting a 100 per cent mortgage which means you don't need to pay a deposit but increases your monthly repayments instead

Types of mortgage

There are different types of mortgage and you should choose the one that suits you best.

Repayment mortgages - A repayment mortgage allows you repay the money borrowed to buy the house gradually over the period of the loan. It is paid back in monthly installments with interest charged. The amount repaid will slowly increase over time and the interest will decrease
Interest-only mortgages - Allow you to pay only the monthly interest on the loan and not the loan itself. This is usually only for a certain period of time or as part of another repayment scheme, such as an endowment 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 installments 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 page) (link to 6f1 Types of Accounts) T. 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.

Paying the interest

As well as considering how you want to repay the mortgage, you need to think about the interest on the loan. There are different rates of interest on different mortgage, including:

Variable rates - This means you pay the going rate on your loan. The mortgage rate changes every time interest rates change or, as in most cases, the overall effect of any interest rate changes is calculated once a year and payments are altered accordingly. Whatever kind of mortgage you start with, it is likely to change to variable rates at some point
Fixed rates - The interest rate is fixed for the period agreed - often two to five years. These are ideal for budgeting or if you think rates might increase. You do not benefit if rates fall, and will face penalties if you try to quit. Very low rates may tempt you, but they can be used to trap you into paying over the odds. Check how long you will have to stay with the lender before you can switch without penalty
Capped rates - These are fixed, but if rates fall you pay the lower rate. Such deals can be a good buy for budgeting
Cash back deals - This is when lenders offer money back if you take out a particular product
Discounted rates - Under this type of mortgage the borrower is offered a discount off the lender's variable rate. The rate paid will fluctuate in line with changes in the variable rate. The discount applies over a set term

Where can I get a mortgage?

Mortgages are available from:

Building societies
Banks
Insurance companies. They only provide endowment mortgages (see above)
Large building companies might arrange mortgages on their own new build homes
Finance houses
Specialised mortgage companies

Always seek advice from an independent financial or mortgage adviser before signing up to any mortgage.

The Money Advice Service has an excellent section on debt managment including:

You can contact the Money Advice Service on 0300 500 5000 (or 0300 500 5555 for Welsh) Mon - Fri 8am-8pm, Sat 9am-1pm. There’s also an online chat function on their site.

You can contact Meic for free via online chat, text (84001) or phone (080880 23456).