HOUSING |
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BUYING A PROPERTY
Choosing a Mortgage. 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. 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'll save a staggering £20,000 in interest payments.
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 types of mortgage:
Repayment: you pay off the interest and the capital over the life of the mortgage - it's guaranteed that you will have paid off the mortgage by the end of its term.
Interest only: also known as an ISA, pension or endowment mortgage. You pay the interest due to your mortgage lender every month. You also invest separately in a policy that will pay off the mortgage as it matures. As with any investment, there is some risk that the final payout will be lower than expected (or it may even have some left over once your mortgage is paid off).
Fixed, variable or capped interest rate. Your other big decision is what type of interest rate to have on your mortgage.
Fixed rate: the interest rate is fixed for a set number of years (usually five). You know exactly what your monthly repayments will be while the rate is fixed. Beware that the rate often returns to the standard variable rate at the end of the fixed term and there may be penalties for moving to a different mortgage.
Variable rate: this is the standard rate offered by all mortgage lenders. It will move with changes in interest rates. So, you will benefit if interest rates fall, but lose out if they rise. Standard variable rates tend to be higher than fixed rate deals at the moment.
Capped rate: similar to fixed rates, it is guaranteed that the mortgage will not rise above a certain rate but it may fall. As a consequence capped rates tend to be higher than fixed rate deals. In the same way as a fixed rate mortgage, the rate will be capped for a fixed term and there may be penalties if you want to re-negotiate away from the variable rate at the end.
Mortgage Term. The longer you borrow the money for, the more interest you will 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 etc.) means that it is uneconomical to move regularly
How Much. Three factors should be taken into consideration when determining the size of mortgage you should apply for:
The deposit you can pay on your house. Lenders usually expect you to put down at least 5% of the purchase price of the house, though some lenders would consider offering a 100% mortgage.
Your salary. Generally, you can have a mortgage equivalent to three times your salary. If you have a joint mortgage, you could apply for 2½ times your combined salaries, or three times the main salary, plus the second salary.
What You Owe. The amount of any existing commitments you have, such as personal loans etc. Hire purchase agreements may be deducted from the amount available for you to borrow.
Long Service Advance of Pay (LSAP). LSAP is available for service personnel over the age of 23 and serving on pensionable engagements/commissions who have not drawn any terminal benefits, given notice or applied to leave the Armed Forces prematurely. The amount of advance to applicants who have not owned a house in the last 12 months is limited to the lowest of £8500; 182 days gross pay; difference between mortgage obtained and purchase price plus certain expenses. There are restrictions on applicants who are current homeowners, or who have owned properties during the last 12 months, which will be dependent upon the cash realised from the sale of property. Interest free repayment is over a period of 10 years commencing 2 years after the date of the advance, but if an individual has less than 10 years to serve, repayment starts immediately with the balance recovered from Terminal Benefits. As there are many other conditions, intending applicants should check their entitlement with the Administrative Office before committing themselves to any expenditure.
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