Understanding Mortgages

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All mortgages are not the same. Understanding mortgages, the different types available and how they work, can help you negotiate better with lenders and get the right deal.

You should understand what a mortgage entails before agreeing to be liable for paying it for the next two decades. The long loan tenure makes it vital to understand how mortgages function. A deposit, monthly installments, and fees are the three main components of a mortgage. Here is what each implies.

understanding mortgages

                              A breakdown of how a mortgage works                             

Deposit

You will need this to purchase a property, the lowest deposit you can put down on a property is 5%

your parents, brother or sister can gift you your deposit, this can be a cash gift or a gift of equity.

Gift of equity is when the owner of the property is your parent or sibling.

The bigger your deposit the better the deal, a big deposit reduces your interest rate, making it easier for you to get an offer.

Monthly installments

The payment you need to make each month to pay off the mortgage over the term of the loan.

It covers all capital and interest payments.

If you don't keep up repayments, your home may be reposed.

Fees

The different charges you need to pay upfront to get the loan. 

  • Valuation fee
  • lenders admin fee
  • soliciotors fees

Some deals come with cash back to help you pay these fees.

Lenders can offer you free valuation or free legal fees to assist you with the home buying process.


The different mortgage options and conditions can make things a little complicated when you are gearing up to finance a home purchase. Luckily, we make things easier for you by providing a basic understanding of the mortgage types below.

understanding mortgages

     An overview of different mortgage types for all borrowers      

Fixed rate mortgage

Perhaps the most common mortgage type is a fixed-rate mortgage. It is a mortgage arrangement where the fees and interest rates are set at a fixed rate for the term of the loan. This makes controlling the financial aspects of the home loan a lot easier. Additionally, the mortgage’s term can be tailored to meet specific needs based on financial circumstances and personal preferences.

Variable rate mortgage

Variable-rate mortgages have interest rates that fluctuate every month. This means that your monthly payments are not fixed and can change with fluctuations in the interest rate. Standard variable rate (SVR), tracker, and discount-rate mortgages are the three major categories of variable-rate mortgages. 

Standard vatible rate (SVR)

In most cases, a standard variable rate is something you would want to avoid because rates are typically higher than those offered by other types of mortgages. While such movement is not guaranteed, the standard variable rate generally goes up and down in line with the Bank of England's base rate. 

If your mortgage contract ends and you switch to your lender's SVR, your monthly payments could easily increase by several hundred pounds. That is why our mortgage advisors recommend looking for a new mortgage about three months before the current one expires.

Tracker

Variable-rate mortgages that "track" an external rate—generally the Bank of England's base rate—are classified as tracker mortgages. This assumes that if the base rate increases (or drops), the mortgage's interest rate will increase (or drop) as well, which will affect your monthly payments. 

Discount rate

For a fixed period—typically two to three years—a discount-rate (or discounted rate) mortgage provides a rebate on the lender's SVR. Since the discount is fixed, the payments will increase or decrease if the lender's SVR increases, which is generally in line with the base rate. Many people prefer a tracker mortgage that “tracks” the Bank of England base rate as they do not have to worry about the lender increasing its SVR or refusing to pass on any base rate cuts.


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