A mortgage is a type of loan specifically designed to assist you in purchasing a property. To obtain a mortgage, you typically must provide a down payment of at least 5% of the property’s value. The remaining amount can then be borrowed from a lender.

After you borrow money through a mortgage, you must make monthly payments to pay it back over several years. Most mortgages have a 25-year term, but some lenders offer shorter or longer terms. Additionally, you must pay interest on the borrowed amount each month. The interest rate may be fixed or variable, depending on the type of mortgage deal you select.

Your property will be collateral for the loan until you fully repay it.

How does the interest on a mortgage work?

The mortgage deal you choose affects the amount of interest you pay. If you select a fixed rate mortgage for a specific period, your monthly interest payment will remain constant.

Once the fixed rate period ends, your lender will most likely transfer you to their standard variable rate, which is usually higher than the special deal you were on. As a result, your interest payments will increase. However, you can consider remortgaging to a new deal to help keep your payments down.

Opting for a variable-rate mortgage means that the interest you pay may change over time. If interest rates decrease, you may benefit from this decrease, as it could reflect lower monthly payments.

If the interest rates on mortgages go up, it becomes more expensive for lenders to lend money, and they usually pass on these higher costs to homeowners. As a result, your monthly payments would increase. Therefore, many homebuyers choose fixed rate mortgages to ensure that their interest rate and monthly payments remain the same, providing them with peace of mind.

At the beginning of your mortgage, most of your monthly payment goes towards paying interest, with only a small amount going towards reducing the principal. Over time, as your debt decreases, you’ll pay off more of the principal amount and less towards interest.

How do mortgages work when selling or moving house?

There are usually multiple mortgage options when you decide to sell your property or relocate.

If you’re planning to move to a new house, you might be able to transfer your current mortgage to the new property through a process called ‘porting.’ However, remember that you’ll need to apply for your mortgage again and convince your lender that you can still afford your monthly payments. The lender will decide whether you can transfer your current deal to the new property. Additionally, there may be fees associated with moving your mortgage.

If you’re planning to move to a new home and require a larger mortgage, you can transfer your current deal first and then inquire with your lender about borrowing the additional funds. Remember that if you choose to do this, the interest rate on the extra amount may differ from your current rate.

If your current mortgage does not have an Early Repayment Charge and you are not bound by it, you can consider switching to a different lender and remortgage for the amount needed to purchase your new property.

Make sure you can afford your new mortgage before applying because lending criteria are more stringent nowadays. Lenders will thoroughly review your finances to ensure you can handle the monthly payments.

If there is a time between selling your current home and buying a new one, you may consider applying for a ‘bridging loan’. This loan allows you to move into your new home before your current one is sold. However, remember that these loans should only be used as a last option, as they often come with higher interest rates and fees. If you are unsure, seek professional advice. Also, remember that you will essentially own two properties for a while, so make sure you are comfortable with the risks involved.

Frequently Asked Questions

1. What is a mortgage?

2. How do mortgages work?

3. What are the eligibility criteria for a mortgage?

4. What documents do I need to apply for a mortgage?

5. How do I apply for a mortgage?

6. What is an agreement in principle?

7. What is an interest rate?

8. What is a fixed-rate mortgage?

9. What is a variable-rate mortgage?

10. What are mortgage brokers?

References:

  1. A complete guide to mortgages | money.co.uk. https://www.money.co.uk/mortgages/a-complete-guide-to-mortgages
  2. How Do Mortgages Work In The UK? – Your Money. https://yourmoney.lumio-app.com/how-do-mortgages-work-uk
  3. Mortgages in the UK: a guide for home buyers | Expatica. https://www.expatica.com/uk/housing/buying/your-guide-to-uk-mortgages-747470
  4. An overview of how mortgages work and their regulation in the UK. https://www.familymoney.co.uk/uk-mortgages/uk-mortgage-guide/overview-mortgages-work-regulation-uk
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