Mansfield Begbie Associates Ltd
What is a mortgage?
Whether buying a new home or remortgaging, our mortgage advisors are ready to help you with practical advice at every stage of the process.
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When you buy your home…
You will most likely take out a loan – a mortgage – to help pay for your new home. The mortgage is secured against your home. If you don’t keep up your mortgage payments your mortgage provider, or lender, may be able to sell your home to recover the money you owe.
Whenever the property is sold, as the lender has a “first charge” – or in Scotland a “standard security” – the mortgage must be paid back first. With your home as security, the lender is usually able to offer you a lower interest rate than you find with other types of loan.
If you change your mortgage to a new lender – remortgaging – you may benefit from a better mortgage rate. Some lenders also offer to pay the legal costs and valuation fees associated with remortgaging.
The process for remortgaging your home can take around 4-12 weeks, as the new lender will want to make similar checks to when you bought your home originally. Your current lender may charge you exit fees when you leave your current mortgage, which may include an early repayment charge.
Types of mortgages
There are two styles of mortgage repayment – repayment and interest only
With a repayment mortgage, your monthly payments to the lender go towards reducing the amount you owe as well as repaying the interest they charge. This means that each month you’re paying off a small part of your mortgage.
The advantages: It’s a clear approach – you can see your mortgage getting smaller, and provided you maintain the required payments, you also have the certainty that your mortgage will be repaid at the end of the term.
The disadvantages: Initially, the majority of your payments go towards interest on your mortgage, which means in the early years, the amount you owe won’t reduce by very much.
It may be suitable for you to pay your mortgage by a combination of repayment and interest only.
Interest only mortgages
With an interest only mortgage you only pay the interest charged on your loan, so you’re not actually reducing the loan itself. You’ll need to have some other arrangement or plan in place to repay your loan at the end of the term. For example – investments, savings plan, downsizing (where you’ll sell your property and buy a cheaper one using the equity to repay your loan), making lump sum payments or changing to a repayment mortgage.
The advantages: If the savings or investment plan you choose performs well, then you could pay off your mortgage earlier compared to a repayment mortgage. At the full mortgage term there may be a lump sum available after the mortgage has been repaid.
The disadvantages: Very few investments or savings plans are guaranteed to repay your mortgage in full. At the end of the mortgage term, you’re responsible for repaying the mortgage in full. If your savings or investment plan doesn’t cover the full amount, you’ll be responsible for paying the difference. Your mortgage lender can demand repayment, and they’ll charge you interest on any outstanding balance until it is repaid.
Lump sum repayments or changing to a repayment mortgage may not be possible if your circumstances change and you can no longer afford the increased amounts.
Downsizing is not a guaranteed method of repaying your loan as, even if you have enough equity now, house prices could fall and may leave insufficient equity to repay the loan. It is not advisable to rely on house prices increasing as this might not happen.
Some people may hope to rely on inheritance. However, there are several risks associated with this: people can change their Wills and, therefore, your inheritance is not guaranteed; the amount you receive may be different to what you expect; you may not have inherited by the time your mortgage term ends or you retire and there can be a delay in receiving funds from an estate.
Many lenders will only accept certain plans to repay an interest only mortgage. Your advisor will be able to guide you.