What is a mortgage?
Though we usually think of mortgages in connection with home buying, a mortgage is actually any loan taken out to buy land or property.
The typical mortgage period for residential purchases is 25 years and you will see most mortgage comparisons and calculators use this as their starting point. This doesn’t mean that other time periods aren’t available. If you prefer to repay your mortgage over a shorter period for example, you can discuss this with your mortgage provider.
More importantly, your property is used as collateral against the loan. This means that the property is used by the lender as security until the loan is paid off. In the worst case that you’re unable to meet the repayments, your property might be repossessed (taken back) by the mortgage provider. They are then free to resell it to repay your debt.
Interest rates and mortgages
There are two parts to a mortgage, the capital and the interest. The capital is the actual value of the property, the amount that you borrow. The interest is the amount the lender charges you to borrow the money.
The level of base rate is the tool used by the Bank of England to manage the economy and it can have a very real impact on the cost of your mortgage. Mortgage rates tend to be pegged to the main interest rate called the base rate. So, when the Bank of England increases the base rate, standard mortgage rates will tend to follow suit too.
Currently base rate is only 0.5%, having fallen dramatically to stimulate the economy after the banking crisis. It has been at its current level since March 2009. This means that standard mortgage rates are also relatively low at between 3 and 5%.
The good news for borrowers is that right now, there is little sign of interest rates rising in the next year and forecasts are that any future rises will be gradual when they do come. However, borrowers should always bear in mind what a rise in interest rates would mean and ensure that they can afford some increase in rates. Those with long memories will recall base rates hitting 15% back in 1989.
Why do some mortgages get declined?
Unfortunately there are a few reasons why mortgages might be declined:
Some people apply for mortgages that in the lenders view, are unaffordable. In the past, mortgages were often purely assessed on the basis of income, typically with lending based on a multiple of salary. These days, lenders assess the affordability of mortgages, taking into account outgoings too in order to arrive at a final decision.
Mortgage lenders always look at credit history when making a lending decision, and poor credit history is the most common reason for a mortgage application to be declined.
Before making an application it might be a good idea to check your credit score with one or more of the organisations who produce them such as: Experian, Equifax and Noddle. In this way you can preempt any issues before making the application. . Experian and however offer 30 days free access then there is a charge to continue.
If you’ve had any problems paying off debt in the past, with other loans, credit cards or utility bills, these will show up on your credit report and be reflected in your score. These may lead a lender to question your ability to repay your mortgage. If they do, they might end up declining your application.
Whether deliberate or not, omissions on your application form might lead to a negative decision. Some applicants may deliberately leave out personal, banking or employment information that they don’t think it helps their application.
If the lender decides you’ve been dishonest they will decline the application. It’s therefore always best to be open and upfront throughout the whole process.
What types of mortgage are available?
A fixed rate mortgage
With a fixed rate mortgage, the interest rate stays the same for a set period of time. With current deals that could be anywhere between 1 and 10 years. This means that even if the base rate rises in this period, your rate will remain fixed and your repayments unchanged. When this period comes to an end, your lender will normally transfer you onto their standard variable rate.
A tracker mortgage
A tracker mortgage tracks the Bank of England base rate plus a set margin. For example, your tracker rate might be base rate +1%. Tracker mortgage deals can last for as little as one year, or as long as the total life of the loan. At the end of the tracking period, you’ll normally convert to the mortgage providers’ standard variable rate.
A discount mortgage
A discount mortgage is a type of variable rate mortgage. The term ‘discount’ is used because the interest rate is set at a certain ‘discount’ below the lender’s standard variable rate for a period of time. For example, if a lender has a standard variable rate of 5.5% and the discount is 1.5%, the rate you’ll pay will be 4%. If the standard variable rate rises or falls, your discount mortgage will follow it.
An offset mortgage
An offset mortgage takes into account any savings that you have in your offset (savings) account. Rather than them earning interest, your savings will be used to offset the interest payment charged on your mortgage. If you have significant savings and would like the flexibility, an offset mortgage could be a good way to reduce the interest payable on your mortgage.
With so many mortgages on offer, it’s worth comparing products to see what your repayments would be. To do so couldn’t be easier, simply visit our mortgage page and doing a quick comparison.
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