2 October 2015
Knowing your mortgage
Whether you’re a ‘first time trier’ looking to buy your first home, looking to move mortgage provider or looking for a better deal elsewhere, it’s never a bad thing to make sure you’re as clued up as possible on the current market. Here, Principality Building Society’s Customer Director, Julie-Ann Haines, goes back to basics on all things mortgages.
There’s no doubt that mortgages are a big financial responsibility, the average one lasts for around 25 years, making it one of the most important long-term commitments you’ll ever make. While such a huge commitment can naturally throw up a lot of worry from time to time – such as ‘what if my interest rate changes?’, ‘what if there’s a better rate out there?’ – it’s important to understand the ins and outs of our mortgage.
Types of mortgage
A recent survey we conducted identified that only 52% of homeowners across England and Wales know the interest rate on their mortgage, a startling figure when you consider it leaves them at risk of being caught out by rising interest rates. Mortgages come with two types of rate, fixed or variable, and it’s important you know the difference between the two.
With a fixed-rate mortgage, your repayments will be the same for a certain period of time - typically two to five years - regardless of what interest rates are doing in the wider market.
If you have a variable rate mortgage, the rate you pay could move up or down at any point, in line with the Bank of England base rate. This type of mortgage can provide more freedom to the homeowner; they can overpay the mortgage each month or change their mortgage at any time. But with this comes the uncertainty of your rate changing - potentially higher - at any time throughout the mortgage.
The monthly payment
Once your mortgage is set up, it’s really important you make the payments on time every month. Keeping on top of this is the key to a successful mortgage. Again our stats show that 87% of homeowners across England and Wales are able to state the amount of their monthly mortgage repayment, which is a positive sign that the majority of us are on top of our regular payments.
However, if you’re struggling to meet your monthly payments or think you might struggle in the future, it’s important you tell your lender straight away. They’ll be able to discuss options with you, such as setting up temporary payment arrangements, lengthening the term of your mortgage or maybe switching to a different product.
When your current mortgage ends
Along with knowing the date of your monthly payments, it’s just as important to know when your current mortgage deal ends. According to our survey 76% of homeowners across England and Wales know when their mortgage will be repaid; but this also suggests there are nearly a quarter of you out there who don’t! If your mortgage end date is getting closer, it’s a good time to be looking out for better mortgage deals on the market. Set a reminder to start shopping around at least three months before your current deal ends to give yourself time.
What to be aware of when re-mortgaging
There are plenty of good reasons to re-mortgage, such as to save money through a better rate, if the value of your property has risen significantly since buying, or if you want to increase the size of your monthly repayments and therefore pay off your mortgage sooner. But it’s important to consider all the costs beforehand.
Since the Mortgage Market Review (MMR) introduced stricter criteria for lenders, you may face tougher requirements when re-mortgaging than you previously experienced. These can include a “stress test” to determine if you’ll be able to afford the mortgage payments in the future if interest rates were to rise, and evidence of living expenses like travel, clothing, entertainment and childcare. But don’t let this deter you; these rules are simply in place to protect you and make sure lenders act responsibly and many lenders have been doing this for many years so you may not even notice the difference.
As usual, you will need to show evidence of your income, such as payslips and bank statements, and your outgoings including other debts and household bills.
With interest rates expected to change in the near future there’s never been a better time to get to know your mortgage. Understanding the terms of your mortgage, the rate and the end date will put you in good stead for reaping the benefits of a better deal if the opportunity arises.
Whilst any rise is likely to be slow and sustainable to put it into context a 1 per cent increase on an average repayment mortgage of £150,000 would see an additional £78.48 to your repayments each month*. If you are unsure how this would impact you then speak to your building society or bank to see what a base rate change would mean for you and your mortgage.
Although a mortgage can feel like a big expenditure, ultimately it allows you to call a home your own where you and your family can prosper for many years to come. What could be better than that?*Source: BBC - http://www.bbc.co.uk/news/business-33786528 By clicking on the links you will leave the Principality website - Principality is not responsible for the content of external websites.