Mortgages key factors to consider

Category: Mortgages
Date: 11/25/2008

Mortgages – key factors to consider

There are various key factors that you should consider before you your mortgage. Here's the Moneyfacts.co.uk guide to things to consider.

Up front costs

You'll need to spend quite a lot before you even start paying the mortgage, on things like:

Legal costs

Usually a solicitor or licensed conveyancer needs to be appointed to deal with the legal aspects of buying a property. There will be costs involved and these can vary, so it is worth getting a few quotes.

Valuation / surveys

Your lender will value the property to make sure it is acceptable security for the loan. The type of valuation will depend on the property type and who your lender is. Some lenders now just do a drive-past valuation for low risk properties. If you want to buy a listed thatched cottage, the valuation will be more in depth and so more expensive.

You should always consider whether to rely on the lender's valuation, or to have your own survey done which will highlight any shortcomings in the property, like damp in the walls or in the roof. The price of the survey could save you a fortune on unforeseen repairs in the future.

The seller of the property in England or Wales must provide a Home Information Pack. This may contain a Home Condition Report, which is effectively a survey report. This may save you time and money as a buyer.

Mortgage arrangement fees

Most mortgage lenders charge an arrangement or application fee when you take out a mortgage. Some mortgage lenders will let you add the cost of this to the mortgage. The fee depends on the mortgage lender and the mortgage offer

How much can you borrow?

Before you fall in love with your dream home, make sure you can get a mortgage to buy it. You may need a substantial deposit.

The lender will decide how much deposit you need. The ratio between the amount of the mortgage and the value of property is called the loan to value amount (LTV). For a £90,000 mortgage on a property worth £100,000 the LTV would be 90%, so you'll need a deposit of £10,000.

The credit crunch has seen most lenders tighten their lending criteria, including lowering their maximum LTVs, meaning a bigger deposit is needed from the borrower.

Mortgage rates

Mortgage rates are linked to Bank of England base rate, and the rates at which banks lend money to each other.

Obviously rates vary and this makes a big difference to how much you have to pay each month. Don't just look at the rate, there may be hefty fees payable. Look at the things to watch out for guide for more details.

You should also make sure you compare the true cost of the mortgage. The figures can be pretty scary but the true cost figure highlights how much your mortgage will cost over the years. Unless you're on a 25 year fixed mortgage it will no doubt change, but still gives you a good method to compare mortgages.

Repaying the loan at the end of the term

With a repayment mortgage your monthly repayment covers both interest and an ever-increasing amount of the capital. The repayments are calculated to make sure that your mortgage is completely paid off at the end of the term.

Interest only mortgages are cheaper than repayment mortgages but leave the full mortgage amount outstanding at the end of the term. So the saving on the mortgage itself needs to go towards a savings plan designed to repay the mortgage when it is due. If you're lucky the savings plan may reach the mortgage amount early so you can repay the loan. Or it may underperform leaving you with an outstanding debt. There are no guarantees.

You can get fixed rate mortgages, variable rate mortgages and discounted rate mortgages on either a repayment or interest only basis. You can also get a proportion of your mortgage on each basis to hedge your bets.

Can you afford the repayments?

Your lender should do a careful assessment of your ability to repay the mortgage and should only lend what they think you can repay. However, things change so you should try to have a contingency fund available. Also, take a look at our Money Saving Tips on income protection so you can still make your repayments if things turn against you.

Fixed rate mortgages let you budget precisely, and discounted rate variable mortgages keep the cost down in the early years.

Portability

If a mortgage is portable, it means you can keep it with the same lender if you move house. They may waive or reduce early repayment fees if you're on a fixed rate or discounted rate deal. So if you think you may move in the next few years, this could save you a lot of money.

Mortgage related insurance

• A home buildings insurance policy will be required by the lender, covering against the usual risks. This ensures their security is protected.
• Home contents insurance covers your contents against as theft, fire and damage.
• Mortgage payment protection ensures you can continue to meet your mortgage repayments in the event of unemployment, sickness and redundancy
• Life insurance for each of the mortgage holders taken out to cover the value of the mortgage allows the mortgage to be repaid in full in the event of death.

Using a mortgage broker

If you use a mortgage broker, make sure they are authorised by the Financial Services Authority. You can check by looking at the FSA's register of authorised firms at www.fsa.gov.uk/register