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WHY WOULD ANYONE LEND ME ENOUGH TO BUY A HOUSE?

Maybe they won’t. A mortgage is in essence a pretty simple thing. You borrow a vast amount of money from a bank to buy a house and it then holds a charge over the house until you pay them back. Miss too many payments and it’ll take the house and sell it off to cover the debt. However, banks don’t like taking houses back (foreclosing). It’s nasty for the ex- residents; it’s bad PR; and it’s a huge administrative hassle. So they only lend to people if they are convinced first that they have enough of a sustainable income to keep up the payments  and second, that the value of the house won’t fall below the value of the loan. That means that they have to either be utterly convinced that house prices will only rise (as was the case pre 2007) or force you to put down a large deposit as a buffer just in case they do (as they have since 2007).

IT DOESN’T SOUND THAT COMPLICATED. HOW DO I GET STARTED? 

Not so fast. The basics may be simple but the financial industry has an utterly unrivalled ability to complicate the most basic of things. So just turning up with a payslip and a cash deposit isn’t going to get you very far.  Before you even call a mortgage lender you will need to have a rough idea of how much you will be allowed to borrow. As a rule of thumb this will be something in the region of three to four times your annual pre-tax salary.

5 Interesting Mortgage Facts

  1. ‘Mortgage’ means, literally, ‘death contract, or pledge’. Really it just means that the contract ends, or ‘dies’ when the house loan is paid off, or the property is taken back through foreclosure. It’s never a good idea to allow the latter to happen.
  2. The origins of the mortgage have been traced to 1190 in England, 25 years before the Magna Carta.
  3. English common law included a provision for protecting a creditor by giving him an interest in his debtor’s property. In the event the debt wasn’t paid, the creditor could sell the property to recover his money.
  4. The early English settlers in America brought the concept of the mortgage with them. By the early 1900s mortgages were widespread, although a 50 per cent down payment was the norm then, as was a 5-year length of term (as opposed to 25 years now).
  5. Although current mortgage interest rates are at an historical all time low, the 1980s saw average rates rise as high as 16.63 per cent.

If you are borrowing as a couple it will be three times the larger salary plus perhaps one times the smaller. Then you need to figure out how long you want to borrow the money for. Make it short (say 15 years) and your payments will be higher but as your total interest bill will be lower so will the total amount you repay. So shorter is better.

Next up, what kind of rate are you going to go for? Fixed? Variable? Tracker? Capped? Discounted? Offset? See what we mean about the financial industry. The key ones to think about are fixed and variable. Go for a fixed rate and you will know that your rate will not change during its term (usually 3-5) years – although anything can happen after that. Go for a variable and your interest rate will fluctuate with the Bank of England’s base interest rate. A tracker mortgage – the most popular type in the UK – is similar to a variable rate mortgage except for the fact that it officially tracks the base rate – so all rises and falls are instantly passed on.

OK. IT’S COMPLICATED. WHICH ONE DO I GET?

The key is to pay as little interest as possible over the lifetime of the debt. Each month your payments are made up of a combination of the capital you have borrowed and the interest on that capital. Clearly the lower the former the faster you can pay back the latter. So if you can get a very low fixed rate for a good amount of time, you might want to take it. But (there is always a but when you are dealing with the banks), before you sign anything you have to do some maths. Why? Because banks are very fond of ‘arrangement fees’ – large fees that they charge upfront. Sometimes that’s just fine but often they are so high (think £2,000 plus) that you are better off paying a slightly higher interest rate instead of getting a cheap looking mortgage with a value shattering fee attached to it.

SO THE KEY IS JUST TO BORROW AS MUCH AS I CAN ON AS LOW A RATE AS I CAN?

So you might think. But here are a few things you might like to remember. House prices can fall. People can lose their jobs. Oh and variable mortgage rates can go up. A few weeks ago the Bank of Ireland announced that all mortgage rates linked to the UK base rate are to rise by well over two percentage points, despite the fact that the base rate itself has not risen and is not likely to for some time. One final word of warning – they aren’t on offer much any more but should anyone ever offer you an interest only mortgage (where you pay back only interest over the life of the loan and the capital back in a lump sum at the end) just say no. Why? Because there is almost no chance you’ll get around to saving the capital sum up. So when the loan comes to an end you will have to sell your house.

ARE THERE ANY OTHER EXTRA COSTS I SHOULD WORRY ABOUT?

Oh yes. There’s stamp duty (1% of the purchase price for properties worth £125,000 – £250,000. If you’re looking for a mortgage to buy a house worth over £2 million, you’ll be charged 7%. But you can worry about that once you earn your second million). You have to pay that but no one will lend you the money to pay it. Then there will be various legal fees (think £300ish), Land Registry Fees (£100), search fees (£100), and the cost of the Homebuyer’s survey (£300-400) to say nothing of the actual logistical costs of moving. Buying houses isn’t for everyone…

MAXIMUM BLUFFING VALUE

It wasn’t long ago that interest rates in the UK were generally set a good 2 percentage points above inflation. Mortgage rates then tended to be another two to three above that. So if we lived in normal times today, most mortgage rates would be at least 7% and a great deal more for anyone with a bad credit record or without a good deposit. If you really want to scare your friends you can tell them this. Then you can say, ‘one day of course interest rates will normalise in the UK.’ That should do it.

 

DO SAY  ‘I hope Mark Carney (the new Bank of England governor) is as keen on mortgage holders as Mervyn King clearly is.’

DON’T SAY  ‘Interest only mortgages – safe as houses!’

Merryn Somerset Webb

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