Guide to Property Finance
What is a basic mortgage?
A basic mortgage is what you get from your high street bank or building society. These days, you’ll need a deposit of around 10% of the property’s value and the bank will lend you the rest.
Payments on the loan are made at monthly intervals. The amount you can borrow is usually based on your current income. Under new rules, lenders don’t tend to lend more than 4.5 times your income.
The loan is secured against the property. This means if you fail to meet repayments, you could be at risk of losing the property.
Technically, the lender takes a legal ‘charge’ against the property. Since this would be the first legal charge attached to the property, these can sometimes be called ‘first charge mortgages’.
There are a number of products available to suit a variety of needs. These include:
- Repayment mortgages: You pay back the whole over a set period with monthly payments, including capital – the money originally lent – and interest charges added to it
- Interest-only mortgages: You only pay the interest on the loan. At the end of your mortgage, you pay off the rest, usually through selling your home or other funds
- Fixed-rate mortgages: You borrow the money at a fixed interest rate for a set amount of years, usually between two and five. After that, the rate than usually changes to your lender’s standard variable rate (‘SVR’) for the rest of the mortgage
- Tracker mortgages: Your interest rates changes over time in line with interest rates set by the Bank of England
- Variable rate mortgages: This is the lender’s standard basic interest rate and can change over the lifetime of the mortgage
- Discount rate: A form of variable rate mortgage where the interest rate is set just below the lender’s standard variable rate for a set period of time
When would you use it?
A basic mortgage is usually used for buying a home that you intend to live in.
But can be used for other circumstances like buying a residential property for redevelopment.
The fine details
- Typically loaned over a long period up to 25 years, but can be taken for shorter or longer periods. This is the mortgage’s ‘term’
- Shorter repayment periods lead to higher monthly payments
- Interest rates can vary but are usually between 1% and 9% per year
- High street banks and specialist lenders are the main source for these loans
- Larger deposits often mean a better lending rate, because the lender is taking a smaller risk if they had to repossess your property to pay the loan back. The bigger your deposit, the smaller the proportion of the value that the lender is loaning to you. This is called the Loan to Value (LTV), and is typically a maximum of 90-95% of the property value
- Early Repayment Charges (ERCs) are fees lenders charge if you pay your mortgage off early. Normally these only apply when you have a mortgage with a cheap interest rate period, for example the first few years when your rate is fixed or discounted. These are typically 1-5% of the loan value high-street banks & specialist lenders are main source of these loans
- Additional costs include overpayment fees, and mortgage indemnity fees to cover high LTVs
Benefits for small businesses and semi-professionals...
- Readily available from most banks and building societies
- Variety of products available