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Mortgages explained
At Saffron Building Society, we understand that sometimes mortgages can seem very confusing.
But when stripped back to the basics, they're quite easy to understand. That is why we have created a guide to mortgages that will help you make sense of the transaction you may be about to enter into.
Our guide to mortgages
It's simply a loan for the specific purpose of buying a home. You borrow money from us and pay it back over a pre-agreed period of time along with interest.
The important difference between a mortgage and most other types of loan is that a mortgage is secured against your home. This means that if you do not keep up the repayments on your mortgage, we are legally entitled to repossess your home and sell it.
When you apply for a mortgage, we therefore carefully check your income and expenditure to ensure that you can comfortably afford the mortgage for which you are applying. It's in your own interest to be completely honest with us and be realistic about how much you can afford to borrow.
There are two main types of mortgages: repayment and interest-only.
With a repayment mortgage, your monthly repayment includes both interest and some of the capital you have borrowed. In the early stages of your mortgage, the monthly repayment will comprise of mainly interest along with a small amount of capital. However, as time ticks by the amount of capital you repay each month will gradually increase, until you have completely repaid your mortgage by the end of the agreed term.
With an interest only mortgage, you only repay interest each month and then pay off the whole of the capital amount borrowed at the end of the mortgage term. Interest only is not available on all of our mortgages and is restricted to certain products, such as buy-to-let mortgages. Landlords may, for example, plan to sell their rental property in order to repay their loan. If your mortgage is for your main home, this will probably not be an option available to you, which is why interest-only is restricted to certain products.
There are several ways in which you can repay your mortgage and each interest rate type has benefits and drawbacks that are worth knowing about.
Here are the main types of mortgage rates we offer:
Standard Variable Rate (SVR)
As its name implies, this is our standard mortgage rate. If you opt for a fixed, discounted or tracker rate (see below) then this is the rate your mortgage will revert to after the special rate period has come to an end. For that reason, standard variable rate is also sometimes referred to as a reversion rate.
The other key point to note is that the rate is variable: it can go up or down. The rate is set by Saffron Building Society and does not simply track Bank of England Base Rate, so do not expect your mortgage rate to rise or fall simply because you have heard on the news that Bank Base Rate has changed. Interest is calculated daily on the outstanding balance of your mortgage.
If you have a standard variable rate mortgage and the rate changes, we will write and notify you beforehand.
Strengths: A simple and straightforward rate that may fall from time to time. You can also repay some or all of your mortgage capital (in addition to your normal monthly repayments) at any time without penalty.
Drawbacks: The interest rate may also rise from time to time and you therefore need to ensure your budget could cope with an increase in your monthly mortgage payments.
Fixed Rate
This means that the mortgage rate is set and won't change for an agreed period of time. Typical fixed rate terms are 2, 3 or 5 years although other terms may also be available from time to time. At the end of the fixed rate period your mortgage will revert to our standard variable rate that is prevailing at the time.
Strengths: Fixed rates make budgeting easy, because you know your monthly mortgage repayments won't change during the term of the fixed rate deal.
Drawbacks: Your rate of interest is fixed, so if our standard variable rate falls, you won't feel any benefit during the term of your fixed rate. You will also have to pay a penalty if you want to repay a significant amount of (typically more than 10%) or the whole of your loan during the fixed rate period.
Discounted Rate
Offers a discount from our standard variable rate for a set period of time. At the end of the discounted rate period your mortgage will revert to our standard variable rate that is prevailing at the time.
Strengths: A discounted rate means that your mortgage repayments will be cheaper for a set period, than if they had been calculated using our standard variable rate. If our SVR falls, your mortgage rate will also fall, unless it reaches a minimum ‘floor' rate beyond which the rate will not drop. Your mortgage offer will confirm if a rate ‘floor' applies.
Drawbacks: If our standard variable rate rises, then so will your discounted rate. You may also have to pay a penalty if you want to repay a significant amount of (typically more than 10%) or the whole of your loan during discounted rate period.
Although many borrowers initially opt for a mortgage term of 25 years, you can choose any term between 5 years and 40 years. There are, however, some key considerations you need to take into account.
A shorter term means you repay your mortgage sooner and pay less interest in total over the full period of the mortgage. However, your monthly mortgage repayments will be higher and you therefore need to ensure they are affordable, especially if your mortgage rate were to rise.
A longer term means that your monthly mortgage repayments will be less, but the longer term means that the total amount of interest you will repay over the total term of the mortgage will be higher. You also need to ensure that the longer term doesn't risk your mortgage running into your retirement, when your income may fall significantly.
As well as paying interest each month, there are other costs associated with applying for a mortgage:
Valuation fees
We will need to have your property valued, to ensure it provides us with adequate security against the loan amount for which you are applying. We have a set scale of valuation fees and these are available on our website, by asking in any of our branches or by calling our helpline.
The valuation is for our purposes only and it is not intended to give you an indication of the condition of your house. If you need further information about your home, you will need to instruct a surveyor (see below).
Survey fees
You can instruct a qualified surveyor, who should ideally be registered with the Royal Institute of Chartered Surveyors (RICS), to undertake an independent survey of your home. They will be able to tell you about the condition of the house and if there are any structural issues of which you need to be aware. It makes a lot of sense to have a survey undertaken, particularly if the house is old, so that you know precisely what you're buying.
Conveyancing fees
You will need either a solicitor or registered conveyancer to undertake the legal work involved with applying for a mortgage. If you do not already have a solicitor, we may be able to help you find one and the solicitor will tell you how much they will charge for the services they provide.
The solicitor is representing your interests and as well as preparing and checking all the legal paperwork, they will also carry out searches to ensure there are no local factors that may impact your house, such as other building work close by or plans to build new roads.
There are 3 type of insurance you should consider:
Buildings insurance
This provides cover against damage to the structure of your home from events such as flooding, fire, subsidence or a major accident such as an explosion. You need to ensure there is sufficient insurance in place to cover the complete rebuilding of your home if the worst were to happen. The rebuild cost can vary considerably from the purchase price and the valuer will confirm the rebuild cost when carrying out the valuation.
Contents insurance
Dependent upon the cover you choose, this can cover everything within your home and garden, such as all your personal possessions. There are different levels of cover available and you usually have the option to insure some items such as bicycles, cameras and jewellery when you're away from home.
Most insurers will give you the option to take out a combined buildings and contents policy, which is usually a more cost effective way of putting cover in place.
Life insurance
This provides cover if you die during the term of your mortgage and can be arranged so that it pays out an amount that is sufficient to repay your mortgage balance. You can also arrange cover against critical illness and loss of income, if required.
Other fees
There may, in exceptional circumstances, be additional fees associated with your mortgage application. However, you will be notified in advance if this is the case. For example, you may need to have a specialist survey such as a tree survey or bat survey carried out.
If you encounter financial difficulties and you believe it may mean you struggle to make your monthly mortgage repayments, the most important thing to do is tell us as soon as possible. Do not ignore financial difficulties or simply hope they will go away.
We will do everything we can to help you maintain your mortgage payments and avoid putting your home at risk of repossession. We may, for example, be able to restructure your monthly repayments for a short period, to help you regain control of your finances.
If you need to speak to us about repayment difficulties, please call us on 0800 072 1100.
It's very important that you declare all your income and all your expenditure, so that we can get a true picture of your finances. This information will enable us to assess whether you can afford the mortgage for which you are applying.
It's in both of our interests to be able to accurately assess affordability, so that you don't encounter difficulties repaying your mortgage in the future. Withholding information or deliberately misleading a mortgage lender classified is fraud and is a criminal offence.
Glossary of mortgage terms
APRC: Stands for Annual Percentage Rate of Charge. This is a calculation that includes the amount of interest you pay and any other fees charged such as arrangement fees for setting up the loan. It also takes into consideration when and how often interest and charges must be paid. An APRC figure is intended to let you easily compare products from different lenders. The lower the APRC the better the deal.
Arrangement Fee: This is a fee to reserve the funds for your mortgage. The arrangement fee for your mortgage may be charged separately or added to the mortgage loan.
Arrears: It is important that you keep up-to-date with the monthly repayments on your mortgage. When mortgage payments have not been paid on time and/or are not made at the correct amount, borrowers are said to be in arrears.
Bank of England Base Rate: The Bank of England Base Rate is set by the Bank of England and determines the cost of borrowing money.
Building Societies Association (BSA): The trade association representing interests of member societies and mutuals.
Cash-back: On completion of a cash-back mortgage, your lender will pay a lump sum "back" to you.
Completion: This is the last stage in the purchase of a property. The legal documentation is finalised and the lender has sent the mortgage funds to the purchaser's solicitor. Once the purchaser's solicitor forwards the funds to the seller"s solicitor the property is now owned by the purchaser.
Council of Mortgage Lenders (CML): A trade association representing mortgage lenders.
Deed: A Deed is the legal written document which transfers title (ownership) or an interest in real property to another person.
Early Repayment Charge: An early repayment charge is a fee made by the mortgage lender if you redeem your mortgage early. Not all mortgages have early repayment charges.
Equity (housing): In housing terminology, equity is the difference in the value of the property and the amount outstanding on any loan secured against it.
Exchange of Contracts (England & Wales only): This is the stage where legally binding contracts are exchanged between the buyer and the seller. After contracts have been exchanged the vendor must sell and the purchaser must buy on the terms agreed.
Fixed Rate: The interest rate is guaranteed not to change during a fixed term.
Freehold: The legal right to hold land/property as the absolute outright owner, free of payment or any other duty owed to another party. As a freeholder, you can then offer to rent your land/property to parties with whom you"ll have a legal agreement. In other words, you may create leaseholders.
Most houses are sold as freehold properties but most flats are sold on a leasehold basis.
Further Advance: A further advance is additional borrowing with the same lender against the security of the property.
Interest-Only Mortgage: The borrower must make monthly payments until the end of the mortgage term. These monthly payments only cover the interest charged on the mortgage. The borrower will still owe the capital balance borrowed at the end of the mortgage term. The borrower is responsible for making their own arrangements to repay this capital balance and any other amounts owing at the end of the mortgage term. Failure to repay the mortgage debt in full at the end of the mortgage term could result in your home being repossessed.
Leasehold: You have a lease from the freeholder (sometimes called the landlord) to occupy the home for a number of years. The leases are usually long term, often 90 years or more.
Loan to Value (LTV): Loan to value (LTV) is a ratio between the size of the loan you would like against the value or sale price of the property you wish to re-mortgage or purchase. Generally the lower your LTV, the lower your interest rate is likely to be.
Mortgage Indemnity Guarantee (MIG): A Mortgage Indemnity Guarantee (MIG) is an insurance policy designed to protect the lender (the bank or building society for example) against loss in the event of the borrower failing to repay your mortgage. The policy may be insisted on by the lender at the start of the mortgage, but it's usually the borrower who pays the premium.
Mortgage Term: The term of a mortgage is the length of time over which the mortgage lender is willing to advance you the money on your mortgage before it must be repaid. The standard mortgage term in the UK is 25 years.
Mortgage Offer: The mortgage offer is the document issued by a mortgage lender to a prospective borrower following approval of the mortgage application. The mortgage offer will contain the conditions of the mortgage and the terms on which it is being made available.
The mortgage offer is a legal document and details the terms by which the mortgage lender and borrower will be bound. It requires careful reading. It is usually valid for a set period of time such as 3 - 6 months, but it can be revoked should circumstances change for the borrower, such as redundancy before the mortgage is completed.
Negative Equity: This is when the value of a property falls below the amount of the mortgage taken out to purchase it.
Overpayment: An overpayment is when more is paid each month to a mortgage lender than the contractual monthly repayment.
Portable Mortgages: A portable mortgage offers the opportunity to move the mortgage from one property to another. This allows the mortgage borrower to move property and move the mortgage from the old property to the new one.
Redemption: Redemption is what occurs after the capital borrowed and all interest is fully paid off. At this point the mortgage lender no longer has any claim on the property.
Remortgage: A remortgage is the replacement of an existing mortgage with a new one on the same property.
Repayment Mortgage: A repayment mortgage is where the capital is repaid gradually over the term of the mortgage. Payments consist of both the interest and the capital balance of the mortgage. In the early years of a repayment mortgage each monthly payment has a greater ratio of interest to capital. Over the term this ratio changes, meaning that eventually more capital is paid than interest.
Variable Rate: The rate of interest paid can change according to market conditions and/or changes to the Bank of England Base Rate or lenders Standard Variable Rate.
Need some help?
Give us a call
We're on hand to arrange a phone appointment to help with any general queries about the mortgage process.
Call us on 0800 072 1100