BUYING YOUR OWN HOME
INTRODUCTION
In Britain the number of people owning their home is increasing. A considerable number of these home owners are households that live in homes that have mortgages or loads secured on them. Buying your own home gives you the freedom to choose how and where you live but it is also a serious financial commitment. It is important to understand the responsibilities that you will have should you take on a mortgage. If you are working and have some savings, this information should help you decide if home ownership is for you.
WHAT IS A MORTGAGE?
A Mortgage is a type of loan to enable you to purchase a home. The lender is known as the mortgagee, and the borrower is known as the mortgagor. The lender will tell you how much they are prepared to lend you and you will have to pay agreed instalments to your lender at monthly intervals over a given period of time (usually 20 -25 years).
There is normally two parts to the instalments (also known as repayments): interest which is the price you pay for borrowing the money and either capital the term used for the money you have borrowed and are paying back directly to the lender or endowment premium, monthly payments that are paid to a life assurance company instead of your lender. These types of mortgages are explained in more detail further on. The word term is used to describe the number of years over which you have borrowed the money and have agreed to pay it back. The rights that a mortgage lender has against the borrower are secured by registering a charge. This means that the lender can apply to the court for an order to sell your home if you break the terms of the mortgage agreements. You will have to repay the outstanding amount left on your loan to your lender if you sell your home during the mortgage term, in order that the charge can be removed.
Other loans may also be linked to your home (known as secured loans) and if you do not keep up with the payments of these loans, the lender may be able to gain possession of your home even if you are not behind with payments of the main mortgage.
It will help if you prepare details of your income and expenditure so that you are able to assess how much of your monthly income you can put towards housing costs. You will need to consider if you can keep up these payments and what other costs there will be. For example, think about what would happen if your income were to drop or if interest rates rose suddenly. If you buy jointly it is best to decide beforehand what you will do if one of you wants to move. See "Relationship Breakdown".
COMMON TYPES OF MORTGAGE
When you borrow money the way you repay the loan varies with the type of mortgage that you choose. The most common types are these:
- Capital Repayment - The repayments are calculated in two parts; the interest (the cost of borrowing) and the capital (the amount borrowed). The instalments are paid direct to your lender. The amount you pay will depend on the interest rate. You will have repaid your mortgage at the end of the term.
- Low Cost - These mortgages offer repayments at a lower interest rate for a given number of years at the beginning of your mortgage but revert to the variable rate afterwards. The increase in repayment amount can be substantial.
- Fixed Rate - Some lenders offer a fixed rate of interest either for an agreed period or for the entire mortgage term.
- Endowment - The repayments are made up of interest on the loan and a monthly premium which you pay to a life assurance company. The company agrees to pay back a lump sum to the lender at the end of the mortgage term (or on your death if you die before the end of the term.) The value of the endowment policy should be at least as much as your loan at the end of the term, although this is not guaranteed. The success of the endowment depends on the financial market and the economy, as policies do not generally do so well when interest rates are low.
- Interest Rates - Unless you have agreed to pay a fixed rate of interest throughout the entire mortgage term you should remember that as the interest rate varies, your mortgage repayments will go up and down during the period of the loan. So you need to be sure that you could afford the increase in the repayment amount, if it occurs.
There are other types of mortgage available. Most lenders will give you written details about the mortgages that they offer and you need to be sure that you understand the information fully. Be aware that advisors within the lender's company will not give independent advice. When you are sure you want to buy you really need to shop around to find a mortgage that suits you.
INSURANCE
There are some insurance policies that may be linked to your mortgage. The cost of these needs to be included when calculating what amount you can afford.
- endowment
- mortgage protection life assurance
- payment protection plan
- mortgage indemnity insurance (for the benefit of your lender)
- buildings and contents insurance
FINDING A LENDER
There will always be someone who will be prepared to give you a mortgage. If a reputable lender has refused to lend you money, the most likely reason is that they have calculated that you cannot afford the repayments. In going ahead with another lender you could risk a) higher repayments and b) losing your home. As a general "rule of thumb" if the amount is more than one third of your monthly NET income you may need to reconsider how much you can afford to borrow. The general questions you will need to ask your lender include:
- What types of mortgage do you offer and which is the cheapest?
- Would they be willing to agree a loan in principle?
- What are ALL the fees and charges?
- Are there any redemption penalties (extra monies that have to be paid back) if you sell?
- If you move house can you keep the same mortgage?
- What would happen if you had problems paying the instalments - would you incur additional charges?
COSTS
You should consider all the costs of buying a home, such as:
- mortgage arrangement charges
- legal fees for solicitor and conveyance
- valuation fees (for a survey of your home, usually required by your lender)
- stamp duty (this is a one-off government tax on properties costing over a certain amount)
- indemnity insurance (depending on the type of mortgage you have and your level of borrowing)
- deposit, the level of which will affect the amount of your monthly costs
- moving costs, please see the information on "Moving Home"
- recurring costs, such as council tax, home insurance,water rates, fuel and living costs, as well as your monthly mortgage repayments, have to be budgeted for
- importantly, repairs and maintenance of your home
Additional costs you may have:
- mortgage protection policy to insure against unemployment
- service charges (related to long leaseholders)
MISSED PAYMENTS
If you have problems paying your mortgage costs tell the lender immediately and explain what your difficulties are. Please refer to further information " Mortgage Arrears" There are numerous things that you can do but you need to act promptly. Impartial and confidential advice is available from a number of local agencies, including Housing Advisory Services, who will help to put your situation in perspective.
It is never too late to try to keep your home.