11th December 2018
For the majority of students, the prospect of getting a mortgage is daunting. The thought that soon enough, we will be moving outside the comforts of our family home and having to pay for ourselves can be frightening. As students, we may have learnt some independence through University but becoming a home owner is something else. A point, as a student which I must make, is that the majority of us have no prior knowledge or understanding of mortgages! I know from my own personal experience that I have never had a lesson, a lecture or so much as a talk about mortgages, what they are and how they work.
A mortgage is a long-term loan taken out in order to buy property or land. The average mortgage length is 25 years. However, many mortgage providers can analyse your situation and change it to make it longer or shorter. (Barclays.co.uk, 2018)
Capital is the amount actually borrowed as part of the mortgage, and interest is the percentage charged by the lender on the mortgage. (Barclays.co.uk, 2018)
There are two main types of mortgages available:
- Fixed rate: Interest you pay on your mortgage will stay the same for a number of years. Most will typically last between 2 and 5 years, although there are a handful of 10-year deals out in the market. (Cheung, 2018)
- Variable rate: As the name suggests, the interest rate will change at any time normally in line with the Bank of England base rate changes but lenders can also change their standard variable rate at any time.
The 2 most common mortgage repayment methods are:
Across the UK, this is the most common method of repayment. The mortgage holder will make repayments monthly for a set period of time until both the capital and interest are repaid. It is worth noting that repayments are mainly made up of interest, and if you were planning on moving house early into the mortgage, the capital owed will not have gone down much. There is also the decision over whether the mortgage will be a fixed or variable rate. (Moneyadviceservice.org.uk, 2018)
Interest-only is exactly what is says, the mortgage holder only pays the interest due each month. This means that repayments monthly are cheaper, but the capital remaining will still be the same once you reach the end of the mortgage term. Lenders will ensure there is a repayment strategy in place so the mortgage holder can repay the capital at the end. Interest-only mortgages have decreased in availability due to the financial crisis of 2008. (Moneyadviceservice.org.uk, 2018)
Mortgage Market Review
The mortgage market review (MMR) is the biggest change in recent mortgage history. It includes tighter rules on interest-only mortgages, more in-depth checks on affordability and qualifications of sales staff. The origin of MMR was the financial crisis of 2008, as in 2007 rules on mortgage lending were liberal, to say the least. (Gregory, 2018)
The main change MMR implemented is the consideration of the borrower’s financial health, which takes a more stringent look at your outgoings. Importantly, this will be verified by the lender, rather than a self-assessment like previously. Expenses like car loan repayments and other loans will be evaluated, but also costs such as a Netflix subscription and eating out will also weigh-in on the mortgage application. As students, it is worth knowing that student loan repayments will be assessed but not any differently to normal loans. (uSwitch, 2018)
A good website for mortgage comparison, and for the average monthly repayment available for borrowers is: https://www.moneysavingexpert.com/mortgages/best-buys/
Barclays.co.uk. (2018). Mortgages made easy | Barclays. [online] Available at: https://www.barclays.co.uk/mortgages/how-to-get-a-mortgage/ [Accessed 7 Dec. 2018].
Cheung, C. (2018). Fixed-rate mortgages. [online] Which? Money. Available at: https://www.which.co.uk/money/mortgages-and-property/mortgages/types-of-mortgage/fixed-rate-mortgages-amf379u2d3zn [Accessed 7 Dec. 2018].
Gregory, S. (2018). 2008 was game changing for mortgage brokers. [online] Ftadviser.com. Available at: https://www.ftadviser.com/mortgages/2018/12/07/2008-was-game-changing-for-mortgage-brokers/ [Accessed 7 Dec. 2018].
Moneyadviceservice.org.uk. (2018). Mortgage repayment options explained. [online] Available at: https://www.moneyadviceservice.org.uk/en/articles/mortgage-repayment-options [Accessed 7 Dec. 2018].
uSwitch. (2018). Mortgage Market Review – What is the MMR?. [online] Available at: https://www.uswitch.com/mortgages/guides/mortgage-market-review/ [Accessed 7 Dec. 2018].