Today, we will be discussing mortgages, what they are and if it is worth getting one this year.
For beginners, let’s start slow. What is a mortgage?
A mortgage is a loan taken by individuals or companies to buy their dream home.
It is most likely the largest purchase you’ll make in your lifetime. For that, it becomes mandatory to be able to afford to get a loan.
This loan can last approximately 25 years but the duration may differ based on the plan you choose. The entity you get a mortgage from secures this loan against the value of the home in most cases. Next, comes where do you get a mortgage from?
You can apply for a mortgage directly via a bank. Additionally, there are mortgage brokers that can help you get a good deal. Before you go to a broker or adviser, however, it is wiser to get a free credit report from bureau like Callcredit, Equifax, and Experian. You can then speak to some mortgage advisers to get professional assistance in selecting the best mortgage option for you. Know that banks and building societies have such advisers to guide you as well.
Like in any legal matter, you’ll need a few documents that the lender asks for. Some common documents are,
- Residency proof
- Bank statements
- Proof of pension or benefits received
- Tax returns
The process generally takes between 18-40 days for a mortgage. In complex cases, it can take even longer.
Now that you know what a mortgage is and how it works, let’s look at the different types of mortgages.
- Fixed-Rate Mortgages
As the name suggests, these are mortgages where the nominee pays a fixed interest rate throughout the timespan. Even if the market interest rate flutters, your rate will remain the same.
The downside of fixed mortgages is they stay the same when interest rates go down as well. In their advertisements, you’ll often find a time-period followed by the fixed interest rate for the duration. For example, a two-year fixed 12% interest rate.
- Variable Rate Mortgages
In this type of mortgage, the rate can change at any point.
There are different types of variable mortgages too—standard variable rate or SVR (as it is popularly called), discount mortgage, tracker mortgage, and capped mortgages.
- Standard Variable Rate
A standard variable rate is a long-term rate of interest . In most cases, the duration of an Standard Variable Rate (SVR) begins once your fixed-rate period ends.
However, some lenders also observe the SVR as their normal interest rate. This means the SVR acts as the rate decided by the mortgage lender. During the loan period, they can modify the rate at any time.
Besides the obvious downside, the homebuyers get a definite advantage with an SVR—freedom!
- Discount Mortgages
A discount mortgage is nothing but a discount offered for a certain period by the lenders on their standard variable rate. These discounted rates only last for a limited period (one to three years).
Make sure to weigh your options. Since SVRs differ from lender to lender. Meaning, a bigger discount will not always get you the lowest interest rate. So, don’t forget to do your math.
Consider this simple example:
Bank A and Bank B offer a 2% discount and a 1.5% discount respectively. However, Bank A has a 7% SVR whereas Bank B has a 5% SVR. If you do the math, you’re paying a lower interest rate with Bank B despite their lower discount.
- Tracker Mortgages
Tracker rate mortgages work in sync with the Bank of England’s rate. If it rises, the tracker mortgages rise along with it and if the base rate falls, you can thank the Bank of England. Based on the lender, you can choose between lifetime trackers and term trackers.
Also, tracker mortgages are variable. So, if the base rate goes up by 1%, your rate simultaneously increases by 1% too.
- Capped Rate Mortgages
This one’s interesting. In a capped rate mortgage, the rate continues to move in sync with your mortgage provider’s SVR. BUT the cap is the maximum increment the lender can make.
The main advantage here is the certainty that the interest rate won’t cross a certain level. Your rate can fall but it cannot rise above the fixed level.
Of course, the lenders set the cap to be quite high. So, that’s not much of an advantage if you ask me. The lender can increase the rate up to the level of the cap whenever they want. There’s nothing you can do about it.
- Offset Mortgages
Offset mortgage may seem confusing at first but once you understand the concept, it’s quite straightforward.
In an offset mortgage, your savings and current bank account are linked to the mortgage. With me so far? Good.
Next, you only need to pay the interest on the difference. You still pay the debt every month. However, your savings help you clear the mortgage earlier than you normally would.
This was the last type of mortgage you are likely to come across. That said, let’s look at the 2021 overview and predictions of the mortgage market.
The outlook for 2021 will largely depend on one term—Brexit. And the pandemic, of course. But what is Brexit? Let’s find out.
Brexit is a term given to the United Kingdom’s departure European Union and the Euratom. It began on February 1st, 2020, and has raised havoc on the mortgage market.
In my opinion, finding the right fixed mortgage plan is a smart choice for anyone looking to buy a property. A lot of uncertainty surrounds the UK’s withdrawal from the European Union. Naturally, it does not help to calm the consumers down, that much is certain. To help you steady your nerves, I’ll predict the extent of the impact this departure may have on the mortgage and real estate industries.
Given the conditions, most economists are predicting a decrease in the interest rates. However, this is only a prediction the Bank of England may not think like that. There’s no guarantee despite most people predicting it.
The best way to be certain after Brexit and a taxing 2020 is to look for a fixed-rate mortgage.
History shows that in testing times like these, the economic condition results in lowered mortgage rates. For instance, in June 2016, the Bank of England dropped the rate to 0.25%. This was the lowest the mortgage rate has fallen in more than ten years.
Based on what we’ve seen so far, the general trend hints at reduced mortgage rates in the future. People paying a variable mortgage may have noticed their payments reduced in the past few months. To get the best deal, I recommend waiting a few months and observing the market before getting a loan. If the interest rate falls you can benefit if you are the borrower and if it increases, vice versa.
Let’s understand the ups and downs of the mortgage industry with the example of the recession we experienced a decade ago. During this period of economic turmoil, most people found themselves facing extraordinary challenges.
Between 2008 and 2009, many people started losing their jobs and homes after the housing market began plummeting. According to data, it became difficult for banks to borrow money causing them to significantly reduce the loans and mortgages.
Let’s come back to the present now. The lockdown has affected house prices and there is a surge in house buying. But is 2021 the best time to get a mortgage especially in the UK?
Timing plays a critical factor in the mortgage industry. And right now, the time is as good as it can be after a worldwide pandemic. The market is balanced, which is great if you ask me.
Even then, it is normal to be worried about getting a mortgage. You’ll be paying it for decades, after all.
Whatever you choose to do, be certain about the following points. How much can you afford to set aside for a mortgage every month? Which mortgage type should you opt for? Can you afford the interest rate?
Don’t forget the expenses such as bills, food, and other necessities.
When it comes to buying a house, it is now or never. If you keep waiting for the market to be perfect to get a mortgage, you’ll end up waiting forever.
With the market as balanced it is right now, I recommend you get a mortgage. However, look for a fixed rate option since stability cannot be guaranteed for a long time.
But also make sure to perform a thorough analysis of the market before going all in. Look at the property markets and then settle for the best option. Right now, getting a property in London cannot go wrong.
If you want to wait a year before buying a house, think again. Most commentators (and I!) agree that the house prices are about to rise in the coming years.
2021 may be a safe year for you to get a mortgage in the UK after all.
Also, if you need further advice on mortgages ,or if you are looking for the lowest interest rate for your mortgage, do not hesitate to contact us on 020 8095 1000.
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