In this article, Steve Gomez, Specialist Mortgage Adviser at Wesleyan Financial Services, answers some of the most commonly asked questions about mortgages. From interest rates to early repayment charges, find out more.
What are interest rates? And how do they affect my mortgage?
Put simply, an interest rate is the amount you are charged for borrowing money. In the UK, interest rates are determined by the Bank of England (BoE) base rate. That’s why when the BoE base rate changes, mortgage rates can go up or down.
The impact a change in interest rates has on your mortgage will depend on what type of mortgage you have and when your deal comes to an end.
For example, if you’re on a variable rate mortgage with a lender whose interest rate rises in line with the Bank of England’s base rate, you may find that the cost of your monthly repayments increases.
If you’re on a fixed-rate mortgage, you won’t see any change until the end of the fixed period. At this point, you’ll be switched to your lender’s standard variable rate (SVR) unless you remortgage.
Should I choose a fixed-rate or tracker mortgage?
What is right for you will really depend on your individual circumstances. Let’s say that today’s tracker rate means your monthly mortgage payment will be £300 per month, but two months later, it rises to £600 per month. Will this be catastrophic to your finances?
If the answer is yes, a fixed-rate mortgage that provides stability of payment may be the better option. This is usually the case for those whose salary is unlikely to increase over the next five years or so. On the other hand, if your income is likely to rise over the next two to five years, you may be able to soak up that increase in payment without too much of a hit to your finances.
This is why it’s so important to seek advice when it comes to mortgages. A good adviser will explore your options in more detail, ascertain your attitude to risk and work with you to find the best solution for your needs.
Always remember your mortgage is secured on your home. Your home may be repossessed if you do not keep up repayments.
Is it worth paying my early repayment charge so that I can remortgage sooner?
Again, the answer to this question will depend on your individual circumstances. There will be cases where it’s cost-effective to pay an early repayment charge, and cases where it’s absolutely not.
If you’re considering paying your early repayment charge, it’s worth getting advice from a mortgage adviser. They will take the cost of the charge, add it onto your loan, see what the new rate is and provide you with a projected monthly cost. If stability of payment is really important to you, this might be the best option.
Wesleyan Financial Services (WFS) provides broker and advice services. WFS is paid a fee by the mortgage lender upon completion of the loan. Product fees may be payable to the lender.
What happens if the property I am buying is valued at a lower price than the amount I offered?
There are a couple of options for buyers when this happens. Firstly, the lender will work out the new loan-to-value of the property based on the valuation.
For example, if the property price is £100,000, but the valuation comes in at £90,000, your lender will only lend up to the loan-to-value of £90,000. This is where your estate agent becomes really important, as you will probably have to renegotiate the property price with the seller.
It’s worth noting that most surveyors don’t work directly for the lender. They’re usually employed by panel companies. The lender then instructs the surveyor to carry out the valuation on their behalf.
This is why it isn’t usually in the best interest of the seller to stand by their original price in the hope that another surveyor will value the property differently, because it’s likely to be the same person carrying out the valuation in that postcode area.
If the seller is unwilling to reduce the asking price, but you still want to purchase the property, the other option is to cover the difference using any additional savings you have. If you have enough surplus cash to pay the extra cost, you can absolutely do that.
What happens if my mortgage offer expires before I complete my property purchase?
If your offer expires before your property purchase is finalised, it’s likely that you will have to reapply for your mortgage – be that with the same lender or a different lender with a more favourable rate of interest.
Your lender will need to reassess your affordability, meaning they will ask for your latest payslips and bank statements to make sure nothing has changed since you last applied. Depending on your financial situation, this may sadly mean that you’re no longer able to proceed with the purchase.
Some lenders will allow you to extend your offer for a further three months at the rate you applied for, but this isn’t guaranteed and should be taken on a case-by-case basis.
What happens if I can no longer afford my mortgage payments?
If you can no longer afford to pay your mortgage, it’s important to contact your lender as soon as possible. Your lender will usually write to you within 15 days of a missed payment, but you shouldn’t wait until this point to speak to them.
Your lender will be able to explain your options in more detail. Depending on your circumstances, they may offer you the option to reduce the amount you pay (usually for a couple of months), extend your mortgage term or negotiate a lower interest rate if there is equity in your property.
They may also allow you to switch to a cheaper, fixed-rate mortgage deal if this isn’t already the case.
Can I take in a lodger if I have a mortgage?
It is possible, but you will need to get approval from your mortgage provider. They will want to know what sort of agreement you have in place, which is usually set out in a written contract.
Your lodger would also need to sign an Occupier Waiver Form, also known as a Deed of Consent, which is applicable to anyone over the age of 17. This document waives the legal rights of the lodger in the event that you couldn’t make your mortgage payments and the property is repossessed by the lender.