Everything You Need to Know About Residential Mortgages
Residential mortgage is the main reason why millions of people have their own home. These mortgages lend you a big amount of money to enable you to get on to the property ladder. The average cost of homes in the UK is around £188,000 however, they do change with region and kind of place you want to stay in. Like London being the urban centre, a home here would cost you at least £400,000 or even more.
Whichever place you want to stay in, you are bound to borrow a big deal of money unless you have the funds readily available. At this juncture, residential mortgages come to your rescue. Let us help you find some more details about this important type of mortgage.
What is residential mortgage?
Simple definition of a residential mortgage is a loan borrowed to buy a new home. This could be a large sum of money and depends solely on the kind of property you choose. The home in question should be a place you need to stay and not a buy-to-let investment.
This mortgage is suitable if you want to move in to a new home or a first time buyer or are remortgaging. You can choose between fixed rate, variable or tracker mortgages, whichever suits your budget and current circumstances.
The residential mortgage is available only if you need to use this place to stay and not for any kind of commercial investment. To get the mortgage, you need to have a cash deposit which can be anything over 5 % of the value of the home.
Loan to Value Ratio:
This is an important parameter in choosing residential mortgage. LTV is the ratio of the amount borrowed and the actual value of the property. You will get better interest rates if your LTV ratio is low. In market terms, if the LTV ratio is 80% then it is considered low LTV ratio and if it is 90% or more then it is considered a high LTV ratio.
LTV and interest rates:
You can get the best rates for residential mortgage if the LTV is somewhere around 60%, which is considered as the lowest ratio. Going further, LTV between 70% and 80% are considered competitive and you can easily set their monthly repayments. LTVs above 80% are subjected to high rates of interest and may require guarantors.
Interest on residential mortgages:
We all know that interest is a small fee which you pay to the lender for offering you a lump sum to buy a home. It is charged on the amount of money you need to pay back to the lender. It is calculated as an annual percentage rate against the total amount borrowed. So, this makes you liable to pay not only the debt but also the interest charged by the lender.
Based on the interest rate, your mortgages are divided into three kinds – Fixed rate mortgages, variable rate mortgages and tracker mortgages.
Fixed rate mortgage: In this case, the monthly repayments are set for a pre-defined time which could be two, three or five years and sometimes even ten. These are highly recommended as you need to pay the fixed amount even if there is a rise in the interest rates in the market. The only drawback in this case is that you cannot leverage the fall in the market interest rates.
Tracker Mortgage: There are in sync with the Bank of England’s base rate and are normally a few percent higher than the base rate. So, if the bank rate is 0.5% now and your interest is 2% then you have to pay 2.5% to the lender. As these vary with the Bank of England’s base rate, you can often face fluctuations in the payments.
Variable Rate Mortgage: In this case, the interest rate varies as per the lender’s decision. Also, you may need to pay higher interests than the initial rate. However, you may not face extreme situations as the lenders are bound to meet the competition and nobody wants bad publicity for sure.
Monthly repayments for residential mortgages:
As a borrower you need to pay monthly repayments to cut down your debt and continue to do so until the entire mortgage is paid. Keep in mind that if you are unable to make monthly payments then you may end up losing your home. The repayment value varies with the interest rate and you normally get around 25 years to pay the repayments and clear your debt.
You need to pay smaller monthly repayments if the repayment schedule or the number of years to clear the debt is long. If you want to pay back in a shorter time then you can choose the option of remortgaging. The option of remortgaging can also be tried if your circumstances compel you to take longer period than the current repayment schedule.
Your age could also be a deciding factor as some of the lenders keep an upper age limit mentioned in the mortgage agreement. It is generally 75 years. So, in case, you choose residential mortgage at the age of 60 then you have just 15 years to pay back the debt along with the interest.
Types of repayments:
Full repayments – In this type, you pay back the mortgage amount plus the interest. So, your monthly repayment consists of both, a smaller amount of the debt as well as the interest. This way, you end up clearing the entire debt and interest at the end of the term. The monthly repayment amount is on the higher side so check if the repayment is feasible for you.
Interest only repayments – In this case, you only pay the interest amount on a monthly basis. It is a riskier choice if you do not have a plan decided for repaying the mortgage amount. You need an investment or savings or will need to sell the home by the end of the term to shore up the finances.
There are advantages and disadvantages of both the options and you can decide the best one based on your current circumstances and financial status. Keep in mind that you have got this mortgage against your home and if you cannot pay the borrowed money at the end of the term then the lender can exercise a claim on the property. The lender can evict you and sell the property to recover the investment.
To know more about different kinds of mortgages, you can read our mortgage guides. To compare the best mortgage lender, you can check our website freepricecompare.com or call our friendly team of mortgage experts on 08008807656.