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The Mortgage Market What is a mortgage? A mortgage is a loan to finance the purchase of a commercial or residential property. Mortgages are generally linked to the income of the borrower and the property is used as security for the loan. Variable and fixed rate mortgages The mortgage choices available to home-buyers are a variable rate, a fixed rate loan or a discount rate Fixed rate mortgages: these fix the monthly interest repayment over a set period of time, regardless of what happens to interest rates. After the end of the fixed rate period, the mortgage cost reverts to the lender's standard variable rate. Discount rate mortgages: These peg the interest rate to a fixed amount below the variable rate. This offers some protection from the threat of rising interest rates. Mortgage rates normally follow the base interest rates set by the Bank of England although they don’t have to. Mortgages – a financial commitment 1 - A mortgage is a secured loan 2 - If you do not keep up with repayments, your home is at risk! 3 - It is compulsory for homeowners to take out insurance so that they can continue to 4 - make repayments if they lose their job 5 - Most loans are at variable rates of interest 6 - Interest repayments on the mortgage affect a household’s “effective” disposable 7 - income Limits to mortgage loans Homebuyers are normally limited to borrowing three times their first income plus half of the second income, or two-and-a-half time’s joint income. Most lenders are prepared to lend 95% of the property's estimated market value but most charge less interest to people who are able to put up a bigger deposit on their property. Anyone who takes out a mortgage worth more than 75% of the house’s market value must also take out insurance to protect the lender against the borrower not paying the mortgage. Typically first-time buyers in the market take out mortgages that are a higher percentage of the asking price for the property. This is because they have a lower level of accumulated savings. One feature of the UK housing market in the last decade has been greatly increased competition between mortgage lenders and the opening up of online mortgage finance via the internet. Thousands of existing homeowners have taken advantage of the chance to re-mortgage their properties with a new finance supplier and reduced their monthly repayments at the same time. There is also some evidence that, in the wake of rising house prices, some mortgage lenders have relaxed their lending limits to potential homebuyers with mortgages of up to and sometimes beyond five times the income of the borrower. Is this a dangerous sign for the market? Are homebuyers risking over-stretching themselves by taking out mortgages much larger than has been the norm in the past? |