People know that a mortgage is about borrowing money to pay for a property, but there is so much more to a mortgage than that. Getting into trouble with a mortgage could lead to a homeowner losing their home.
Mortgages need to be taken seriously; they need to be understood.
Here are 5 key things about mortgages every property buyer should know.
1. The lender’s power to sell
When you obtain a loan to buy a property it is not like any other loan. It is secured on your property by way of a mortgage deed. The mortgage agreement gives the lender a number of rights.
The main right is the power to sell your property if you don’t comply with certain terms in the mortgage agreement, including making the monthly payments due.
What this generally means in practice is that you could face eviction proceedings if you default on your monthly payments and go two or more months into arrears.
Not paying your mortgage on time and in full could therefore lead to court proceedings and loss of your home.
2. Go for a “repayment mortgage” to end up mortgage free
With an “interest only mortgage” your monthly payments are for the loan interest only. The capital remains unpaid until the end of the mortgage term (typically 20-25 years) when you are expected to pay it off in full.
That means you should ideally have arrangements in place to pay off the amount borrowed – such as by relying on your pension or your savings.
If you want to be mortgage-free at the end of your mortgage, you need to take out a “repayment mortgage” – where each month you pay the interest due and a part of the capital until it is fully paid off at the end of your mortgage term.
3. Choose fixed rates for greater certainty
When choosing the interest type of your mortgage you can basically choose between
- Variable rate interest.
- Fixed rate interest.
With variable rate interest, the interest rate payable will change from time to time in line with changes in the Bank of England’s base rate.
With fixed rate interest, the interest rate will remain unchanged for an agreed fixed period, typically 2 to 10 years, regardless of changes in the Bank of England’s base rate.
If you want the peace of mind of knowing your monthly mortgage payment with certainty for a number of years, go for a fixed rate mortgage.
The downside is that fixed rates tend to be a bit more expensive in general. Further you can lose out if you are tied into a fixed rate for a long term when rates are falling.
4. It’s your property but it’s not!
People who have bought a property with a mortgage often talk about “my property”.
But strictly speaking their ownership is limited by their mortgage.
Therefore, where you own a mortgaged property, your ownership is subject to the terms and conditions set out in the mortgage deed.
You are not free to do what you want with the property without reference to your lender until you have fully paid off the money they lent you.
Restrictions which may apply to you include:
- Your right to rent out the property if it is meant to be your home
- Your right to change the use of the property or to add to or alter it
- Your right to transfer your share to someone else such as a partner or child.
5. The power to appoint a receiver
As well as the power to sell, mortgages usually give lenders or mortgagees another awesome power – the power to appoint a Law of Property (LPA) or fixed charge receiver who has the right to step in and collect any income or rent being received on the property.
If you fall into mortgage difficulties, a receiver is only likely to be used against you if your property was bought on a buy to let basis or is a commercial property.
The receiver, usually a surveyor, is treated as your agent rather than your lender’s and has the power to collect rent directly from the tenant, bypassing you totally.
The receiver will take their fee out of the rent collected, pay the mortgage amount to the lender and account to you for any balance left. More likely than not there will be none – due to the high fees receivers typically charge.
Do you have any experiences of the mortgage matters mentioned? Please leave your comments below.
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Rebel Property Coach
My website is: www.rebelpropertycoach.com