Getting Started with Mortgages
With so many different types of mortgages, and so many outside factors making them so personal, it is often hard to determine if your mortgage is right. Knowing whether you are getting a good deal is pivotal, especially considering a mortgage loan is probably going to be the largest and longest of your life.
Types of Mortgages
Mortgages can come many different forms, which makes estimating the average mortgage rates in the UK quite tricky. Repayment, interest-only, discounted rate, capped rate, cashback, offset and flexible mortgages are all available in Britain, but the most popular types are fixed rate, standard variable rate and tracker mortgages.
A fixed rate loan is currently the most popular at present, given the instability in the economy & the fact that fixed rate deals are currently extremely close to tracker deals. With this, the interest rate paid on a mortgage loan stays the same throughout a fixed amount of time, called the initial period. This can last anywhere between one and ten years. Following this, the mortgage is then defaulted to a standard variable rate.
A SVR mortgage, although not technically a mortgage deal, is the lender’s standard interest rate. The rate is set by the loan provider, so is usually not going to be the best rate. Once a mortgage is out of its deal period and becomes a standard variable rate, the debtor is likely to re-mortgage to another deal.
One type of mortgage they may switch to is also common, called a tracker mortgage. This is a type of variable rate mortgage, which means the interest paid can fluctuate from month to month during the repayment period. This type of mortgage tracks an external rate (usually the Bank of England’s base rate), with the lender adding a small percentage on top of this.
Average Interest Rates
The most important aspect of getting a great mortgage deal is the amount of interest charged on the loan. It is important to remember that the amount of deposit you are able to pay towards the house will affect how much interest is added to the loan. The more of the property asking cost you pay for upfront, the less money you will have the borrow.
It is also key to keep the loan to value – LTV – in mind. This is the relationship between the current value of the house and how much loan you will need. For example, if you have 20% of the cost of the house as a deposit, then you will only need to borrow 80% of the price as a mortgage loan. This can heavily impact the amount of interest added.
Average Length of a Mortgage
Typically, mortgage loans can take 25, 30 or even 35 years to pay off. Originally, more would opt for a 25-year mortgage, but the more current favourites are 30-35 year loans. This is due to the idea that a longer pay-back time will reduce the amount of the monthly repayments, which makes it more affordable for first-time buyers. However, it is crucial to note that a longer mortgage will result in paying more interest over time. So really you will be paying more, just over a longer timescale.
As previously mentioned, many types of mortgage deals have expiry dates. For example, once a fixed rate mortgage is over, it will revert to a standard variable rate. This means that many people re-mortgage after their initial deal is over.
As well as re-mortgage, some may want a longer term so as to pay less in their monthly instalments. Also, people may wish to overpay their repayments so that their overall mortgage and interest is lower and paid off more quickly. Be wary of this, however, as some providers may charge for overpayment, especially if you exceed more than 10% of the outstanding mortgage payment in a 12-month period.
How Much Should You Pay a Month?
Like everything else, how much your monthly repayments should be depends on multiple outside factors. The size of the mortgage, the term the mortgage is over, your deposit, the value of the property and personal income and outgoings can affect loan pay-off.
In 2017, the average mortgage payment in the UK was £617.23 a month. This works out as £142.44 per week or £7406.76 for the year (moneyadviceservice.org.uk, 2018). How much interest you pay on your mortgage can largely affect the pay-back. As mortgages are so large and lengthy, the interest can grow to huge amounts. For example, the average cost of a house in the UK is around £227,000. For a standard variable rate mortgage paying 4.33% over 25 years, the amount of interest paid would be £151,018.
However, interest rates can go up or down depending on the type of mortgage and with this in the mind, the average UK household could be paying between £200,000 and £380,000 across the entirety of their mortgage for loan plus interest.
So, is your mortgage normal? Short answer; there is no average. Just like people, every mortgage is different. To ensure you’re helping yourself out though, it is important to keep track of your mortgage. Budgeting can help throughout and come the end, it will be of aid to check up to date mortgage deals to ensure you’re getting the best bang for your buck.
