Buying a House

If you wish to buy a home you may be able to borrow money to do this. This is called a mortgage. The loan is for a fixed period, called a term and you have to pay interest on the loan. If you do not keep up the agreed repayments, the lender can take possession of the property.

Types of mortgages

There are several types of mortgage available. The most common ones are described below:

Repayment mortgage

This is a mortgage in which the capital borrowed is repaid gradually over the period of the loan. The capital is paid in monthly instalments together with an amount of interest. The amount of capital which is repaid gradually increases over the years while the amount of interest goes down.

Interest only mortgage

With this type of mortgage, you pay interest on the loan in monthly instalments to the lender. Instead of repaying the loan each month, you pay into a long-term investment or savings plan which should grow enough to clear the loan at the end of the mortgage term. However, if it doesn’t grow as planned, you will have a shortfall and you will need to think about ways of making this up.

There are three main types of interest-only mortgages. These are:

* an endowment mortgage. This mortgage is made up of two parts – the loan from the lender and an endowment policy taken out with an insurance company. You pay interest on the loan in monthly instalments to the lender but do not actually pay off any of the loan. The endowment policy is paid monthly to an insurance company. At the end of the mortgage term, the policy matures and produces a lump sum which should pay off the loan to the lender. In some circumstances, an endowment policy may produce an additional lump sum. However, there is also a risk that it will not be worth enough to pay off the loan at the end of the mortgage term. If you have been told by your endowment provider that your policy will not be enough to pay off your loan, you should seek independent financial advice. You can get information about dealing with endowment policies from the Financial Services Authority (FSA) at (New window) www.moneymadeclear.fsa.gov.uk
* a pension mortgage. This mortgage is mainly for self-employed people. The monthly payments are made up of interest payments on the loan and contributions to a pension scheme. When the borrower retires, there is a lump sum to pay off the loan and a pension
* an ISA mortgage. With an ISA mortgage, you pay interest to the lender, and contributions to an Individual Savings Account (ISA) which should pay off the loan.

Islamic mortgage

With an Islamic mortgage, none of the monthly payments includes interest. Instead, the lender makes a charge for lending you the capital to buy your property which can be recovered in one of a number of different ways, for example, by charging you rent.

Where to get a mortgage from

A mortgage could be available from a number of different sources. Some of the available options are:-

* building societies
* banks
* insurance companies. They only provide endowment mortgages (see above)
* large building companies might arrange mortgages on their own new-build homes
* finance houses
* specialised mortgage companies.

For some groups of people, such as first-time buyers and key workers, it may also be possible to borrow some of the money you need to buy a home from other, government-backed sources. You will usually need to borrow the rest of the money from a normal mortgage lender such as a bank or building society.

For more information about government-backed schemes to help you buy your own home, in England see HomeBuy in Finding accommodation and, in Wales, see HomeswithinReach in Finding accommodation.

As well as standard mortgage deals, lenders might also offer deals which are especially designed for people who don’t qualify for a standard mortgage.

This type of deal is known as a ‘sub prime’ or adverse credit’ mortgage. They are aimed at people who have had financial difficulties or credit problems in the past. For example, you might have had a previous home repossessed, have a County Court Judgment (CCJ) or have been declared bankrupt. You might also have difficulty in proving that you have a regular or reliable income.

Sub prime and adverse credit mortgages usually charge a higher rate of interest than standard mortgages. Lenders may also limit the amount of money they are prepared to lend you.

Before taking out a sub prime or adverse credit mortgage, you should get some independent financial advice.

If you’re thinking about taking out a mortgage you should make sure you look into all the different options available, and that you only borrow what can afford to pay back. If you do not keep up the agreed repayments, the lender can take possession of the property.

The Financial Services Authority (FSA) has produced a helpful guide to mortgages called ‘No selling. No jargon. Just the facts about mortgages’. You can view the guide on the FSA’s Moneymadeclear website at: (New window) www.moneymadeclear.fsa.gov.uk.

If in doubt, you may want to consult an independent financial adviser. For help with finding a financial adviser, visit the FSA’s website at: (New window) www.moneymadeclear.fsa.gov.uk.

Using a broker to get a mortgage

Instead of going directly to a lender such as a building society for a mortgage, a broker could be used. A broker may be an estate agent, or a mortgage or insurance broker. They will act as an agent to introduce people to a source of mortgage loan to help them buy a home.

A broker may be used when it could be difficult obtaining a mortgage directly from a lender, for example:-

* the mortgage required is particularly large
* the property is unusual in some way
* more than two people wish to jointly purchase the home
* the applicant is self-employed and their income fluctuates.

There are rules about how much a broker can charge for their services. Also, brokers must not discriminate against you because of your race, sex, disability, religion or sexuality when they are offering you their services.

For more information about mortgage brokers, go to the Financial Services Authority (FSA) website at: (New window) www.moneymadeclear.fsa.gov.uk.