You can afford your mortgage now, but what if...?

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1 You can afford your mortgage now, but what if...?

5 Mortgage term You can choose the length of time over which you pay back your mortgage the term to suit you as long as the lender agrees you can afford it. With an interest-only mortgage you pay the same each month to the lender whether the term is long, say 25 years, or short, say 10 years. If you plan to pay off the loan with an investment or savings plan, you will need to make sure the term is long enough for the plan s value to grow. With a repayment mortgage over a shorter term, you ll have higher monthly payments but pay less in total. With a longer term, you ll pay less each month but more in total. Key points Use our online budget planner to help you work out what you can afford see moneyadviceservice.org.uk/ budget. Think about whether you need a fixed rate mortgage so that you know your payments will stay the same for a set period but don t forget that if rates fall, your payments won t. It s not a good idea to have a mortgage term that continues past the age you plan to retire unless you re sure you ll be able to afford the payments then. moneyadviceservice.org.uk 3

7 Example 1: repayment mortgage You borrow 100,000 over 25 years on a repayment mortgage, initially at a rate of 4%: Example 2: interest-only mortgage You borrow 100,000 over 25 years on an interest-only mortgage, initially at a rate of 4%: Interest rate Monthly repayment Increase from 4% 4% 528-6% % % Interest calculated monthly Interest rate Monthly repayment Increase from 4% 4% 333-6% % % Interest calculated monthly Don t forget that rates could go higher than those shown here. moneyadviceservice.org.uk 5

9 When deciding how much to borrow: Check that you don t overstretch yourself by borrowing the maximum on offer. Just because you can afford it now doesn t mean you can afford it in the future. Use our mortgage calculator to work out what your mortgage payments will be if interest rates rise see moneyadviceservice.org.uk/mortcalc. Check that you get documents from your adviser or lender. Read them because they contain important information that the firm must give you about their service and the costs and features of the mortgage. They ll also tell you how much your payments will increase if the interest rate rises by 1%. Remember that rates can rise by more than this. Check that you understand how the repayment and interest only options work, and what you must do to ensure you pay off your mortgage by the end of the term. Check that you understand the interest-rate deals on offer and how they work. Make sure you know when a special deal will end and what will happen to your payments when it does (they are likely to be higher than before). moneyadviceservice.org.uk 7

14 Jargon buster Some key words and phrases explained. Agreement in principle A certificate that some lenders give you, showing the amount they will probably be willing to lend you. This isn t a guarantee, but can be helpful when dealing with estate agents. APR Annual percentage rate of charge this shows the overall cost of a loan each year, taking into account the term, interest rate and other costs. Buy-to-let mortgage A loan you take out to buy a property that you intend to rent to tenants. Capital The amount you borrow to help you buy your home. Capped mortgage A mortgage with a maximum limit on the interest rate you will pay during the deal period. Deposit The amount of money you put into buying a home (not including the money you are borrowing). Discounted mortgage This has a lower variable rate of interest for a set period, then the rate increases. Early repayment charge A charge you may have to pay if you pay back a mortgage early (including if you move to another lender). Fixed rate An interest rate that is fixed (in other words it doesn t move up or down) for a set time. Income multiple The number by which a lender multiplies your earnings to find out how much you can borrow. Interest The charge that lenders make when you borrow their money. 12

16 Standard variable rate mortgage The lender s normal interest rate ie without any discounts or deals. Term The length of your mortgage, normally expressed in years. Tracker mortgage A mortgage with an interest rate linked to a particular base rate and moves up or down with it. 14

19 Complaints and compensation Financial Ombudsman Service Resolving complaints. South Quay Plaza 183 Marsh Wall London E14 9SR or Financial Services Compensation Scheme (FSCS) For claims against your adviser or lender if they have stopped trading. 7th Floor Lloyds Chambers Portsoken Street London E1 8BN or moneyadviceservice.org.uk 17

20 This guide is part of our buying a home series. Other titles in this series include: Dealing with your mortgage shortfall Problems paying your mortgage Sale-and-rent-back schemes All our guides are available from: Our website moneyadviceservice.org.uk Money Advice Line If you would like this guide in Braille, large print or audio format, please call us on or Typetalk on Calls should cost no more than 01 or 02 UK-wide calls, and are included in inclusive mobile and landline minutes. To help us maintain and improve our service, we may record or monitor calls. June 2011 Money Advice Service June 2011 Ref: VRSN0010b

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