Your home may be repossessed if you do not keep up repayments on your mortgage.

Understanding mortgages

Most people who are buying a home for the first time have barely heard the term mortgage, let alone understand what it is. In fact, a lot of people who are buying their second or third home aren’t entirely sure of the process involved either, so let’s start from scratch and explain it.

What is a mortgage?

A mortgage, in simple terms is a loan provided by a bank in order for a borrower to purchase a property. Not many of us have the money to buy a home outright (although that would be nice), so we have to borrow some of the money in the form of a mortgage.

How does a mortgage work?

As with any other loan, with a mortgage you borrow money and pay it back in instalments. The instalments include interest and are paid over a period of time which has been agreed between you and your lender. This period of time is known as the mortgage term and is typically 25 years.

The way in which a mortgage differs from other loans such as a bank or credit card loan is that it is secured against your property. This means that during the term of the loan, your property provides the lender with security so if for any reason you cannot repay your mortgage, the lender can sell your home to recover their money. This is why it is vital that you only borrow what you can afford.

Paying off your mortgage

A mortgage is split into two components – the capital and the interest. The capital is the amount you have borrowed, and the interest is the amount the lender charges you for borrowing the money. As well as how much you borrow, how you choose to pay off your mortgage is one of the key decisions you will have to make during this process.

With Northern Rock you have three options for paying off your mortgage:

A repayment mortgage

If you choose a repayment mortgage your monthly payment will cover the interest you need to pay, as well as a percentage of the original loan, i.e. the capital. This means that you will reduce the sum of money you have borrowed (the balance) and so the mortgage will be fully repaid when the mortgage term ends (providing you meet your regular monthly payments of course).

An interest-only mortgage

If you choose an interest-only mortgage your monthly payment will only include the interest you need to pay. This means at the end of the mortgage term you will still need to repay the amount you originally borrowed, as well as any additional borrowing you may have taken out. So, you’ll need to think about how you intend to pay this off at the end of the mortgage term, for example you could set up an investment or savings plan.

With Northern Rock, you can borrow up to a maximum of 75% of the property value with an interest only mortgage. Any borrowing above 75% must be on a repayment basis, so you should consider a part and part mortgage (see below).

A part-and-part mortgage

Not surprisingly, a part and part mortgage is a combination of the above. So your monthly mortgage payment will be split into two parts; one part will work as an interest only mortgage so you only pay the interest on that portion, and the other part works as a repayment mortgage so you will pay the interest plus some of the original loan (i.e. the capital) on that portion. When the mortgage term ends, you will still need to pay off the interest-only part of your loan, however the repayment part will be paid off (again, providing you have met all of your regular monthly payments).

With Northern Rock, you can borrow up to a maximum of 75% of the property value with the interest only part of your mortgage. Where borrowing is above 85% LTV the entire loan must be on a repayment basis.

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At the risk of sounding like a broken record, it really is important you think carefully about how you want to repay your mortgage as you are responsible for keeping up your monthly repayments. Remember, if you are unable to make your agreed payments, you run the risk of your property being repossessed.

Understanding deposits and loan to value

In order for you to get a mortgage from a lender they will typically require you to provide a deposit. The value of your deposit may influence the mortgage deals that are available to you, and we’ll explain how:

As you progress with your search for a mortgage you will no doubt come across the term ‘loan-to-value’ or LTV. This refers to the amount you are looking to borrow as a percentage of the value of the property, so is essentially determined by the deposit amount you are able to put down. It’s probably easier to understand this using an example:

Your property is valued at £100,000. You have a deposit of £20,000 so need to borrow £80,000 (80% of the property value) so your loan to value is 80%.

Propery value

£100,000

Deposit

£20,000

Mortgage

£80,000

LTV=80%

So, if you can increase your deposit you will lower your LTV. You will find that the lower your LTV, the better the mortgage rate you will be able to get.

But don’t let this worry you, if you’re a first time buyer then you may not be able to put down a big deposit which is why like us, some lenders will lend up to 90% of the property value to help get you on the property ladder. That said, you must ensure that you can afford whatever you’re looking to borrow as a mortgage is a big financial commitment. In order to help you to work out what you can afford and what we may lend you, we’ve created some online calculators for you to use before you apply for your mortgage - so please make sure you give them a go, they make things a lot easier!

Loan to value for new build properties

If you’re thinking about purchasing a new build property? then please bear in mind our loan to value limits:

• For new build flats the maximum loan to value we will lend up to is 70%.
• For new build houses with a valuation / purchase price up to and including £500,000 you can borrow up to a maximum LTV of 85%.
• For new build houses with a valuation / purchase price over £500,000 you can borrow up to a maximum LTV of 80%.

What are the different types of mortgages?

Following everything so far? Great, now on to the different types of mortgages. There are two main types of mortgage, a fixed mortgage and a tracker mortgage:

Fixed Mortgages

A fixed rate mortgage pretty much does what it says on the tin – fixes your mortgage payments throughout the term of the deal, which is typically 2, 3 or 5 years, sometimes as long as 10 or 15 years.

A fixed mortgage would work for you if:

• You want to know what your repayments will be every month
• You want the security of knowing your payments will never go up during the fixed rate period

Tracker Mortgages

A tracker mortgage follows the Bank of England Base Rate (BBR), so whatever that does, your mortgage rate also does. For example, if BBR is 0.50% and your mortgage tracks it by always remaining 3% above, your mortgage rate will be 3.50%. If BBR goes up by 0.25%, then your mortgage rate will increase to 3.75%. Similarly, if BBR goes down by 0.25%, your mortgage rate will reduce to 3.25%.

A tracker mortgage would work for you if:

• You want to take advantage of reductions in BBR
• You don’t mind the potential change in monthly payments, up or down

As well as offering an extensive range of competitive tracker products, we also offer Freedom to Fix Tracker mortgages, which allow you to switch to a fixed rate product at any point should you wish to during your mortgage deal. More on this later.

All Northern Rock mortgages revert to our Standard Variable Rate at the end of the mortgage deal (the mortgage deal is also referred to as the ‘special rate’ period).

Standard Variable Rates

With most mortgages, when the term of your deal comes to an end your rate will refer to the lender’s Standard Variable Rate (SVR). Standard Variable Rates tend to roughly move with the Bank of England Base Rate, however it doesn’t have to and so any lender can change their SVR at their discretion.

There is no right or wrong mortgage to choose. Everyone’s circumstances will be different so for one person a fixed product may be more suitable, and for another a tracker could be better. The key is to understand your own financial commitments both for the short and long term, then weigh up your options to work out which is better for you.

What types of mortgages do you offer?

Good question, at Northern Rock we offer a range of both fixed rate and tracker mortgages. Within these ranges we also offer cashback products and freedom to fix trackers, so let’s explain those in a bit more detail:

Freedom to fix trackers

These products track the Bank of England Base Rate in the same way as our standard trackers, but with the flexibility of allowing you to switch to a fixed rate product at any point during your special rate period without having to pay an early repayment charge – so if your circumstances change and you decide later on that you actually need to fix you interest rate, then you can.

Naturally, fixed rate deals in the future may not be as competitive as they are today and you can only switch to a new product once. You may also have to pay a product fee on the new product you take.

Cashback mortgages

Some of our mortgages offer a cashback incentive aimed at helping you with the costs of setting up a new home. Buying a new house can be expensive and we can’t get away from that, however we can try and give you a hand by offering some cash back on selected products.

You can use the money in any way you choose; you may want to use it to cover legal costs or valuation fees, or perhaps to help decorate your new home - no doubt you’ve had your eye on a few things already! If you take a cashback product you will receive the cashback on completion of your mortgage, and don’t worry, we won’t be asking for the money back at any point.

Our mortgage range is made up of two types – the Everyday range and the Flexible range:

Everyday Range

Our everyday range has both fixed rate and tracker products, the key features include:

• Some of our lowest priced mortgage rates
• Some products offer cashback incentives
• You can make overpayments of up to 10%
• You can apply for a payment holiday, subject to your terms and conditions

Flexible Range

Mortgages from our flexible range provide you with more flexibility than those from the everyday range, key features include:

• You can make unlimited charge-free overpayments meaning you can pay off your mortgage quicker
• You can make underpayments or borrow back the money you’ve overpaid (subject to our agreement)
• You can apply for payment holidays subject to your terms and conditions

And that brings us to the end of your 10 minute mortgage lesson – don’t worry, there are no exams to follow.

Key considerations and decisions

Having read this guide you should now have a better understanding of how mortgages work and the key decisions you’ll have to make when you come to apply for your mortgage. If you have a printer then it’s worth printing this guide and checklist off, then pop it in your handbag or wallet so you’re prepared when it comes to making your final decision.

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