Beginners' guide to mortgages – MoneyWeek investment tutorials



one of the most important financial decisions you'll ever take is getting a mortgage it's one of the biggest financial commitments most people make alongside private school fees to their children if they're lucky enough to be able to afford them so what is a mortgage that's what we'll cover in this video and what do some of the key bits of jargon plus little over the newspapers actually mean right a mortgage is a secured loan that makes it different from a loan that you might take out for example unsecured to buy a car or just simply by racking up credit card debt or using a store card those are unsecured all right now the difference is very simple a secured loan a mortgage here's the deal you go to a bank say I want to borrow a hundred thousand pounds for argument's sake the bank says that's fine Tim but we want the loan secured on an asset an asset being the house you plan to buy a deal is simple and it's a two-sided Deal in return for that security the bank will offer you a low interest rate much lower than on say a car loan or a credit card or a store car loan all right you can pick up mortgage rates for around 4 percent for 5 percent at the moment depending on the period you go for where the unsecured store card loans could cost you up to 30 all right so that's the upside the interest rate is low but that's because the load is secured and that means if you fail to repay it or keep up with repayments the bank reserves the right to seize your property and sell it and use the proceeds to repay the loan right so a mortgage has one benefit upfront the interest rate tends to be a lot lower you can get other loans and that's because the bank has a lot of security in the form of your property all right now property prices can go down as well as up all right which is why banks don't always lend or certainly not anymore the full value of the property to somebody who wants a mortgage okay the heady days the ridiculous days before the financial crisis are now long gone so that brings me on to my first piece of jargon relate two mortgages loan to value LTV now if you see that what does that mean and what practical consequence does it have for you trying to get a mortgage well here's how it works people you've seen my videos before when other graphics our particular Forte of mine so there's a house all right let's say that the value of the house on the open market is 100,000 pounds all right and you plan to put down a 30,000 pound deposit lucky you and that means you need a 70 thousand pound alone or mortgage all right now how do I know you put down a xxx half and deposit well maybe you can't afford a 30,000 pound deposit the deposit is down to what you can manage to scrimp and save together okay persuade parents or friends to give you whatever happens to be so you've got a deposit from somewhere all right and the rest is the mortgage so a combination of what's called equity that's your bit and a loan from bank secured on the property makes up the funding for the hundred thousand pound property all right now here the LTV as you'll sometimes see it quoting the press put a jargon there the loan to value ratio is simply that compared to that as a percentage all right so here the LTV 70,000 as a proportion of the value of the property literally our loan to value ratio is 70% all right and in simple terms basically the higher that is the harder it is to get the loan all right now back in the ridiculous days pre-financial crisis there are banks around that would say no problem you can have LTVs of more than one hundred percent one hundred and twenty five percent you can actually borrow more or than the value of the property from a bank I'd even give you hints and tips as to what to do with the extra alright so on a hundred thousand pound property this may sound a little mad but it was happening you could borrow one hundred and twenty five thousand pounds I'm not kidding your bank website saying things like well book yourself a holiday buy a car with the extra now that is madness I've got a lot of people into big trouble which is why LTVs tend to be a lot lower Nell okay because of something called negative equity she's the third bit of jargon I'll cover just now but here's my take away ok the higher the loan-to-value ratio naturally the higher the interest rate and the heart of the mortgage will be to come across so if you can scrimp together as much of the deposit as you can get hold of bring down the loan-to-value ratio but tend to find that better deals and become available why are we no longer seeing loans in excess four hundred percent the value the property while unfortunately if you allow someone to borrow a huge amount of money and the value of the property then drop so imagine for example if I take out the deposit altogether alright and I make the loan one hundred percent alright so imagine that the whole thing still following my scribblings here it's funded by a mortgage the danger is this if the value of the property then drops which it could do to ninety thousand you are now in something called negative equity it's the danger taking out loans that are a high proportion of the value of the property negative equity means the property is not enough to pay back the loan ninety thousand if you sold the property tomorrow won't pay back a loan of a hundred thousand pounds that's a problem again can leave you unable to move for example so that's a trap that quite a few people unfortunately knowing the other or otherwise probably unknowingly hell into it's probably price decided to come off okay once we hit the financial crisis in 2007 and that's why unfortunately banks are now being very very conservative unfortunally because it makes it harder for other people to get onto the property ladder at all okay so that's a negative equity what the Americans call being underwater okay now once you decided how much you're going to borrow seventy thousand in my previous example you've got a couple of choices you can either go interest only or you can go a repayment style mortgage okay what does that mean basic choice all mortgage products all loans fall into one of those two camps essentially no matter how they're written up in the advertising literature there are interest only or repayment as worth bearing in mind interests only is tempting with interest only you borrow let's say a 100,000 pounds and you commit to just pay the bank the interest on the loan okay at whatever rate that happens to be 4% for argument's sake so the 100,000 pounds you're not paying back all right now how's that how's that work you've got to pay back at some point the idea is you just write a check if you like you pay the bank the interest every month on the loan and then you set up another vehicle that will eventually pay off the capital you've got to still pay off 100,000 pounds as well as the interest all right and that could be some sort of equity based product all right they used to be known as it endowment mortgages now upside to interest only loans the payment every month the bank is lower than it would be if you were paying the back interest and some of the original capital of hundred thousand pounds okay that's the upside the downside is you'll be pretty damn sure that whatever you're going to use to repay the capital after 20 or 25 years for argument's sake is enough to do the job and the problem a lot of people found or have found in the past is they set up these kind of little investment funds on the side saying well after 20 years this will have grown footsie 100 fund to 100,000 pounds or more so I've got to clear my mortgage have a party all right problem is if the equity market plummets your little savings vehicle isn't enough to repay the original loan then you got a problem okay so interest only mortgages attractive because the initial payment the bank will be relatively low but you've got to have some way to pay off the capital that you've borrowed in the future the alternative is a repayment mortgage as the name suggests there every month your repayment the bank is interest on the loan four percent private let's say plus a little bit of the original capital you borrowed the idea being that of 25 years for example you will have cleared all of the 100 thousand pounds if that's the amount you borrowed that you owe the bank okay now downside to that one is you will find your monthly payments the bank are a little bit higher because they include interest and some capital course the upside is you know provided you keep your job and keep up the repayments you will clear your mortgage after 20 or 25 years I no doubt about it because you are chipping away at the capital every month okay now that means that normally I would recommend if you could afford it you do a repayment mortgage of some sort but watch out again there are a couple of traps which I want to finish this video on this is a beginners introductory guide there are a few traps to watch out for with mortgages so decision tree so far is how much do I want to borrow how much do I need to borrow how much of a deposit have I got this is the amount required to buy the property I'm after okay that will affect the deal you can get from a bank but then you need to decide on the amount you're borrowing am I going to go down the interest only or the repayment style route okay and I've already highlighted a couple of criteria to think about and making that decision now well let's say for a moment I've picked a repayment style mortgage there are one or two other things to look out for number one when you're looking up mortgage rates again you can look up on sites like money fax and money supermarket and so on you can you can look up these rates on a number of different sites when you're looking at mortgage rates just watch out because you might see how juicy low rate aha brilliant you know frogman's a 3% anything well that's a really low interest rate I'm having some of that watch out number one is there an arrangement for you on top some borrow on some lenders will charge you quite a meaty arrangement fee we could be talking you know a thousand pounds 1,400 pounds two grand just to set up the mortgage all right all of a sudden that 3% is not looking quite so good so you need to compare apples with pears you know it's 3% within the arrangement fee the same as five percent with no arrangement fee for argument sake all right there's one little trap to watch I will always check the arrangement fee number to watch out for lowball initial deals the ones where the bank says are come to us borrow from us both of us because what we can do is set you up for a few years on a really low rate then watch out because once that low rate period ends you might be kicked into what's called the standard variable rate svr that may be first of all not a fixed rate secondly a lot higher all right thirdly redemption penalties if you take out a deal and it commits you to a minimum number of repayment their numbers be a number of years watch out you're not stung okay if you need to sort of switch product or kick out of there early okay you know as something goes wrong you may be stung for a big Redemption penalty simply to get out of the mortgage earlier or move it or change it okay so there's a few traps to watch out for when you're shopping around for a mortgage all right so just to recap there a mortgage is a secured loan the good news is that means you can borrow lower than you would on other types of loan okay first decision to make how much do I need to borrow or less you need to borrow that that's the deal you'll get okay third thing just to bear in mind is that you've got to make a decision between interest only and repayment okay and you've also got to make a decision between paying a fixed rate and paying a variable rate of interest lots of things to think about here fixed rates certainty variable rates well the opportunity may be if your mortgage payments to go down and interest rates fall as well as up if they rise okay so the another decision to make there do watch out for little stings in the tail including arrangement fees low initial rates to grab you in and redemption of these to download this free video to your favorite mobile device find us on iTunes by searching for money week and the entire video archive is also available free just visit money week com

23 Replies to “Beginners' guide to mortgages – MoneyWeek investment tutorials”

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  2. Now I can finally pay back my mortgage. I have been in debt for 37 years. I've been stalling since 1982. Absolutely fucking buzzing. Thank you Carl.

  3. Good video| thanks for sharing such an amazing information about mortgage loans for more information about it you can visit us at https://loansparadise.com/mortgage-loans.php

  4. I have a friend into mortcage loaning and i swear even if he is guilty of wrongs which he could i would defend him. Since hes a close friend.

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  6. Thanks for the introduction to a mortgage topic. You have highlighted fixed and variable rates. Considering that interest rates might be doing going up or down (down, highly unlikely) by a few percents, would it be a right approach to fixed the rate for 5 – 10-year considering you will be living in the property?

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