Receiving a mortgage offer is something to celebrate – but it can be confusing if you don’t understand what’s in the document. Darren Polson helps a first-time buyer who is puzzled about their payments
The Question
My partner and I are 22 and 23 and buying our first home – it’s all quite confusing and we feel a bit overwhelmed.
We have had a mortgage offer but when we looked at the statement our broker sent, us the figure we have to repay is £250,000 (or thereabouts) but the price we are paying for the flat is £95,000.
I asked a friend who said it’s probably the total amount over the length of the mortgage (30 years) including interest. But I’d like this confirmed. Can you help and could you advise how this is calculated, please?
Darren’s Answer
There is an algorithm and equation to this calculation but let’s keep it straight forward!
Generally speaking, your friend is correct. The mortgage offer will calculate your payments over the initial fixed rate period and then what your payments will be if you were to lapse on to the lender’s Standard Variable Rate (SVR).
As part of this illustration, the lender will set out what your monthly payments will be during the fixed rate period (two, three, five, 10 etc years). Then they will set out what the payments will be after this period if you were to remain on the lender’s SVR for the rest of the mortgage term, which is 30 years in your case.
The offer will also include the interest rates and any fees added to the loan, such as an arrangement fee.
It is worth noting that it is very unlikely that you will actually be on the lender’s SVR as you will be able to complete a product switch or remortgage to a new lender at the end of your initial rate.
You might want to have a look at my article about remortgaging for guidance on how this will work.
When you complete your rate switch, you will receive a new illustration for the new rate, again with similar content.
While we’re not able to predict what rates will be in a few years’ time, the numbers you have quoted will change as you switch and secure new rates over the term of your mortgage.
We always recommend speaking to a mortgage broker who can explain this further and guide you through the rate switch process.
Meet our expert…
Darren Polson is head of mortgage operations at Aberdein Considine. He has been writing a regular column for What Mortgage for over two years and is now here to answer YOUR questions.
If you have a question for Darren please email kate.saines@emap.com or leave a message in the comments below.
