Your Easy Guide To Mortgages (Part 1 of 2)

If you're going to be a happy homeowner, then you need to know the rules of the home-loan game. The first thing to understand is that your monthly mortgage repayments are just the start of the fun, because there are dozens of other fees and extras that you could be forced to pay for. So here's my plain-English guide to the finances of buying and owning a home:

A is for...

Annual Percentage Rate (APR)

The APR is meant to give you an indication of the cost of borrowing, enabling you to shop around for low-rate loans. However, it's complicated to calculate and open to manipulation, so don't rely on it too much. Always dig down into the small print to find out exactly how much you have to pay.

Application, booking or reservation fee

These days, most special-rate mortgages (and even some bog-standard deals) come with an upfront fee attached. This can be paid separately you can choose top add it to the mortgage – at which point it begins to incur interest and ends up costing considerable more in the long terms. In the past, this initial fee would be around the £200 to £400 mark; these days, it's more like £600 to £2,500 for low-rate 'bargains'. Ouch!

B is for...

Broker

A mortgage broker is a middleman who helps you to find a good deal. However, some brokers have links only to certain lenders, so be sure to look for a broker who can search the whole of the market for you, and avoid brokers with high brokerage fees. The Fool's mortgage service is an award-winning, no-fee, whole-of-market facility, which we're rather proud of.

C is for...

Capital repayment or interest only (IO)

With a repayment mortgage, your monthly repayments pay your monthly interest bill plus an extra amount which chips away at your debt. With an interest-only mortgage, you pay only the interest bill and must make your own arrangements to pay off your debt at the end. Interest only is usually abbreviated to IO, which is short for 'I owe a lot of money, so I can't afford a repayment mortgage'.

Cashback

With a cashback mortgage, you receive an upfront 'gift' (of up to 10% of your loan) in return for being locked into a higher mortgage rate for, say, ten years. As with most bungs, this can backfire, so I generally warn readers against taking out a cashback loan.

Conveyancingor legal fees

The fees paid to your solicitor or conveyancer for doing the necessary legal work to buy or sell your home. Can add £1,000+ to the purchase cost.

D is for...

Daily interest

Some lenders take your repayments each month, but only subtract them from your debt at the end of the year. It's far better to have daily interest, where each repayment reduces your loan as soon as it hits your account. Deeds release, exit, sealing or discharge fee A charge paid to your mortgage lender when you pay off your mortgage. Fifteen years ago, this would have been about £50; nowadays, some lenders charge £300+. Learn how to reclaim rip-off mortgage exit fees.

Deposit

This is what you need to save in order to own a stake in your home. Even a 5% deposit (a twentieth of the purchase price) will give you access to better mortgage interest rates. No-deposit (100%) mortgages are riskier and thus are more expensive.

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