Purchasing a home is an exciting experience, especially if it’s your first time. However, the majority of home buyers will have to get a mortgage. Delving into the world of mortgages can seem daunting for first-timers. There’s plenty to introduce yourself to. For instance, there are unfamiliar terms you need to know and tons of lenders to choose from, among countless other decisions you need to make. It’s important to know what you’re getting into so that you’re positive that you can pay the agreed-upon rate. This guide will help beginners to better understand what mortgages are, how they work, and what to be aware of when buying a home.
What Is a Mortgage?
Simply put, a mortgage is a loan from a bank or building society that allows you to buy a property. In most cases, mortgages run for 25 years, but they can be longer or shorter depending on many variables we will discuss in more depth. This loan is secured against your home until you have paid it back fully, meaning the lender can repossess your home and sell it to get their money back if you fail to pay your mortgage payments.
Why Are Deposits Important?
In the UK, you typically need a deposit that equals at least 5% of the home’s value to acquire a mortgage. In order to get a better interest rate, the deposit should be 20% or higher. For example, if you bought a house for £100,000, then you would need £10,000 to make a 10% deposit. In this case, the lender would put up the remaining £90,000, which is known as the loan-to-value (LTV). LTV is the percentage of the property price that you need to borrow in order to purchase that property. The mortgage’s interest rate is affected by LTV; higher rates for higher LTVs and vice versa.
What Are Your Repayment Options?
The amount you borrow from the lender is called capital, and the lender charges interest on the capital. There are two ways to repay your mortgage and that’s a decision you must make before getting a mortgage. Repayment mortgages are the most common option, in which you make monthly payments towards your capital and interest. Usually, these payments get smaller as long as you keep up with them, and at the end of the term, you’ll be free of debt and own your home.
Another repayment option is interest-only repayments in which you repay your interest only each month and repay the capital at the end of the mortgage. However, it is hard to acquire a mortgage with this method of repayment as lenders are worried that homeowners won’t be able to repay their debt.
Obviously, the main cost you need to pay is the monthly payment on your mortgage, which depends on your property’s value and the deal you get from the lender. Before you apply for a mortgage you should try to get a sense of how much you will pay in interest. The interest rate affects the amount you need to pay over the term of your mortgage and for your monthly repayments. A mortgage calculator is a useful tool for estimating these figures. There are other fees you should also be aware of that are charged when you apply for a mortgage. You have to pay for application fees, whether you eventually get the mortgage or not, and some lenders charge valuation fees if they’ve worked on evaluating your property’s worth. If your deposit is small, higher lending charges may apply to your mortgage. In addition, a telegraphic transfer fee is paid to your mortgage provider to transfer the money to your solicitor, and if you opted to go through a broker, they may charge you for their services as well.
Fixed vs. Variable-Rate Mortgage
In addition to choosing a repayment option, you will have to decide on a type of mortgage. Fixed or variable interest rates are the two main categories of mortgages, but there are other types as well. The fixed-rate mortgage has equal monthly repayments for a set amount of time, usually between 2 and 5 years. When this term ends, the interest rate will revert to your lender’s standard variable rate, which is typically higher, or you can remortgage for a better interest rate depending on your situation at that moment.
With variable-rate mortgages, your monthly payments could move up or down depending on the bank base rate. Usually, variable-rate mortgages are cheaper, but your payments could end up higher than what you budgeted for in a given month depending on the base rate. The other types of mortgages will fall under these two categories with slight modifications.
How to Apply for a Mortgage
There are two stages of applying for a mortgage. The first stage involves the lender asking you questions relating to how much your deposit is going to be, how long you want it for, and what type of mortgage you need. At that point, they won’t delve deep into your financial situation but will seek to get a general idea about it. The lender will consider these factors to determine the amount they are willing to lend to you:
- Your deposit
- Your property’s value
- Length of mortgage
- Your credit record
- Your income
- Your age
At the end of this stage, the lender will make a conditional offer stating how much they are willing to give you. When you find a house to buy, the second stage starts. The lender will perform a detailed affordability check, in which you’ll be required to provide evidence of your income, deposit, and other financial information. If the application is approved, the lender will hand you a binding offer that is valid for six months.
Hopefully, this guide cleared up any confusion or misconceptions you may have had about getting a mortgage. The process isn’t too complicated once you get to know the terminology. Keep all these points in mind while you are hunting for your new home.