A beginners guide to mortgages
When it comes to buying a home, it can be a scary prospect. This is likely to be the biggest purchase you will ever make. When it comes to mortgages, it can be easy to get confused by the variety and complexity of some that are on offer. So let us lead you through it so you can buy your home with ease.
Basics
A mortgage is simply just a large loan. The difference is that it is secured upon your house. This means that if you fail to pay it back then the mortgage company can reclaim their money through taking and selling your house. The time you have to pay it back is normally 25 years for most, though this can be shorter or longer.
Deposits
When it comes to the mortgage you normally need a deposit. This will be a percentage of the amount of money that you want to borrow. The more you have the better. This is money that you need to have already, and you can't take a loan out to cover as this will be counted against your mortgage.
Banks lend against what they think the property is worth, rather than what you pay for it. They will typically lend up to 95% of the value. So, if you are buying a house that is worth £100k then the bank will lend you £95k. If you are paying £90k for the property, then you are likely to not need much deposit. However, if you are paying £110k for the property then you will need to find £15k for the deposit.
How much can I borrow?
Before, you were able to borrow up to 4x times your income however banks and lenders now do some ‘affordability’ calculations. This takes into account all the money you have coming in, as well as all that is going out and what other debts you have. This will all factor into how much they let you borrow. Your credit rating is important. If you have a very poor credit rating, then most high-street lenders will not give you a mortgage. You can find ‘bad credit’ mortgages but they tend to be very expensive.
Types of mortgages
There are two main types of mortgage ‘interest only' and ‘repayment' mortgages. ‘Interest only' options are normally not available to first-time buyers. When it comes to a repayment mortgage, the amount you pay each month covers the interest that has accumulated that month and a little bit more to reduce the amount you owe. These can either be fixed-rate or variable-rate mortgages.
Interest Types
With a fixed-rate mortgage, the amount of interest you are charged each month is fixed normally for a certain period. This means the amount you pay back each month is fixed, which gives people certainty. Variable-rate mortgages changes the amount of interest depending on market conditions and can go up as well as down.