Feeling confused and overwhelmed when it comes to mortgages is completely normal, especially if you are new to this topic, and you have never had a significant debt before. However, choosing the right mortgage can help you buy a house and make your dreams come true, not to mention it will save you thousands of pounds.
So, are you excited to get on the property ladder, but don’t have a clear idea of where to start? This complete guide for mortgages is the best way to get you started. Here, you will learn what a mortgage is, what might be the best option for you, and how to get it. Finding the right mortgage doesn’t have to be stressful at all!
What Is A Mortgage?
Simply put, a mortgage is a loan from a bank or building society that you get in order to buy a property. Most people don’t have a whole amount of price in cash, so they pay a deposit, which is usually 10% or more of the asking price, and apply to a mortgage lender for the rest of the money. Mortgage lenders are often banks and building societies.
How Does A Mortgage Work?
First of all, the mortgage is a large loan. Most people pay it off monthly and the lender is the one to decide on an appropriate repayment amount for every month. You should be aware that you won’t be paying back the amount you have loaned only, but also the interest. In order to help save money for the long term, it’s important to invest in the right property.
Most repayment terms are around 25 years, but you can take them out over shorter or longer terms. So, the total amount that you will be repaying over the years includes the mortgage and the interest. Until you have paid it off fully, your mortgage will be secured against your property. In other words, if you fail to repay it the lender could repossess your home.
If you are wondering how to work out your mortgage, here are some examples:
Let’s say you are buying a property worth $400.000. You will probably need a deposit of $40.000 and a mortgage of $360.000. Two percent interest is very common, so that gives us the number $97.844 for the interest, meaning that the total repayment will be $457.764. In case your mortgage term is 25 years, you will pay $1.526 per month for the loan. By paying more of it sooner you will ensure your interest will be lower since the interest is generally cumulative. Don’t be shy to use a mortgage calculator if you need help to work out your monthly repayments.
Interest-Only VS Repayment Mortgages
Most lenders offer repayment mortgages nowadays, so it’s rare to have an interest-only mortgage. Let’s figure out the difference:
- Repayment mortgages – your payment goes towards both the property value and the interest, meaning that you will own the property once you have paid the interest.
- An interest-only mortgage – you will only pay the interest and at the end of the term, you still won’t own the property. It is an alternative to paying rent, and it can be a good way to manage your expenses. Basically, you can keep it low until you get some larger sum of money and then make a large payment to reduce the principal.
What Can You Afford?
This depends on a few factors. Be aware that lenders offer you a huge amount of money, hoping you will return it. It can’t be based on trust only, and that is why they often do mortgage affordability tests.
10% is the minimum for a deposit, but if you can afford a bigger percentage it will definitely put you in a better position. Not only will it be easier for you to pay it back, but the lender will have to give you less money, which could make them feel more confident. Not to mention that a big deposit may also open up better offers.
Have you ever heard about the 4.5 rule? Well, mortgage lenders have a tendency to lend you 4.5 times your annual income only! This can make it very difficult if you plan to buy on your own, compared to buying as a family or a couple. It’s not impossible, but if you already have a partner maybe you should consider buying together. For example, if your and your partner’s combined income is $100.000 a year, you can apply for a mortgage worth $450.000. That makes it a lot easier, right?
Make sure you check your accounts before applying for a loan. They need to look healthy, with no widely big spending or overdraft charges, because lenders often look at the last 6 months of your accounts.
Where Can You Get A Mortgage?
Doing your research and choosing the best deal is essential. There are many variations when it comes to interest or setting the monthly amount of payment.
Banks and building societies are the usual choices, but you can also consider a mortgage broker. By hiring them you will make sure that he/she will consider all the different offers on the market and work out the best plan. Be aware that a specialist often has access to better deals than you do, so it’s sometimes worth paying the commission.
How Can You Apply?
This is a pretty straightforward process, but you will need some documents in advance:
- Proof of identity (ID, driver’s license, passport, utility bill)
- Your annual income:
- P60 from your employer, or SA302 if you are self-employed
- Payslips from last 3 months
- Bank statements from the last 6 months
The lender will check the application and ask some additional questions (about the price, your outgoings, or the property). When you are in a meeting with the lender be sure to ask everything you need to know about the mortgage (charges, fees, rules about overpaying, total repayable amount, etc.).
The lender will have to perform a credit check and review all the information. He/she might arrange a valuation of the property to ensure that it is worth the amount. Generally, this process can take up to 40 days, sometimes even longer.
Buying a house or a property is likely the largest purchase you will make, so make sure you know all the facts about mortgages; all the different types, and everything about the process. Not everybody is in a position to buy the house they dream about, but by following this guide for mortgages, you may develop a constructive plan and make your wishes a reality.