A beginner’s guide to mortgages

A beginner’s guide to mortgages

24th Jan, 2018

Purchasing a property is one of the biggest financial investments you’re likely to make, so before you arrange your mortgage, check out our guide on how the process works…

What is a mortgage?

This may seem like a straightforward question, but do you know precisely what a mortgage is? In simple terms, it is a loan taken out to buy property or land. The majority of them run for 25 years, but the duration can be shorter or longer, depending on what you can afford.

It is very important to remember that if you can’t keep up your repayments the lender can repossess your home in order to get their money back. So, a key piece of advice is to not over-stretch yourself financially!

What can you afford?

When setting a budget for what you can afford, you need to consider your repayments to the bank, as well as the running costs of owning a home. This includes everything from household bills and maintenance, to council tax and insurance.

It can be easy to set your heart on a home that is beyond your budget, but it’s crucial to be realistic in what you can afford!

Where can you get one?

First of all, if you’re not experienced in such matters of money, it is a good idea to consider seeking advice from a mortgage broker, or independent financial adviser, who can compare the market and find the best deal for you.

Once you have established the type of mortgage, exactly what property you want to buy, how much you want to borrow and how long for – as well as the type of interest and rate – you can then apply for a mortgage. This can be done directly thorugh a bank or building society, by choosing from their product range.

How do you apply for a mortgage?

This is often a two-stage process.

  1. This stage entails a basic fact find to help you work out how much you can afford, and which package best suits you. Within this step, you should also receive key information about the product, service and any fees involved.
  2. The lender conducts a more detailed affordability check, which requires evidence of your income. This can involve detailed questioning regarding your finances and any plans you may have that could potentially impact your income.

If your application is accepted, the lender will provide you with a binding offer. After this, you will be usually given a reflection period of seven days, where you can make comparisons and assess your offer.

How big should your deposit be?

The deposit is a lump sum that goes towards the cost of the property you’re buying – you can’t purchase one without it. Your deposit must be a minimum of 10% of the overall price of the house – the larger the figure, the lower your interest rate could be.

How does your mortgage work?

The money you borrow is capital, which the lender then charges you interest on, until the full loan amount is repaid. The types of mortgages are:

Repayment – with this, you pay back both interest and capital every month. Once the term has ended, you should have managed to repay the entire amount owed and you will own the property.
Interest-only – these mortgages are becoming much harder to come by, as homeowners are often left with a huge debt and no way of paying it off. With interest-only, you just repay the interest on the loan and nothing of the capital.

When you have established how to pay back the capital and interest, you then need to think about whether you want a fixed or variable interest rate. It’s important to know that fixed rates will always remain the same even if the market changes, whereas variable rates will fluctuate in line with the Bank of England figures.

We hope that this simple guide has given you the knowledge to better understand mortgages, and how they work.

If you require any further advice, or are simply on the hunt for a new home, please feel free to contact our helpful sales team. 

View all posts by Chloe Byrne

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