Purchasing a property is highly likely to be the biggest purchase in your life.
With the average house coming up to just under £270,000, you will most likely get a mortgage to purchase your new home. If you’ve been living on Mars for the past few years, you would be the only person to miss the fact the Britain now has a housing supply crisis.
Mortgages are available through a copious amounts of banks and building societies with many different types of mortgages and offers available.
It can be overwhelming to understand it all, especially if you’re a first time buyer struggling to raise a deposit to secure your first property.
So here’s a basic breakdown of what a mortgage is and how they work.
A mortgage is a loan from a bank or building society that you use to purchase a property and then steadily pay back over many years.
You agree to pay a chunk of the property’s price, known as your deposit, and the bank agrees to fund the rest over a set period of time, usually 25 to 30 years, charging you interest for the privilege.
How much you can borrow is determined by several factors: Your deposit, what you earn, your credit score and your debts, plus others.
What Is LTV?
LTV (loan to value) is the ratio between the size of your deposit against the size of your loan.
This is one of the big deciders for how much you can borrow and how expensive your mortgage will be.Your deposit is usually a minimum 10% of the value of the home, however some banks and building societies accept deposits as low as 5% under the help to buy scheme. Therefore a property valued at £200k would need a £20k deposit (at 10%) or £10k deposit (at 5%).
Keep in mind that the bigger the deposit you have saved up, the better deal you could get for your mortgage, as the more money you can pay upfront, the less your mortgage will be and your monthly repayments and interest rates will be smaller. A 25% deposit will give you quite competitive rates.
Most mortgages will be lent on a capital repayment basis, where you steadily repay the amount of money you have borrowed plus the interest you owe on it.
Interest Only mortgages
There are also interest-only mortgages, where you only pay interest – as the name suggests. At the end of the mortgage term, you will not have repaid any of the debt and will need to find the money to return the sum you borrowed to the lender.
An interest-only mortgage comes with cheaper monthly payments but without the structure that lets you pay off a mortgage slowly and steadily over time.
Interest-only mortgages were once very popular, but have fallen out of favour after financial authorities and banks got worried by the number of people failing to put a saving plan in place to repay them. It’s now much harder to get an interest-only mortgage.
Don’t forget, you will need to put aside a fairly large chunk of cash for things like fees and stamp duty. The total can reach thousands of pounds, so will eat into the size of your deposit.
Once you have an idea of how much you can afford you can speak to a bank or building society directly to discuss products, or use a mortgage broker who can scour the market for you.
If you do use a broker make sure they are a whole of market one, meaning they are not tied to a limited range of mortgage lenders.
Whichever route you choose, the lender will want to know one crucial thing: can you afford to pay this money back?
They will assess that by using your earnings and your outgoings to decide what you can afford to borrow.Once upon a time this was calculated as a multiple of your salary, for example four times your earnings. Now lenders must follow strict rules on affordability, looking at your income and spending and working out what they think you can afford to borrow.
You should prepare for a grilling to show how you will afford the mortgage and what your monthly essential spending amounts to. Make sure you have all the documents you need to back up your application, such as payslips, bank statements and bills.
Banks and building societies will want to know about things ranging from your utility bills,to nursery fees, mobile phone contracts and how much you spend on leisure.
The lender will evaluate the property, your spending and your credit rating and decide if you are a worthy borrower.
Fixed or tracker Rate?
If you have stretched yourself in trying to buy a property or if you are someone who likes the security of knowing your repayments won’t change, then a fixed-rated deal is probably for you.
But you do have to pay for this additional security – rates on fixed rate deals are higher than for variable special offers and many lenders have high fees for their best deals.
Two-year fixed rates are the most popular with British homeowners, but increasing numbers of borrowers are turning to longer term fixed rates of five or ten years. These longer measures give more security and cut down remortgaging costs, but you will have to pay a hefty penalty to leave.
If you choose to do this, make sure that your loan is portable and so can be carried with you if you decide to move house, but remember any extra borrowing will generally have to be with the same lender.
A tracker mortgage is a type of variable-rate mortgage. The interest rate tracks the Bank of England base rate at a set margin (for example, 1%) above or below it.
Tracker mortgage deals can last for as little as one year, or as long as the total life of the loan.
Once your tracker deal comes to an end, you’re likely to be automatically transferred onto your lender’s standard variable rate (SVR). Typically, this will have a higher rate of interest.
A standard variable rate mortgage (also known as an SVR or reversion-rate mortgage) is a type of variable-rate mortgage. The SVR is a lender’s ‘default’ rate – without any limited-term deals or discounts attached.
When a fixed, tracker or discount mortgage deal comes to an end, you will usually be transferred automatically onto your lender’s SVR.
Watch out for extra costs
Many lenders will have extra costs in the guise of application, product or processing charges, which could add thousands to your purchase. Rather than just going for the cheapest rate, it is important to weigh up the overall cost of your mortgage by looking at both the rate and any fees, as this will impact how much you pay back over time.
We feel it is important to provide our customers with useful information on obtaining credit to purchase a property, or alternatively to carry outbuilding works on an existing property. It is beneficial to understand the process of obtain credit to improve your home, possibly for adding a home extension, loft converson, new kitchen or removal internal walls to open up a dark ground floor lounge for additional space in your home.
Understanding the procurement of debt is all important.
Hope this information was helpful.
The Diligent Team.
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