Mortgages can seem complex with plenty of unfamiliar terms to get your head around. Add to this the fact that a mortgage represents a huge financial commitment, and you may find yourself feeling daunted by the mortgage process.
Here at Smith Partnership Move, we support our clients every step of the way when buying and/or selling property and we pride ourselves on our plain-speaking approach. With this in mind, we have come up with our list of the seven things you need to know about getting a mortgage, check them out…
A mortgage is a way of buying a property without having the whole funds available. Your chosen lender, typically a bank or building society, loans the money for the property and holds the title deeds until the loan is repaid. Monthly repayments are made until the debt is repaid. If repayments are not made, the lender can take back the property and sell it to reclaim the money owed.
When it comes to buying a property the first thing you need to know is how much you can borrow. Each lender will have their own way of setting the amount they are willing to lend depending on individual circumstances, so shop around and do your research.
Most lenders have online mortgage calculators to give you a rough idea of how much they could lend you and what the monthly repayments would be.
Rather than looking at the maximum amount you can borrow, consider the amount you are comfortable repaying each month. A useful exercise is to do a mock budget which takes into account all the costs associated with home ownership, including utilities and household maintenance.
Saving for a deposit can be tough but it is worth the effort as the greater the sum you put down, the lower your loan to value (LTV) ratio will be. This is important because if your LTV ratio is low, you are likely to get offered better interest rates. For example, you want to buy a £100,000 house and have a £40,000 deposit, this means the amount you will need to borrow is £60,000 – a LTV ratio of 60%.
The amount of time you take a mortgage out for is known as the length of term. Terms are usually 20 or 25 years but could be as little as five years. Homebuyers, particularly first-time buyers, often look to stretch their mortgage over the maximum number of years as this will make the monthly payments lower. Bear in mind, however, the fewer the years you spread your mortgage over the less interest you will ultimately have to repay.
Equity is the difference between the amount you owe your mortgage lender and how much the property is worth. For example, a property with a £40,000 mortgage that is valued at £240,000 will see the homeowner sitting on a nest-egg of a potential £200,000 in equity.
The flip-side of this, however, is negative equity. This is when the value of the mortgage on the property is greater than what the property is valued to be worth. Negative equity can occur through a variety of reasons but is often due to a high mortgage combined with plummeting property prices. In such instances, there is often little that can be done except wait to see if property values rise.
The mortgage you choose will see you repay the loan, plus interest, as outlined when you signed on the dotted line. You may also choose to have the associated costs with taking out a mortgage added to the loan, such as legal and arrangement fees.
When it comes to the type of mortgage you choose, there are a few options to consider. These include:
A popular choice, with this mortgage you repay the loan and the interest each month. Interest-only mortgage Monthly payments see you repay the interest on the loan, but not the loan itself. This makes for smaller monthly paymentsbut does mean that the loan amount will need to be repaid in full by the end of the term.
Often set for three or five years, fixed-rate mortgage deals are a popular choice as they help homebuyers budget. At the end of the fixed rate, you can move the mortgage to another fixed rate deal or go on to the mortgage lenders standard variable rate.
These mortgages can see payments vary as the lender can decide to raise or lower the interest rate.
Following the Bank of England’s base rate, tracker mortgage repayments go up and down only if the Bank of England changes its rates.
Make your savings work harder by offsetting them against your mortgage to reduce the amount you’ll pay interest on.
If you are investing in a property with the intention of letting it, you will need a buy-to-let mortgage. It is worth noting that with these mortgages interest rates are typically higher.
Perfect for those unable to save a deposit, family members can use their savings as security on the mortgage.
To find out the best mortgage for your specific circumstances and the best deals on the market, it may be advisable to seek advice from an independent mortgage advisor. With access to the whole market, an independent advisor should look into the affordability of each mortgage and work out which works best for you and your needs.