Buying a home is often the single biggest purchase we will make in our lifetimes, but for most of us it’s not as simple as buying something from a shop. The process of home-owning, buying and selling can be incredibly daunting, especially for those just starting out on the property ladder. That’s why we’ve put together this mini guide for those beginning their journey into how mortgages and buying a home really works. Read on to see some basic and commonly asked questions and straightforward answers…
What is a mortgage?
A mortgage is a long-term loan that is taken out in order to pay for a property, or a piece of land.
Usually, this loan will be borrowed from a bank, building society, or a mortgage lender who will ask for a cash deposit of a specific amount (usually between 5%-15% of the overall price) in order to secure the loan.
The loan (mortgage) plus interest will be paid back monthly over a set number of years.
How do I know what I can borrow?
There are many resources online that can help you calculate how much you may be able to afford and borrow when looking for a mortgage, for example this Mortgage Affordability Calculator by the Money Advice Service.
Tools like these can help you to figure out what your options are in terms of borrowing based on your current income and expenses. It’s also important to keep in mind what else you would need to spend on if successfully getting a mortgage, such as maintenance costs, insurance and travel.
When talking to lenders, they will want to see proof of things like your regular income, any debt you have, and expenses, so keep this in mind when making appointments, as they want to ensure you would be able to keep up with repayments, particularly if interest rates go up.
Where can I get a mortgage?
You can apply for a mortgage directly from a bank or building society – or you can use a mortgage broker or financial adviser (like our mortgage experts here at Greenfields) who will compare different options and advise you on which would be most suitable for your situation. Many people agree that getting independent advice is the best option unless you are well-versed in financial matters and mortgages.
If looking for mortgage deals feels overwhelming, it could help to start on a public-friendly website like MoneySavingExpert. Take a look at their guides to current mortgage and interest rates to see what’s out there and to get a general idea of the current market.
How do mortgages work?
When you borrow money for a mortgage, the amount you borrow is called the ‘capital’, which the lender charges you interest on until the loan is paid.
There are a few different types of mortgage that you can apply for, and one thing you will need to decide on is whether you want to apply for a repayment mortgage, or an interest-only mortgage, or a mixture of both.
Repayment mortgages mean you will pay both part of the capital (the amount you’ve borrowed) and part of the interest every month. By the end of the term (lending period), you will usually have paid the entire loan and interest off.
Interest-only mortgages, on the other hand, mean you will only pay interest on the loan and nothing of the capital for the term of the loan. You will then need a separate plan organised with the lender for how you will repay the original loan after the term is over. As the MoneyAdviceService have said, these types of mortgages are becoming increasingly harder to come by, so might be unlikely at the moment.
Occasionally, lenders will offer a combination of both of these options, so if this is something you are interested in it is worth discussing it with your adviser.
Once this has been decided, you can start to think about the mortgage type you want; with fixed or variable interest rates.
Fixed rates mean your repayments will stay the same amount for a period of time (often two to five years), despite the state of the wider market.
Variable-rate mortgages mean that the rates you pay can change depending on the Bank of England base rate.
When should I get a mortgage?
In terms of where you are in your life, we can’t answer that! However, it’s best to decide on the type, and rough amount you’ll want to borrow before starting to seriously look at properties.
It’s a good idea to be looking on various property websites like Rightmove or Zoopla, just to get an idea of the amount you’d ideally want to borrow, however the process of applying for a mortgage can be a long one, so getting in early could alleviate stress later on!
Where to start with your deposit?
If you’re planning on applying for a mortgage in the near future, saving for your deposit could be the first step.
As we stated earlier, deposits are what you put down at the start of the mortgage term in order to secure the loan, and usually range from 5%-15% of the total loan. With house prices at their current state, this can mean a deposit is usually in the tens of thousands. The higher your deposit, the lower your interest rates and repayment amount are likely to be, so the logical first step is to secure this amount.
There are a few different ways to help first-time homebuyers increase their deposit savings, including Help-To-Buy and Lifetime ISAs that offer monetary incentives for new homeowners.
There are also other options to increase your savings such as investing.
Are you looking to get your first mortgage in the near future? Or looking longer-term but want to increase your savings?
At Greenfields we have the knowledge and experience to help you achieve your goals while looking at your current situation. For more information on how we can help you, send us an email at ian@greenfields.biz or message us on Facebook to book your FREE initial meeting to discuss.