Mortgages explained for first time buyers
As buying a home is likely to be the largest purchase a person, couple or family makes in their life, it is understandable why first time buyers are looking for as much support and guidance as possible. A mortgage is a style of loan that is taken out to buy land or property and while some people will instinctively say that mortgages last for 25 years, they can last for longer and shorter periods of time.
The loan is held secure against the home’s value until the mortgage has been paid off. If you fail to maintain or meet payments, the lending company can take back (repossess) the property. The lending company will then sell the property in order to recover all of their money.
The serious nature of defaulting on mortgage payments means that it is vital to work out what you can afford each month. It is important that you don’t just think about the mortgage payments, you need to find money on a monthly basis to pay for:
- Household bills
- Council tax
When applying for a mortgage, the lending company will request proof of your income and your current expenditure. The lender will also ask if you have any existing debts and they may ask questions about your personal expenses, any child maintenance costs or even the household bills you have to pay
Before a lender will provide you with the mortgage you require, they will carry out tests to determine if you can afford to meet payments, especially if interest rates change. A lender may decide against offering you a mortgage if they believe that you will not be able to make the payments.
There are many banks and building societies providing mortgages and they all have their own product range, so you should take the time to review your options. If you would like assistance in determining which style of mortgage would be best for you, you can arrange an appointment with a mortgage broker or an independent financial advisor, an IFA. This professional will review and compare the mortgages that are likely to be available to you and they may be able to provide you with mortgages that are not on general offer to the public.
Some brokers are tied to specific lenders, which may limit what advice they offer you or it may lead them to advising you to take a particular mortgage, even when it may not be the one that best suits your needs. A mortgage broker is also likely to impose a fee for their services, so it is important that you find out about all of these aspects before you make a judgment on which mortgage is right for your needs. If you are looking for a good starting point in finding the ideal mortgage, comparison sites will offer you a range of mortgages. This can help you to find out what is on offer and what may be of benefit to you.
Given the huge importance of a mortgage, it is vital that you carry out as much research as you can on your available options.
When looking for a mortgage, you will have to answer a number of questions including:
- What type of mortgage you are looking for
- How long you want your mortgage to last for
- How appropriate it is for you
The answer to these questions will provide a lender or broker with the information they need to recommend a particular mortgage to you.
You need to raise a deposit
When looking to buy a property with a mortgage, you will find that you are required to provide a deposit. This is an amount of money that will go towards the purchase of the property. The greater the size of deposit you can offer, the lower the rate of interest will be. You will likely hear people talking about the LTV, or the Loan To Value when it comes to obtaining a mortgage. Briefly, the LTV stands the amount of your property that you own outright and the amount that has been secured against a mortgage.
If you buy a £200,000 property and place a £10,000 deposit down, the deposit represents 5% of the property and the LTV is the 95% which remains. If you can lower the value of the LTV, you will find that a lender is prepared to provide you with a lower level of interest rate. This is because when the level of deposit is higher, there is a smaller risk for lenders.
The money that is borrowed in a mortgage is referred to as capital and the lending company charges interest on this capital until it has all be repaid. There are different types of mortgages to choose from and this can allow you to choose between repaying only the interest or repaying interest and capital.
A repayment mortgage
With a repayment mortgage, you will repay interest and capital every single month. At the conclusion of the mortgage term, you should have paid off everything you own and you will now own the property.
An interest only mortgage
With an interest only mortgage, you will repay interest only.
This style of mortgage is becoming less common as an increasing number of lenders are concerned about homeowners being left with a sizable level of debt and no real solution to pay it off. If you undertake an interest only mortgage, it is advisable to come up with a separate plan that will allow you to pay off the capital element of the mortgage at the conclusion of the mortgage term.
It may be possible to combine the style of mortgage that you have, and this will see you splitting the mortgage amount between a repayment aspect and an interest-only aspect.
There are also different types of mortgages with the main differences coming with respect to fixed or variable interest rates.
A fixed-rate mortgage
If you have a fixed-rate mortgage, you can be confident that your repayment amount will be fixed for a set period of time, which is usually between two and five years. Regardless of what is happening to interest rates, a fixed-rate mortgage ensures you know how much you have to pay each month.
A variable-rate mortgage
If you have a variable-rate mortgage, you will find that the amount of money you pay can change every month. This is because the rate is tied to the base rate of the Bank of England. If you believe the base rate will fall in the next few years, choosing a variable-rate mortgage can help you save money but if you believe the base rate will rise in the next few years, you should avoid choosing a variable-rate mortgage as this would see you paying out more money each month.
There are a number of different types of variable rate mortgages to choose from.