Mortgages: Where to Start
If you are ready to take that first step onto the property ladder, chances are you are going to need a mortgage. But where do you start?
A few mortgage facts;
- Most run for 25 years, but can be longer or shorter
- Lenders can refuse a mortgage if they think you can’t keep up payments
- You can get mortgages direct from banks or building societies
- There are different types of mortgages you can get
- How much you can borrow is dependent on several factors
Applying for a mortgage
When applying for a mortgage, it typically has two steps for you to complete. The first is working out how much you can borrow, and the second is a more in-depth look into your finances to confirm the first step.
Step one is fairly straightforward – the mortgage lender will run through a series of questions with you to work out the type of mortgage you want, or need, and how long you want it for.
They’ll get a sense of your financial situation, so even though you don’t need to provide evidence at this stage, it’s good to have a rough idea of your income and outgoings.
For the second step, you will need to provide proof of things like income, savings, and outgoings.
The mortgage broker will run through a more detailed affordability assessment to get a better idea of your overall financial situation, and how this may impact the amount you can borrow. You will likely be asked for hard or electronic copies of things like payslips, bank statements, and savings accounts.
Once your application has been approved, you’ll be given a ‘mortgage in principle’. This is key, as it allows you to make offers on properties.
Unless you are a cash buyer and have enough money to buy a house outright, you will need a deposit instead. This is a lump sum that you pay that goes alongside your mortgage.
So, for example, a deposit of £30,000 and a mortgage of £110,000 could, in theory, get you a house of up to £140,000 in value
You’ll often hear people talk about LTV when discussing mortgages. This simply means ‘Loan to Value” and is the amount of your home that you own outright, compared to the amount that is secured against a mortgage.
So, using our example above, with a £30,000 deposit on a £140,000 property, the deposit is 21% of the property, and the LTV is the remaining 79%.
Obviously, the larger your deposit, the better, as the more deposit you have, the lower your interest rate could be when applying for a mortgage. This is because lenders will opt for less risk with smaller loans.
Types of Mortgage
There are different types of mortgage you can go for, depending on your circumstances;
This is probably the most common mortgage type. When you have a repayment mortgage, you pay a monthly amount that pays off the interest and part of the total every month.
Repayment mortgages are usually set for 25 – 30 years and, at the end of that term, you should have paid off the total amount and so own your home outright.
There is also an option for an interest-only mortgage when applying for a mortgage where you pay only the interest on the loan each month, but don’t pay anything towards the total amount.
These types of mortgages are harder to get as lenders are hesitant to give loans if they are unsure about getting the full amount back.
With a repayment mortgage, you will need to have a separate plan in place for how you plan to repay the original loan at the end of the mortgage term.
Fixed Interest Rate
Mortgages come with different interest rates. A fixed interest mortgage is set for a certain amount of time, typically 2 – 5 years, and within that time, the interest you pay each month will be fixed.
This means that if the market interest rate goes up, you won’t pay any more than your fixed amount. This goes the other way too; if the rate goes down, you will still pay the same amount.
Once the term is over, you can negotiate another fixed term with your lender.
Variable Interest Rate
If you choose to have a variable interest rate mortgage, the rate you pay each month could move up or down, in line with the Bank of England base rate. So some months you may pay more, and sometimes you may pay less.
Mortgages can seem daunting when you first decide to step on the property ladder, but getting professional mortgage advice is a step in the right direction.
If you would like to discuss your mortgage options, please contact Argyle Estate Agents on 01472 603929 or email email@example.com.