In order to buy your own home you will normally have to borrow quite a lot of money, unless you are very wealthy. Money that is borrowed to purchase property in England is called a mortgage. This type of loan is offered by all the high street banks, many building societies and some other types of loan companies.
If you are not sure what is meant by interest rates, these are the percentage values of your mortgage that the lending institution each year gets from you as payment for being able to borrow the money in the 1st place. For example, if you borrow £150,000 initially at 4% fixed for the first 2 years, you can expect to pay £6,000 each year to your loan company, depending on whether it’s a repayment or interest only mortgage.
While interest rates are comparatively low at the moment, the same cannot always be said about the deposit, which is the amount you need to provide to secure the mortgage agreement. The amount of deposit depends on the lender and the type of mortgage you want to negotiate. The average deposit in 206 for first time home buyers was around 17%.
A very useful site for UK mortgage help and information is mortgage.uk. Another useful site is the Money Advice Service.
You will need professional guidance for a first mortgage
Once you have found your ideal property, you will then have to find the best mortgage provider. This is not necessarily as simple as it may sound but hiring a professional mortgage adviser to put you on the right track is a good idea.
Types of mortgages
There are 2 main mortgage types which are repayment and interest–only mortgages. The most common type offered by lenders is the repayment mortgage. However, if you are lucky enough to have access to a home already and you want to take out a mortgage for a buy-to-let property or you have a high income, you are more likely to be interested in an interest-only mortgage.
A repayment mortgage
If you decide on a repayment mortgage you will gradually repay the borrowed money throughout your mortgage term, which is set at about 25 years. You will make a single payment monthly to your lender, part of which is the interest on the loan which is your lender’s profit while part of it paying back the borrowed money.
Even though the part that is repaying your mortgage is relatively small, over time the amount you owe will decrease, so you will be paying less in interest but more in the mortgage repayment. As long as you stick to the regular monthly payments your mortgage provider has calculated, you will eventually pay off the loan.
An interest-only mortgage
An interest-only mortgage is when you pay just the interest on a monthly basis to your lender. You will pay off the mortgage when the term has come to an end. Mortgage lenders expect you to have the capital available when the mortgage period is up and you are usually required to pay money into an investment like stocks and shares.
With this type of repayment option you can never be certain that you will be able to pay off the full amount of your mortgage when you are asked to do so. Because you are not paying back the loan, only the interest, the amount you pay remains more or less the same throughout the loan period.
How interest is calculated in a mortgage
A fixed rate mortgage is when the interest you have to pay is fixed for a certain period, such as between 2 and 5 years. This means at least for that period of time your interest repayments won’t alter, but the rate tends to be higher than with a variable rate mortgage and if interest rates fall you won’t benefit until your term is up.
With a variable rate mortgage your interest payment could be changed with limited notice, so if there is a rise you should be prepared to pay the increase.
A capped rate mortgage is not quite the same as a variable interest rate mortgage, as the interest is capped at a maximum rate, meaning the agreement you have made with your lender ensures you don’t pay more than the interest rate you have agreed together. Your interest rate will vary depending on trends but if it reaches more than the maximum you have agreed to you won’t need to pay that extra. However, there is what is called a collar rate attached meaning if the rate falls below this rate you will not be able to take advantage of it.
An offset mortgage is a way you can use your savings to lower your mortgage cost. It is linked to one or more of your bank accounts. If you have savings but you don’t want to use them to pay off your mortgage your lender can offer you some incentive by lowering the amount you pay interest on based on the amount you have accumulated in savings accounts. The disadvantage of an offset mortgage is that you are not able to earn any interest on the savings you are using to offset your mortgage.
To see how much your repayments might be, or how much you could afford to borrow, check out these mortgage calculators.
Process for applying for a mortgage
Once you have discussed your mortgage with your chosen lender which mortgage is best for you, it will necessary to provide a credit report to ensure you don’t have any unpaid commitments. What your credit report reveals helps the lender decide on your interest rate. CallCredit, Experian and Equifax are businesses that can provide a credit report for your expected lender.
When to apply for a mortgage
Before you apply for a mortgage, make sure you are certain what you want to buy and that you have the funds available for the deposit. The deposit is the single most important financial outlay you will make. Also make sure you have the ability to pay back the repayments or interest over the period of the mortgage and have the documents (listed below) required by most lenders.
- ID of applicants;
- Proof of present address;
- Proof of earnings for all applicant, e.g. a payslip;
- Most recent bank statements from previous three months;
- Facts about the property you intend buying;
- Details of estate agent and solicitor.