Getting a Mortgage
Taking out a mortgage to buy a home is a big financial commitment so it’s vital that you understand how the process works and what it means for your finances.
What is a Mortgage?
A mortgage is a loan acquired to purchase property or land. The loan is ‘secured’ against the property which means that if you fail to make repayments then the lender has the right to take possession of your home and sell it to repay what you owe. The average mortgage runs for 25 years but the term can be longer or shorter depending on your circumstances.
Taking out a Mortgage
You can take out a mortgage with a bank, building society or specialist mortgage lender. Before they agree to lend you the money they will make thorough checks to ensure you can afford the monthly repayments and that the property is worth the amount you’re requesting to borrow.
Almost all mortgage schemes require a deposit of your own money. This deposit is a fraction of the total cost and the mortgage that makes up the difference is referred to as the percentage ‘loan-to-value’. For example, if you secured a £10,000 deposit on a £100,000 property then the deposit is 10% of the price and the mortgage loan-to-value is 90%. In general, the higher the amount you can put down as a deposit then the lower the mortgage interest rate you’ll be offered.
How a Mortgage is Repaid
A mortgage consists of two parts:
- The money you borrow (the capital)
- The charges made by the lender (the interest)
When you acquire a mortgage you have to state how you will make repayments. You can either repay a combination of capital and interest, interest-only or a combination of the two. If you opt for an interest-only mortgage you will also need to show how you will repay the capital at the end of the term.
Types of Interest Rates
Mortgages are available with fixed or variable interest rates. A fixed interest rate will remain the same for a fixed period of time whereas a variable interest rate could move up or down.
What Can You Afford?
Before you go ahead with any loan, you must always consider how you will keep up repayments. If you cannot keep up repayments then your home may be repossessed and following this incident, you may find it difficult to borrow in the future.
Lenders require proof of income and outgoings, including household bills, personal expenses and child maintenance when they decide on the amount to lend to you. They will also look ahead to consider whether you could still afford repayments if interest rates were to rise and will question you about any planned changes which could affect your ability to pay in the future (e.g. having a baby or retirement).