If you want to get a foot on the property ladder, you will almost certainly require a mortgage. However, to those unfamiliar with them, they can be something completely alien. Getting a mortgage can be a terrifying concept, especially if you are a first-time buyer. Where on earth do you start? What will assist you in obtaining the best mortgage rate possible? And don’t let us get started on the terms and jargon used. Here we have put together a brief guide to help you make sense of mortgages.
Of course, this is only touching on the very basics of what getting a mortgage entails and make it a little less daunting. If you are looking to take out a mortgage and buy a property, it is always a good idea to seek the advice of a professional, who can give you the most up-to-date advice and help you to get the best deals.
The great thing about owning your own home is the security. There is no worry about the landlord or landlady wanting to move back into the property or giving you notice to leave so they can sell it. It also means that you can do whatever you want to the property, to make it fit with your tastes and requirements. Want to paint that wall hot pink? Go ahead. Want to knock a wall down? Do it. Well – do it as long as you are sure the rest of the house will not come down alongside it! The point is, it is your home to do whatever you want with. The problem is, getting a foot into the property market, let alone buying your dream home can be a massive challenge.
There are several approaches to take when it comes to finding a mortgage and getting on that often elusive housing ladder. If you are not sure if you can afford a mortgage or what alternatives are open to you, using tools like the mortgagecalculator.uk can help you ascertain the type of mortgage you will meet the criteria for and how much you can afford to procure before you submit your application. This will give you a better idea of the type of mortgage you could go for.
Image via Unsplash CC0 License
What actually is a mortgage?
Before we go any further, let us take a closer look at what a mortgage actually is. It is one of those concepts that we have pretty much all heard of but many of us do not truly know what it entails. A mortgage is a lump sum of money lent to you by a mortgage provider to cover the cost of the property you are buying, as very few people have the entire amount of money needed to buy the property outright. You and our mortgage provider will decide upfront how much of this lump sum you will pay off every month and how long it will take you to do so; this is the mortgage term. You will also be told how much in terms of interest you will have to pay on it – this is how much the lender charges you extra each month for the credit. A mortgage is a charge against the property. It means that if and when you sell your home, the proceeds will be used to pay off your mortgage first, with any remaining funds going to you as the owner. It also means that if you do not keep up with the repayment terms, you can end up losing your home. This is why it is vital to make sure you are financially stable before taking out a mortgage and not borrow more than you can realistically afford.
What are the different types of mortgages?
Mortgages are classified into two types: Variable Rate Mortgage and Fixed Rate Mortgage
A Fixed Rate Mortgage means that your interest rate is fixed for a set period of time, usually two to five years, so your repayments remain constant. With a variable rate mortgage, the amount of interest you pay can fluctuate, as can your repayments.
The other way mortgages can be defined is by interest-only or repayment. A repayment mortgage requires you to repay both the interest and a portion of the principal on a monthly basis. As a result, by the end of the term, you will have paid off your loan and will own your home. With an interest-only mortgage, you will repay the interest on the loan but not the actual loan amount until the mortgage term is over. A plan between you and the lender will determine how you will make capital repayments at the end of the mortgage term. However, mortgage companies and regulatory bodies are becoming distrustful of interest-only mortgages because they leave homeowners with a large amount of debt and some are unable to repay the loan. Ask a few questions about combining a repayment and an interest-only mortgage.
What does loan to value mean?
This is the amount you owe on your mortgage in relation to the value of your home.
For example, if your home is worth £100,000 and your mortgage loan is worth £75,000, you have a Loan to Value of 75%. Mortgages with a lower Loan to Value tend to be more competitive.
What do you need to be able to take out a mortgage?
To take out a mortgage, you will have to provide prospective lending institutions with a plethora of data. First and probably most important, they will want to know about your earnings; how much do you make? Is it a reliable and consistent wage? If you are employed, you will usually be required to provide evidence of employment, such as your employer’s contact information as well as your most recent payslips. If you are self-employed, they may request bank records of your income or tax returns for the last few years to demonstrate that your business is profitable enough to sustain the monthly mortgage repayments.
They will also ask a few questions about your living expenses, such as how much you spend each month on credit card repayments, household bills, childcare, and so on. Mortgage lenders want to know that you will be able to make the payments, so they will look at your credit rating as well as your employment status and bank records. This, along with other variables, will allow them to determine how much money they are willing to lend you – if any.
What is a credit score?
If your credit score is not deemed high enough. it could curtail your mortgage application by lowering the amount that your provider will lend you, increase the interest rates, or even stopping you from getting a mortgage at all. What is a credit score though, and if it is poor, what steps can you take to improve it? Your credit score is a number between 1 and 999 and is used by financial institutions to predict how likely it is that you will be able to make payments on time and how responsible you are with money. You may have a low credit score for a variety of reasons, including past defaults, late payments, or simply having never had access to credit before. Yes – you need to have had credit to get credit!
Fortunately, there are simple steps you can take to help improve your credit score. According to the credit reporting agencies – Experian and Clearscore are two of the main ones – there are two major factors that influence your credit score – how much credit you use and your payment history – and these are the ones you should concentrate on first in order to have the greatest impact quickly.
To begin, ensure that your information is up to date and that you are paying your existing bills on time. Check that you are officially marked on the electoral roll. If you want to demonstrate your ability to repay credit on time, look for other loans that you can take out and repay within the terms. Be cautious; the last thing you want to do is obtain a loan that you will be unable to repay on time.
After this, obtain a copy of your credit report and challenge any factual errors, including double-checking all of the information on it.
What happens next?
If you are confident that you are in a great position to begin looking into mortgages, it is time to shop around. There are numerous mortgage comparison websites on the internet as well as numerous banks that provide mortgage advice. There is also the option of using an independent mortgage broker. It is always a good idea to compare different types of mortgages, including styles, lengths, and amounts, to see which one feels like the best fit for you and your lifestyle.