Mortgages - The Complete Beginners Guide
Mortgages can be a scary word even for those who are experienced on the topic – but it can be particularly overwhelming for those who are new.
Buying a home is likely the largest purchase you’ll make. Choosing the right mortgage will help you purchase a home, and potentially save you thousands every year. Before you arrange your mortgage, make sure you know what you can afford to borrow.
Sounds scary, doesn’t it? It doesn’t need to be – especially after you’ve done your research. Luckily for you, all your research can be found here. Here is everything that you need to know in order to find the right mortgage for you.
What is a Mortgage?
A mortgage is a loan that you take out from a bank or building society in order to purchase a property.
Most mortgages run for 25 years. However, the terms can be shorter or longer depending on your financial situation. You then pay back the amount you have borrowed with interest over that time period in monthly instalments.
When you purchase a home with your loan, you’ll put down a deposit of around 5% of the property price and pay the rest with your mortgage.
Your mortgage is secured against your home until you have paid it off in full – meaning that if you fail to repay the loan, your lender could repossess your home and sell it so they get their money back. That’s why it’s important to ensure that you take out a plan that’s in line with what you’re able to afford.
How Do Mortgage Deposits Work?
You will need to pay for a deposit when purchasing a home. Your deposit is a percentage of the property’s value, usually around 5-10%. So if you bought a house for £300,000, you would have to pay a £15,000 deposit and your mortgage provider will lend you the rest.
The rest that your provider lends you is called the loan to value (LTV). So from the above example, a 95% LTV mortgage would cover the remaining £275,000, which turns into the amount you owe back to your lender. Your mortgage is secured against the 95% portion.
The lower your LTV, the lower your interest rate it likely to be. This is because the lender is taking less of a risk with a smaller loan. You’ll find the cheapest interest rates are available with a 40% deposit.
It also depends on how much of a risk the lender se you as. If you’re at high risk to them, then you may need to put down a larger deposit to get approved for a mortgage. Your lender will assess your level of risk by looking at your credit history. They will look at:
- Your credit report. This will help them see if you’ve repaid credit successfully in the past
- Your income and regular expenditure. This helps lender see how much you’re able to afford to repay each month
- Other financial commitments such as credit cards and loans. This helps them understand how much debt you already have
If you have a poor credit score, then lenders will see you as a high risk, so they will ask you to pay a larger deposit. You can check your credit score here.
What Type of Mortgages Are There?
So we’ve established that after you’ve put down your deposit you’ll pay the remaining sum with a mortgage and you’ll do this by paying monthly repayments to your lender in order to keep your home.
There are several types of mortgages and they are:
The perfect type of mortgage for those getting onto the property ladder for the first time. This is designed for those purchasing their first home. Lenders will see first-time buyers as high-risk, but if you can impress them with your credit score and financial history then you can still get good rates. Don’t worry too much if you’re unable to put down much of a deposit, there is always a way for you to get a first-time buyers mortgage.
Home-mover mortgages are for people who already have a mortgage and a home and are looking to relocate. Doesn’t matter if you’re upsizing or downsizing, you’ll be able to move your current mortgage over to your new one. However, be aware that you may not have the same rates. Alternatively, you can start a new mortgage.
To remortgage means to change the mortgage on your current home by either getting a different deal with your existing lender, or switching providers all together. The majority of the time people remortgage to get better interest rates, find cheaper monthly payments, or release equity to spend on home improvements. Please be aware that you could face early repayment feed while remortgaging (that does depend on the lender though).
Looking to remortgage? Let's start.
Are you looking to purchase property to lease out to tenants? Buy-to-let mortgage is just the thing for you. These types of mortgages usually come with higher interest rates and you’ll be expected to put down a larger deposit.
It’s important to find the mortgage that best suited to your financial and living situation. If you’re wanting to live in the property, then the majority of mortgages available to you are monthly repayment mortgages.
What Fees Are Involved With Mortgages?
Unfortunately for you, quite a few fees are included when you taking out a mortgage. They are:
Product Fees – you are charged when taking out the mortgage
Application Fees – whether or not you end up taking the mortgage, you will be charged for the application
Valuation Fees – your lender may charge you for working out how much your property is worth
Broker Fees – if you take out a mortgage recommended by a broker you can be charged
Higher Lending Charges – you may be charged if you have a small deposit
Transfer Fees – these are charged when the bank transfers you the money they are lending to you
How Can I Improve My Chances Of Getting a Mortgage?
There are several ways to improve your chances of being approved by lenders for a mortgage. You can:
Improve Your Credit Score
As your credit score can change like the weather, what your current score is doesn’t mean it’ll remain like that forever. It changes with your financial behaviour and you have the ability to change it. One way of doing this is ensuring that you’re reliable to make payments. If you make them on time and in full each month then that will improve your credit score and show to mortgage lenders that you are reliable.
Tell The Trust About What You Can Afford
You might want that 4-bedroom house with a helicopter pad and private cinema room in the countryside, but if you’re unable to make those repayments, you won’t be able to enjoy yourself and end up losing the house. Review your finances and decide what you can afford. Remember to factor in the possibility of rising interest rates.
Use a Help To Buy Scheme
If you’re struggling to put together enough money for a deposit, the government have a scheme called ‘Help To Buy’. This is a scheme where the government lends first-time buyers and existing homeowners money to buy a newly-built home. However, the price must be no more than £600,000.
Have a Guarantor
A guarantor means that someone like a parent or older relative promises to make your repayments if you’re unable to. This will reduce the risk for the lender and will increase your chances of being approved.
What Are The Steps Involved With Getting a Mortgage?
Let’s break it down for you…
- Save up for a deposit
- Find the property you want to purchase
- Find a mortgage through a comparison website or directly through a broker
- Make sure you’re able to afford the mortgage you choose
- Put in an offer on the property you want to purchase
- If the offer is accepted, put down the deposit
- Take out the mortgage
If you’re a first-time buyer or looking to remortgage, Kompare can help you find your ideal mortgage deal that’ll suit your situation in no time at all. Use our free comparison service to start your search today.