Information for First Time Buyers
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A mortgage is a legal agreement where money can be loaned to you so that you can buy property or land. A mortgage usually runs for 25 years, but can be altered to a longer or shorter period of time.
The purpose of a mortgage is to secure the loan against the value of the property or land until it has been paid off.
The money you borrow from a lender is called the capital. The lender will charge interest on the capital until it has been repaid. The type of mortgage you apply for can be determined by whether you want to repay interest or interest and capital.
What you can afford
It is important to think realistically about what type of mortgage you can afford on top of your monthly bills and expenses.
A lender will want to see your proof of income, expenditure and any debts you may have. Your lender may also ask about your household bills, child maintenance and any personal expenses.
This will simply give your lender the proof they need to show that you can keep up with your repayments if interest rate rise. It can also help the lender to decide whether you are a suitable applicant to offer a mortgage. A lender can refuse to offer you a mortgage if they feel that you would not be able to keep up with repayment.
Where to get a mortgage
To compare different mortgages and mortgages that may not be directly offered to customers, you would need to contact a mortgage broker or an independent financial adviser. You could also directly apply for a mortgage from a bank or building society.
A broker will look at the entire mortgage market, whereas others may only look at products from certain lenders. The broker will explain the market and their own fees.
How much Deposit
Your deposit goes towards the cost of the property that you are buying.
The higher the deposit you can make, the lower the interest rate could be. A loan to value (LTV) is the amount of your home that you own outright, compared to the amount that is secured against the mortgage. Therefore, the lower the LTV, the lower the interest rate could be.
This is because the lender will be taking a smaller risk with a smaller loan.
What is a Repayment Mortgage?
A repayment mortgage is when you pay the interest and part of the capital off every month. At the end of the term, the mortgage would be fully paid off and you will fully own your home.
The loan reduces slowly at first so that the interest element becomes smaller, while the capital repayments become a larger part. Providing the repayments have been made every month at the end of the term, you can be assured that the loan will be paid off without risk.
What is an Interest Only Mortgage?
An interest only mortgage is when you only pay the interest and nothing off of the capital. This means that at the end of the mortgage the amount borrowed from the lender still needs to be paid in one large sum. This can lead to homeowners not being able to repay a huge debt owed to their lenders. However, repayment vehicles such as; savings, pensions, stocks and shares, investment bonds and other properties or assets, etc. can aid paying off an interest only mortgage.
The risk involved with this method is that if you do not have sufficient funds available to repay the loan at the end of the term could mean that you would have to sell your property.
Mortgages come with fixed or variable interest rates.
A fixed rate means that your repayments will stay the same for a certain amount of time, usually between two to five years. These terms remain fixed regardless of what interest rates are doing.
A variable rate mortgage can increase or decrease, depending on the Bank of England base rate.
Applying for a Mortgage
Firstly, the lender will ask you a series of questions to determine what kind of mortgage you want and for how long. This means that you will have to provide them with some personal financial information. This allows the lender to decide how much they are willing to lend you.
Next, the lender will carry out a fact find and an affordability assessment. This requires you to provide proof of income (i.e. pay slips) and specific expenditure.
To assess your affordability, you will be asked about your finance and any future plans that may impact your income. The lender will also assess the impact that interest rates rising would have on any future repayments.
The lender will then provide you with a binding offer and a mortgage illustration explaining the terms of your mortgage.
Finally, you will be given a reflection period which lasts seven days. This time given will allow you to consider the lenders offer, make comparisons and gauge the implications of accepting the lenders offer. During the reflection period, the lender cannot change or withdraw their offer, except in limited circumstances (e.g. if any information provided proved to be false). The reflection period can be waived and the home purchase can be sped up.