Introduction to the mortgage world
It is very likely that your mortgage is going to be your biggest outgoing, so it is important to get it right the first-time round.
Here is how it works. When you take out a mortgage you are borrowing an amount from a lender to pay for your purchased property. Like any loan, you make monthly repayments to pay off the capital you have borrowed as well as the interested charge. Some mortgages are interest-only rather than repayment mortgages which means you only pay the interest back each month. You don’t pay the capital lump sum borrowed until the end of the mortgage term. It is unlikely as a first-time buyer that you will be offered this type of deal as most lenders will only consider lending on an interest-only basis if you put a large deposit down.
The amount of interest you will end up paying is all down to the type of deal you choose. The bigger the deposit you are able to put down the better the mortgage rates you will be eligible to apply for.
When you are choosing a mortgage, you can see which deals you might qualify for based on the size of the deposit you have by looking at what is known as the mortgage (loan to value – LTV). The LTV is essentially the size of the mortgage you are taking out relative to the value of the property.
So, for example:
- If you were to buy a flat that cost £100,000
- You put a deposit down of £5,000
- You would need to look for mortgages with a 95% LTV, as you will be borrowing 95% of the properties worth.
Remember when choosing a mortgage, it is important not to look at the rate alone. You will need to factor in arrangement fees too. These can sometimes sustainably bump up the overall cost.
As a first time buyer how do I get a mortgage?
Taking the necessary steps for applying for a mortgage for the first time can be a challenging task. Below we have outlined some things for you to take into consideration that could potentially boost your chances of your application being accepted.
Lenders will always look closely at not only how much you earn but also at all your outgoings. Sit down and think about whether you can reduce these in the run up to making your application as it could really help your chances. The general rule of thumb is that you can borrow around four times your annual income, but this can vary from lender to lender.
Most mortgages are for 25 years but sometimes it is possible to opt for a longer term which means cheaper monthly repayments. You are spreading the cost over a longer period of time. The downside to this is that you will end up paying more interest overall.
Getting a mortgage in principle from a lender can be a good way to find out how big a mortgage you might be able to get before actually making a full application. This involves giving your lender some basic details about your finances and they then conduct a credit search. They give you a mortgage amount that they would be prepared to lend ‘in principle’. Having this kind of agreement before you start house hunting can help prove to estate agents and sellers that you are serious about buying a property.
Yes, the words everyone dreads to hear. When thinking about affordability, remember that you will need to pay stamp duty on your purchase if the property costs over £125,000, as well as any other costs such as conveyancing fees and mortgage arrangement fee’s.
Once you have found your dream home to buy, the length of time it will take to get your mortgage offer depends on whether you have all the required information to hand. Always be overly organised.
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