Buying a home, or any property for that matter can be a daunting task. It’s not just about finding the perfect home for you and your family; it’s also about understanding what to do when buying a new home. If you’re looking to buy your first home then this mortgage guide for beginners is perfect for getting you started. In it, you’ll find the right information you need for the mortgage process.
What is a Mortgage?
A mortgage is a loan that you take out from a lender, usually a bank or building society, in order to buy a property. It’s like your house is the collateral for the loan, which means you’ll have to pay it back through monthly payments.
A mortgage can be fixed-rate or variable rate. If you’re buying a property off-plan then it’s likely that the rates will change frequently. We’ve covered type of mortgages in depth.
How do Mortgages work?
It is a large loan on your property that you have to pay every month. Your mortgage lender will work out the best repayment amount for you to pay each month and this also includes interest that they charge you on top of the loan.
Normally a repayment term is around 25 years but you can have it longer or shorter depending on how much you can pay off each month. You should know that the total amount of the mortgage, with the interest, will be split over the years that you have agreed to pay off the mortgage and that’s how much you pay each month.
How to calculate your mortgage payments?
Before you start your search, you’ll need to know how to calculate your mortgage payments. Your monthly mortgage payments will depend on where you’re buying your property, what type of property it is, and how much deposit you’re willing to pay. An example of a mortgage payment is below:
- If you’re purchasing a property worth £200,000 will need to put down a deposit of around £20,000
- That would mean that your mortgage would be around £180,000
- If there is 2% interest, then your interest is at £48,922
- The total amount you would have to repay would be £228,882
- You would be paying £763 a month if your mortgage term is 25 years
If you would like to know how much you would be paying for a property you’re looking at, you can use the mortgage calculator to work out monthly repayments. You’ll pay less interest if you can pay off the mortgage sooner so if you can afford to pay higher monthly payments.
Repayment vs. Interest-only mortgages
With repayment mortgages, your monthly payment goes to the property value and you pay the interest off completely. You will own the property at the end of the term and the interest has been paid in full.
With an interest-only mortgage, you are only paying interest so you wouldn’t gain any equity into the property and still wouldn’t own it or owe the mortgage lender the full amount at the end of your loan term. Only really available for buy to let properties.
Where to look for a mortgage?
There are a lot of people who would like to buy a property in the UK but don’t know where to start.
Shopping around online on comparison sites is always worthwhile, as there’s quite a variation in interest rates, and the length of the fixed-rate mortgage that’s best for you.
However, if you really like your bank or building society, they may offer a great deal to existing customers, so it’s worth asking them about their mortgages.
You can also consider using a mortgage broker – these are professionals who help you choose a mortgage that will suit you and your financial situation the best. They’re experts and it’s always a good idea to consult one if you’re planning to buy a property. The broker will usually be paid a commission from the lender you choose to go with, but may also charge one for their services. Be sure to ask.
Where to apply for a mortgage?
Applying for a mortgage is not complicated but you will need documents and your details to give out in advance.
You need to provide proof of identity. A driver’s license, passport or ID card will be required along with your utility bills. You also need to provide your income (P60 from your employer) for the last 3 months and your bank statements for the last 3 to 6 months. If you’re self-employed, you might have to produce your tax return (SA302). These details can be confirmed with the lender and ask if you need other documentation.
Your mortgage lender will look at the application and check your income and your outgoings. They will also want to see the details of your current property, what it’s worth and your other outgoings.
Be sure to ask lots of questions about the mortgage. Find out how much the repayable amount is, how the amount is calculated, whether there are any fees and any other terms that apply to your mortgage.
A lender will look at the property you are interested in and give you an estimate of the value. You should compare this to the price you are offering for the property and decide if it is a good match. If you decide the property is not worth the price you are offering for it, the loan will be declined.
In general, a mortgage application process can take between 18-40 days. But, if it takes longer it will usually be due to the number of applications the bank receives or because they have to be verified by their underwriters.
What is a Mortgage in principal?
A mortgage in principle/agreement is the promise that a lender is willing to give you the mortgage. If you view a property, it shows the seller you’re serious about buying the property and that you could afford to make the important purchase. However, you don’t have to go with the lender for the mortgage that was offered in principle.
Mortgage charges and costs
If you’re considering buying a house, you should know about mortgage set-up fees. A mortgage comes with a lot of fees, so it’s important to understand what they are.
You’ll need to factor these fees into your budget. Sometimes the option of adding the fees to your total mortgage amount is possible but you would have to pay interest on top of that.
One way to minimize your mortgage costs is by finding a great deal on a fixed rate for four years, or even five, but you may have to pay a little more up-front for the privilege. The fee might be £200, but if that’s cheaper than no setup fee at all, then it’s worth it.
What happens when a fixed-rate mortgage ends?
Usually, when your mortgage fixed term ends between 1 to 5 years, you’ll be placed the Standard Variable Rate (SVR). This is generally expensive and your lender can change the rate whenever they feel it’s best to.
You can remortgage, which simply means that you’ll be transferring your current mortgage onto a new deal. That could be with your current lender or a new one. You won’t need to pay for conveyancing if you stay with your current mortgage lender.
You will need to pay solicitor fees, but your new lender will need to pay off the old lender before you get an agreement with them. Your mortgage property costs should be less expensive because you would have paid off at a section during your fixed-rate period.
Remortgaging is popular for home owners to release equity in the house to pay for renovations or big purchases. This is increasing the value borrowed so is an equivalent to taking out a loan for the same percentage. Renovating the home in theory should increase the house value so is often worthy of consideration.
What happens if you want to move?
If you’ve sorted a mortgage for 25 years, you don’t have to stay at the property till the end of the mortgage period. If you’re selling your house to move, the amount left on the mortgage is paid by the sale, moved to the mortgage lender and whatever is left after the sale you can put towards the deposit of your house.
However, you’ll fall into negative equity (property worth less than the initial price at the start of your mortgage) if you haven’t paid off much from the mortgage and the value of the house hasn’t increased. After selling the house, you may still owe money to the lender which could set you back from affording the deposit for the new property. It would be wise to put a hold on selling your house and see whether you can make improvements to drive up the value.