Four Main Questions To Ask Yourself Before Applying For A Mortgage

Getting a mortgage is a serious investment that will ask for a long term commitment – usually more than 20 years. From this point of view, it requires serious consideration and plenty of education – in fact, it might help discussing with an independent mortgage adviser before making any decisions on your own. Not only will they teach you what to do, but they can also guide you regarding your finances.

Now, there are a few basics that could help you make more informed decisions. The more you know, the easier it becomes. It is essential to build a foundation and get ready to assimilate more information as time goes by – whether you are still looking for properties, discussing with a lender or perhaps negotiating with your solicitors. So, what do you need to know first?

How much money can you get?

Mortgage lenders will usually give you up to five times your early income – before tax. You could get less than that though – it depends on more factors, such as your credit score. If you apply with your partner, add up your incomes and you could get up to four times the yearly amount. Every lender has specific rules for their mortgage deals – the affordability is also an essential consideration.

You should also consider the maximum monthly payments you can make. If you need to pay more than 30%, you might be considered house poor. In other words, you will own a home, but you will not be able to put money into your savings account, get a car or go on holiday.

How much money do you have for the deposit?

A big deposit means you will need to borrow less money. At the same time, you will have a low LTV (Loan To Value) ratio. The bigger your deposit, the more mortgage deals you can qualify for. Plus, your interest rates will obviously be cheaper.

Ideally, you should go for more than the minimum, but make sure you consider all the associated costs – from solicitors and moving to actual renovations and repairs.

Interest only versus repayment

A classic repayment mortgage implies paying both interest and the value of the loan just like you would on a payday loan. As you get rid of the debt, the interest will inevitably become lower and lower. You initially finish the interest first, while the rest of the mortgage will be paid towards the end.

You can also opt for an interest only mortgage, meaning you cover the interest only. Obviously, monthly payments are incredibly low. However, this type of mortgage comes with some restrictions and you need a different way to pay your loan – investments or other assets.

As a first time buyer, you are less likely to get an interest only mortgage.

Fixed versus variable rates

The fixed rate implies having the same monthly payment for a particular duration of time. You can usually get this deal for three or five years – you are less likely to get it for the entire duration of the payment. Your payments will not be affected by interest rates – you will also fail to get lower payment if the interest rate goes down. Everything is fixed.

On the other hand, variable rate mortgages can go up and down from the first month – based on the Bank of England and its base rate.

In the end, these four steps are essential when starting your mortgage education. Having a few clues about what to expect can guide you in the right direction and help you understand further details and financial elements in a more efficient manner.

Understanding What Stamp Duty Means & How Much It Costs

While relatively small compared to the overall price of the property, the so called stamp duty is a tax you seriously have to consider when about to buy a property in England or Northern Ireland. The good news is there are a few rules that might work in your favour. For instance, the tax might be reduced every now and then – sometimes, cleared to nothing.

There is no tax to be paid if the property costs less than £500,000. On the other hand, if you buy a second home, you will need to pay extra in the stamp duty. First time buyers can normally avoid the stamp duty, but the rules change every now and then – reduced rates to certain dates, just to give you an example on how it works. So, what is this stamp duty after all?

Understanding the concept of stamp duty

The stamp duty only applies to England and Northern Ireland – Scotland and Wales do not have such taxes. It makes no difference if you buy an actual building (a house) or a piece of land – the stamp duty applies to any type of property. Now, things change regularly – for instance, you might be able to avoid the stamp duty if your property is less than £500,000.

This rule normally applies until March and it is not valid on a yearly basis, so double check upfront – sometimes, it might be worth waiting. In such cases, you can avoid the stamp duty even if this is not your first property. From this point of view, such times make it a bit difficult for first time buyers because many investors rush to buy.

Assuming you are in one of these times with no stamp duty and you want a property that costs more than £500,000, you will pay the stamp duty based on the value that exceeds this limit. If you are after a second home, you will still have to take stamp duty into account when analysing your budget – extra 3% if the property costs more than £40,000.

The tax applies to all types of properties – it makes no difference if it is a freehold property or a leasehold one. On the same note, it does not matter if you have the money for it or you plan to do it with a mortgage. Now, while there is no stamp duty in Scotland and Wales, each country has its own type of transaction tax.

The cost associated with the stamp duty

So, how much is the stamp duty? It depends on the band your property is in. If the property costs less than £500,000, you will not have to pay anything if you do it before March – again, every year may have different dates. If the property costs under £925,000, the stamp duty will go up to 5% of the selling price. If it reaches up to £1.5 million, the stamp duty costs 10%. Anything more than that involves a 12% rate.

It is important to know that the stamp duty only applies to the amount that exceeds the limit. For instance, if your desired property costs £600,000, you will pay the stamp duty for the extra £100,000 and not the whole selling value.

Bottom line, the stamp duty is seriously worth some consideration because it can add to the final price – and it is not a small amount. The good news is the first time buyers can avoid this tax, so they will not have to count it when assessing their financial needs – just the government’s way to help new buyers.

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