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.