How Mortgages Work: A Brief Guide for First Time Buyers buying their first home.v
Houses are expensive. The average home in the UK costs £268,000, according to the Office of National Statistics – and that’s almost ten times the average full-time salary of £27,000.
It’s very unlikely you’ll to be able to buy that home outright so the majority of people use a mortgage to fund the bulk of the purchase.
The Importance of a Mortgage
Successfully applying for a mortgage is, for most people, the crucial step towards securing their dream of owning a home.
A mortgage is a loan from a bank or building society that you use to purchase a property and then steadily pay back over many years.
You agree to pay a portion of the property’s price, known as your deposit, and the bank agrees to fund the rest over a set period of time, usually 25 to 30 years, charging you interest for the privilege.
The mortgage is secured on the property. This means that if you don’t make the monthly repayments that you are meant to, the bank or building society can take the property back off you, an unfortunate scenario known as repossession.
Most mortgages will be lent on a capital repayment basis, where you steadily repay the amount of money you have borrowed plus the interest you owe on it. This way if you keep up the monthly payments on the mortgage it will be guaranteed to be paid off at the end of the term
A property owned with a mortgage is held in your name, although the bank’s interest in it is officially registered. The home is yours to do what you want with – within reason – but your lender might impose certain restrictions, such as saying you can’t rent it out.
The Importance of a Deposit
For first-time buyers this deposit will be the cash amount they can afford to put down and for a 95% LTV mortgage you’ll need at least a 5% deposit. Lenders are more comfortable lending 90% so if you can raise 10% or more that maybe a better option.
Also, you will need to put aside a fairly large chunk of cash for things like fees and stamp duty and legal costs. The total can reach several thousand pounds and may eat into the size of your deposit.
The Amount you can borrow?
Once you have an idea of how much you can afford you can speak to a bank or building society directly to discuss products, or use a whole of the market mortgage broker who can scour the whole of the market for you (email@example.com).
Whichever route you choose, the lender will want to know one crucial thing: can you afford to pay this money back? They will assess that by using your earnings and your outgoings to decide what you can afford to borrow.
Once upon a time this was calculated as a multiple of your salary, for example four times your earnings. Now lenders must follow strict rules on affordability, looking at your income and spending and working out what they think you can afford to borrow.
The lender will evaluate the property, your spending and your credit rating and decide if you are a worthy borrower.
The Importance of a Good Credit Score
The Majority of Lenders prefer to lend to borrowers with good credit scores. There are Lenders who are more sympathetic to would be borrowers but if you are in doubt to your credit worthiness or how to improve your credit score, contact one of the main Credit scoring companies – Experian, Equifax or Noddle (Call Credit Consumer Ltd).