21 May 2019

Beginners guide to mortgages

We understand that your mortgage is most likely going to be one of the biggest financial commitments you’ll make, so its important to find one that suits you and your finances. There are many different shapes and sizes of mortgages, which makes understanding them a little tricky. We’ve put together some answers to your most frequently asked questions to get you started with your mortgage process!

What is a mortgage?

A mortgage is a loan taken out to buy a residential property or land. A bank or building society provides a loan against the value of your home until it’s paid off. Most buyers pay monthly repayments to the lender for around 25 - 35 years to pay off their mortgage. If you can’t keep up your repayments, the lender can repossess (take back) the property.

How does a mortgage work?

When you buy a home, you’ll typically put down your deposit. This is a percentage of the property’s total purchase price (usually between 10% and 20%).

With the government backed Help to Buy scheme, you could get a mortgage with just a 5% deposit. You pay a deposit worth 5% of the total property price, the government will then loan you 20% of the total property price and the rest (75%) is taken out as a mortgage. Read more about the scheme here. 
If you don’t use Help to Buy, you put down your deposit and the remaining cost of your home can be paid for with a mortgage. You legally own your own home and make monthly repayments on the mortgage until eventually, you have paid off your mortgage and own the home 100% outright.

How much deposit do you need for a mortgage?

To buy a new home, you’ll need to pay a deposit. This is a lump sum of money that goes towards the cost of the property you’re buying. The remaining cost of the property is taken out as a mortgage, which you’re charged interest on.
The bigger the deposit you pay, the lower your interest rate could be.
Which is why it’s important to consider your buying options (such as Help to Buy and Shared Ownership) to get the most out of your deposit. With the help to buy scheme, you will need 5% of the total cost of the home you’re buying, and with shared ownership you usually need at least 5% of the share you’re buying.

How will I know how much I can afford?

When the lender is assessing how much they’re willing to lend you, they will take into account the following:
  • Your income – they will take into consideration your basic household income, including any benefits, pension contributions and other earnings.
  • Your outgoings – credit card repayments, maintenance payments, insurance and other loans are all considered when assessing your mortgage eligibility.
  • Future changes – any changes that might cause an impact on repayments such as having a baby, career break, redundancy, increased interest rates. 
It’s important to seek advice from a mortgage advisor. This will give you chance to fully analyse your finances and their professional advise will mean you can decide on the best type of mortgage for you, how much you can repay each month and find the best mortgage rates. 

How can I boost my chances of getting a mortgage?

The more reliable you are, the more likely you are to get a mortgage. This is about proving you can afford the repayments. Below are some top tips on improving your chances of getting a mortgage;
  • Try improving your credit score – you’ll need a good credit score to qualify for the best mortgage deals. Your score reflects your financial behaviour, so you have the power to improve your score.
  • Consider using a guarantor – a guarantor mortgage is where someone (usually a parent or relative) promises to make your repayments if you can’t. This reduces risk for the lender and makes you a more reliable buyer, so they’ll be more likely to approve you for a mortgage.
  • Ensure you’re on the electoral roll – update your address on the electoral roll so the lender can verify your identity. Your mortgage application can be refused if you’re not registered on the electoral roll. Contact your Local Authority and ask for a registration form, or sign up online.
  • Pay off debts and close unused accounts – its important to try pay off as much debt as you can before applying for a mortgage. Lenders may be concerned about your ability to keep up to repayments if you still owe money. It’s also advised to close any unused accounts.
  • Save the biggest deposit you can – cut out the unnecessary purchases and put that money towards your deposit! The bigger the deposit, the more chance you’ll have of being approved. Plus, lenders are more likely to reserve the best deals on the market for those who can put down bigger deposits. If you’re a first time buyer, a Help to Buy ISA is a great way to kick start your new home savings.
  • Consider using Help to Buy – if you’re struggling to save a huge deposit, you can buy a brand new home with just a 5% deposit using this government backed scheme. Find out more here.
  • Prepare relevant documents – make sure you can prove who you are. Have a form of ID ready (driving licence or passport), details of your solicitors and/or estate agents, a P60 from your most recent employer and your payslip from the last 3 months and current bank statements from the previous 3-6 months.

What are the different types of mortgage?

With so many mortgage deals out there it’s easy to be confused by the jargon used by lenders. So to break it down, mortgages usually fall into two categories:
Repayment Mortgages:
Each month your mortgage payment contributes towards your overall loan until you own the home outright.
Interest-only Mortgages: 
With an interest only mortgage, you only pay interest on the loan and nothing off the amount you borrowed. You then make a second monthly payment into an investment fund to cover your loan, which, once the mortgage term is over should have enough to pay off the overall loan.

How long does it take to pay off a mortgage?

This is dependent on the terms and conditions of the mortgage you take out. Lenders usually take 25 years, however, some lenders will offer up to 40 years to pay off your mortgage.

What are mortgage rates and how do I find the best one?

Mortgage rates are the rate of interest charged on a mortgage that’s determined by the lender. Typically, a bank or building society will lend 80% of the price of the home, whilst you pay rest in your deposit.
The best mortgage for you will depend on your unique situation. Start by using a mortgage calculator to assess your finances and work out how much you can afford, what your monthly payments will be, how long you’ll be paying off your mortgage and the interest rate. Then, you can start comparing the mortgage rates different lenders are offering.

Where do I get a mortgage?

You can apply for a mortgage from a bank or building society. At this point, it’s advised that you seek professional advise from a financial advisor. Using a financial advisor means they can compare the different types of mortgages on the market and advise which ones are best suited to you. They will be able to compare the different mortgage rates on the market and match the best one to you and your current situation.