A Beginner’s Guide to Mortgages
Buying a house is a big deal. In fact, for most of us, it is the biggest financial investment we will ever make. And, unless you are Jeff Bezos, you will probably need a mortgage to help you purchase your home.
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Getting a mortgage can seem like a rather terrifying, complex and prospect, and it is often tricky to know where to begin with the process. If you’re someone who shudders at the thought of borrowing a large sum of money, you’ve come to the right place. We’ve put this handy guide together, giving you an overview of mortgages so that you know all the ins and outs about borrowing to buy your home.
What is a mortgage?
A mortgage is a large loan that you take out to help you buy a property. Although you usually borrow this money from a bank or building society, aka the lender, they are not the owner of the property; you are. In order to get yourself a mortgage, you need to put down a deposit. This is usually at least 5% of the total property price.
The more money you can put down in the deposit, the less you have to pay back over the mortgage term, and you may even get reduced mortgage rates for every 5% you can put down. Finally, a mortgage is a long-term relationship. They tend to sit at between five and 40 years, with the majority hanging around the 25 year mark. The time you take to pay back your loan is called a mortgage term: the shorter the term, the higher the repayments. However, shorter terms also mean that you pay the mortgage off at a faster rate.
A mortgage broker can help you decide which is the best mortgage term for you.
What is a mortgage broker?
A mortgage broker is a person (or company) that has in-depth and specialist knowledge of the market. They help to arrange a mortgage between you (the borrower) and the mortgage lender. They work with you directly to understand what kind of mortgage you need, and then seek out a deal that matches your criteria.
What is the difference between interest and repayment?
Also known as capital and interest, repayment means that every month you pay off the loan itself and the interest added to it. Each month, the total amount left to pay back on your loan will decrease, and by the end of your term you will have paid the full amount.
Interest-only means that you only pay back the interest on your loan. This means that monthly payments will be lower, but you won’t pay off any of the loan itself. At the end of the mortgage term, you will receive a bill for the total loan amount, meaning you either have to have saved up in the meantime, or sell your house in order to pay it back. This is pretty much impossible for first-time buyers, but good to know for future investments.
What is the difference between fixed and variable rate?
It is also possible to pick which type of interest you’d like applied to your loan. Again, generally speaking there are two options:
Fixed rates give a guarantee of what you will pay back over a certain length of time. Variable rates, while tending to be cheaper, are less predictable as they can change over time. This is because they are in accordance with the Bank of England’s base rate and lender rate of interest.
What is the Bank of England base rate?
The Bank of England base rate is the most important interest rate in the UK. It is set by the Monetary Policy Committee (MPC) and it helps the government to keep inflation low and stable. The base rate determines the interest rate paid to commercial banks that hold money with The Bank of England and it influences the rates those banks charge people to borrow money or pay on their savings.
What does mortgage in principle mean?
You can apply for a mortgage in principle if you are not 100% set on a property but want to have the peace of mind that your budget is accurate. However, you won’t be able to apply for an official mortgage until you have an offer for a property accepted.
Is there extra support for first-time buyers?
If you are a first-time buyer, you can get government support to help you secure a home, especially if you have a limited budget for a deposit. There are also ISAs for first-time- buyers.
Mortgages aren’t so scary when you have all the information at your fingertips! Now you’re well-versed in the mortgage lingo, why not head to our mortgage section and your search for the perfect property to commit to, mortgage and all.