First time buyer guide
What Is a Mortgage?
To put it very simply, a mortgage is money you borrow from a bank or mortgage lender to help you finance buying a property. Its main characteristic is that it’s categorically bound to the house you buy.
How Does a Mortgage Work?
Mortgages mostly work in the same way: you usually borrow a percentage of the value of the house and repay the loan plus additional interest. Should you fail to repay, beware!, you could lose your property, as it may be sold to pay off your loan. This unhappy scenario is known as repossession.
You basically need to understand that you’re agreeing to pay a deposit (make a down payment on the price of the house) while the bank agrees to lend you the rest of the money over, generally, a 25-year period. The special favour comes with a price: interest charges. Also remember that the mortgage is tied to the property.
What is LTV?
LTV stands for loan-to-value and, essentially, it’s the size of your mortgage in relation to the value of the property you’re buying. It’s expressed as a percentage. So for example, if you have a mortgage of £240,000 and you’re buying a home that costs £300,000, your LTV would be 80% (£240K / £300K = 0.8).
If you have a high LTV the bank will see you as a riskier client and therefore the mortgage rates they offer you will be less competitive. For the best mortgage rates you should aim for an LTV of 60%.
Types of Mortgages
When you buy a property, there are two main types of standard mortgages out there:
- You repay the amount you borrowed (capital) regularly
- Monthly, an amount goes towards paying off the capital and the rest covers the interest
- By the end of the mortgage term you’ll have repaid the full loan and the house will finally be yours
Other Types of Mortgages
Maybe Shared Ownership Mortgages or Help to Buy Equity Loans also ring a bell. Both of these are part of a government scheme aimed at assisting first-time buyers (or lower income families). Shared Ownership means that you can get a loan for the share you own and pay rent for the rest. The Help to Buy Equity Loan is basically a loan from the government which covers part of the money needed to buy the house, so you’ll need to borrow less cash from a traditional bank for the mortgage, giving you a wider choice of mortgage deals to pick.
Finally, you also need to know that mortgages can have fixed or variable interest rates. The first type will have you repaying the exact same amount of cash for a precise time, never mind what’s happening out there in the larger market. The latter means that the rates could go up or down according to the Bank of England’s base rate.
Picking a Mortgage
We know that the huge amount of choice can make picking a mortgage a little hard, however, having some sound information before making your mind up will definitely make it less scary. So, before you take the leap, bear these tips in mind:
- Mortgage brokers know their stuff. Why not use one? Read our article on Mortgage Advisers to find out more
- Don’t forget to check your credit score. The higher your score the better chances of getting a good mortgage deal you’ll have
- Government schemes such as Help to Buy can really help you get onto the housing ladder quicker
- Never underestimate the power of a large deposit (at least 20%) to get you a good deal on your mortgage
- Bear in mind that there are other costs (fees and charges) involved in taking out a mortgage besides the monthly repayments. So don’t forget to look at the full picture!