An Introduction to Mortgages

There is a time in most peoples’ lives when they have to step onto the property ladder. If you are first time buyer you will probably find the concept of homeowner finances incredibly daunting, particularly mortgages. The good news is that you should not worry, if you start with the basics and do your research, you will know enough to get started.

What Is a Mortgage?

In basic terms, a mortgage is a large loan of money specifically for the purchase of a property. It is a ‘secured’ loan, which means that the lender protects their investment by using your home as collateral (in simpler terms, if you do not meet your repayments, they can ultimately repossess your property).  You can generally borrow three times the amount of the greatest income in your household, plus half of the second greatest (two and a half times the joint income). You will probably not be able to find a lender who is prepared to offer a mortgage which covers more than 75% of the property price, meaning you will need to find the rest of the money yourself. Also, bear in mind the larger percentage of the price that the mortgage covers, the higher interest rates you will be charged.

The Costs of a Mortgage

A mortgage lender will usually ask for a deposit at 10% of the property asking price. However, the costs do not end here. Lenders will normally charge you Mortgage Arrangement Fees, and the amount they are asking for is rising sharply towards the thousands. You should also remember that you will need to pay solicitor and valuation fees. Finally, properties that are asking for over £125,000 will also involve Stamp Duty, which is a form of land tax.

You will be charged interest on your repayments (a percentage increase on the value of the loan). The two types of rate are normally fixed rate (set percentage increase) or variable rate (fluctuating increase based on the economy). There are also discount rates which cut the costs of variable interest, but these usually seek to lock you into a contract so you cannot switch to another lender without paying high fees.

Paying Back Your Mortgage

The structure of paying back your loan is split up into ‘repayments’, usually over a period of around 25 years. The repayments will usually be monthly, and you will pay back the borrowed money plus interest. There are other options on the market, but they are generally more risky and involve paying back the interest first. It is a good idea to think carefully about how much you think you are going to be able to afford each month before you decide on a property.