Particularly for first-time buyers, the most daunting part of buying a new home is likely to be the financial side of things. Mortgages and loans might not be the most exciting aspect of house hunting, but they don’t need to be as intimidating as many people think. Arm yourself with the right information, and it all comes down to a few important decisions.
Choosing a mortgage
One of the most important aspects to bear in mind is the kind of mortgage you want. A mortgage is the money lent to you by a bank or building society to cover the cost of your property after you’ve put down a deposit. Broadly speaking, your choice will be between two main types: repayment mortgages and interest only mortgages.
For many people, a repayment mortgage is preferable as it involves paying off a portion of your loan and the interest charged on it every month, until the end of your mortgage period. After this point, you’ll no longer be in debt, so repayment mortgages are often advertised as the safest mortgage choice.
However, particularly for young buyers without much money to hand, something called an interest only mortgage may be a more attractive option. With this kind of mortgage the buyer only needs to pay the mortgage lender the interest being charged every month.
Instead of paying back the mortgage itself in monthly instalments, they can invest money themselves to repay the lender in one sum at the end of the mortgage term.
This flexible monthly cost reduces the financial burden on many buyers, but Phil suggests that this kind of mortgage should only ever be undertaken for a few years, following guidance from a reputable adviser. You don’t want to saddle yourself with debt you won’t be able to repay in future.
Securing a lender
So you’ve found your dream property and decided on the type of mortgage to go for. How do you now find a lender to give you the best deal out there?
Before approaching a lender, work out exactly how much you can afford to pay on your mortgage each month. Knowing your own realistic budget is important to ensure you get a good deal, and that you won’t be over-stretching your bank balance. Many well-known lenders like Nationwide and the Co-operative Bank have facilities on their websites to allow you to calculate what you can afford.
In order to apply for a mortgage, you’ll need to supply information about your employment, income and the property you plan to buy. Tax bills, pay slips, bank statements, insurance requirements and property details are all things you’ll need to be able to provide, so Phil advises having these ready to avoid lengthy delays.
Approach your lender while you’re house hunting to fill out the relevant paper work, then you’ll need to go back once you’ve made an offer. It can take some time for a lender to make up their mind about loaning you the money, so be as efficient as possible when providing information so you don’t miss out on the property you’re after.
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Interest rates aren’t fixed and you’ll need to take into account the fact that these rates could rise when calculating your budget. Here are the different types of mortgage rates your lender may offer:
Capped rate: A mix of variable and fixed rates. The interest rate is variable but can’t go over a certain amount for the agreed period of time.
Discount rate: A discount rate based on the lender’s variable rate might be offered for a certain amount of time. For example, you might be offered 1% off the variable rate for a year.
Fixed rate: An interest rate that is fixed for a certain period of time (usually a few years).
Tracker: A variable interest rate that goes up and down in line with the Bank of England mortgage base rate.
Variable rate: Your interest rate goes up and down depending on the economy.