Buying a house is one of the most significant pieces of debt you’ll take on in your lifetime. When it comes to the big purchase, there's a lot of unfamiliar financial terms to get your head round. Here’s an easy guide to take you through the process by which most people purchase a new house - getting a mortgage.
A mortgage is a loan that you take to purchase property or land. Typically, a mortgage is taken out for a set amount of time - for example, 25 years is considered a fairly standard mortgage term.
These types of loans are ‘secured’ with properties as ‘collateral’, meaning that if you default on payment, the lender is within their rights to repossess the house you purchased.
Taking out a mortgage can get pretty complicated! Here’s a simple breakdown of the process.
1. Approach a bank or building society
To apply for a mortgage, you first need to take all the relevant paperwork to a bank or building society and establish how much you’ll be allowed to borrow based on your income, your deposit, and any existing debts you have. The bank will then work out how much you can borrow based on your Debt-to-Income ratio (DTI), i.e how much you can afford to pay each month alongside any existing payments you owe.
The bank will then give you a total amount you can borrow, called AIP.
2. Take out an Agreement in Principle
AIP stands for Agreement in Principle. It’s a preliminary agreement that indicates the bank is willing to offer you a mortgage. You can use this agreement as proof to the estate agent that your property purchase will be financed.
3. Start mortgage application
Once your offer has been accepted, you can begin your true mortgage application. Should all go well, after rigorous checks the bank or building society should accept your application, with 10% or 15% put forward as a deposit.
4. Complete the purchase
During the completion stage of the transaction, the mortgage lender transfers the mortgage monies to your solicitor, who then transfers it over to the seller. 5. Begin paying back the mortgage
You pay the mortgage back over a set period of time, usually in monthly instalments.
6. Monitor your rate of interest
Your mortgage will have an interest rate, which can change over the term, depending on the agreed fixed rate, or the Bank of England’s base rate. The interest will be added to the total amount you owe. You may have to remortgage to get a better deal after your fixed term is over.
**7. Finally pay off your mortgage! **
Once you’ve paid back the initial loan and the added interest, you’ll** own the property wholly**.
Mortgage repayments are monthly instalments for clearing your loan. You can pay your instalments on:
But you must pay off your borrowed total by the end of the term or you could face penalties. If you just pay interest, it’ll take longer to clear your mortgage than the agreed period.
Remortgaging is the process of taking your mortgage to a new provider, and replacing your existing loan. Your new provider buys your loan from the previous lender, and you pay the new provider back monthly.
If you have a short fixed term deal (two to five years), remortgaging is a natural part of your loan’s lifecycle. Once the fixed term is over, you transfer over to your provider’s SVR (Standard Variable Rate). You’ll pay a higher rate of interest than what you agreed during the fixed term. As such, it’s better to transfer to a new deal, one with greater discounts and flexibility as a result of your improving LTV ratio.
There are other reasons why you’d choose to remortgage. You might remortgage if you want to borrow more money against the property to purchase a bigger home.
It’s worth noting that remortgaging does come with its risks. If you remortgage outside of your fixed term, you may be liable for Early Repayment Charges.
Yes, you will need a mortgage, unless you have a significant amount of available funds to purchase the property in full upfront, you’ll likely have to borrow money to be able to buy a home.
You might currently be paying rent, but you won’t owe the property after years of paying to live there. A mortgage allows you to invest in purchasing a property but repaying over time while you live in the house.
The cost of a mortgage depends on the price of the property you’re able to purchase. Banks and lenders are unlikely to accept a deposit of less than 10% of the property value, so if you want to buy a house worth £200,000, you’ll need to have £20,000 saved up.
Of course, you’ll also need to make regular repayments, usually a fraction of your outstanding loan. Higher loans require more expensive monthly repayments.
When looking at borrowing to buy a property, it’s good to be aware of the different types of mortgage you can access and which suits your needs the best.
This is the type of mortgage where you pay back the interest and the loan amount in your monthly instalments.
As the name suggests, you only pay back the interest on the loan every month. You’ll then have to pay back the whole loan amount at an agreed date. While your monthly repayments will be cheaper, it can be challenging to save the total amount of capital you owe to pay back in full in cash.
These mortgages have a set interest rate, usually for up to 5 years, before moving to an adjustable rate. You can then remortgage to get a new competitive rate.
The interest rate on an adjustable-rate mortgage fluctuates. How much it changes is usually determined by the Bank of England’s base rate. Your payments fluctuate with your interest rate.
If you lose your job or find yourself in unforeseen circumstances, you can speak to your bank/lender, and they may be able to help by putting a freeze on your payments for a couple of months. However, if you cannot afford the amount, then the lender will be able to seize your home as repayment as the loan is secured against the property.
The total you make from the sale will pay back the remainder you owe the bank. Whatever cash remains after paying this back is yours to keep — or go towards a deposit on a new mortgage if you’re buying another property. You can read more about selling a property with a mortgage in our guide.
If you want to better your chances of getting a mortgage, you can read more here and follow these tips:
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