Buying a home can be daunting! Read below to find out more about how to get your finances in order to buy a home, including how to get yourself mortgage ready.
What is a mortgage?
A mortgage is a loan that helps you to buy a property. People usually put down a minimum of 5% of the property value and a mortgage allows you to borrow the rest from a lender.
The general concessions is to pay back what you owe monthly, generally over a period of many years. Mortgage terms often run for 25 years, although lenders may allow longer or shorter terms than this. You’ll typically pay interest on the amount borrowed each month too, either at a fixed or variable rate of interest, depending on which type of deal you choose.
The loan is usually secured against the value of the property until it’s paid off. If you can’t keep up with your monthly repayments, your lender may repossess (take back) the property and sell it to gain their money back.
How do I get myself mortgage ready?
If you can get yourself as mortgage ready as possible (around 6-9 months prior to applying), it will leave you with a better chance of being successful when the time comes.
You can apply for a mortgage with a bank or building society, choosing from their product range.
Another option is to visit a mortgage broker or independent financial adviser (IFA) who can compare different mortgages on the market. Some brokers tend to look at the whole market while others look at products from a number of lenders. They evaluate the options for your and let you know of all of the details, including any requirements or charges.
When you apply for a mortgage, you will be expected to know:
- How much you want to borrow and for how long
- Exactly the type of property you want to purchase
- The type of mortgage you want
When applying for a mortgage, the lender will assess your financial situation to see if everything is in order. This helps to identify if you can afford repayments or whether you have any other financial commitments which could have an impact on your affordability. This test will include a look at your income and expenditure, so it’s important that you’re able to show you are capable of managing your finances.
Improving your chances of getting a mortgage
Things you can do to have a better chance of being successful include:
- Loans – It’s advisable to pay off any outstanding loans before you apply for your mortgage (and avoid taking out any more in the meantime). However, don’t let this put you off speaking to a mortgage adviser as it doesn’t necessarily mean you aren’t eligible.
- Keep on top of your payments – Pay all your bills on time. This can be anything from a phone bill to general household utility bills.
- Electoral roll – A simple but effective thing to do is to register on the electoral roll to vote where you live. This makes it easy for the lender to trace you to officially living at the address. This is surprisingly important and one of the simplest ways to boost your credit score.
- Regular savings – Regular savings can be traced on your statements, this is good for a number of reasons. It shows where the deposit comes from and can prove to your lender that you’re able to save a lump sum or regular amount each month.
How much money can I borrow?
- Using an online ‘affordability calculator’ is a quick and easy way to see how much you could afford to borrow
- Before you apply for a mortgag,e it is advisable to get a Mortgage in Principle (MIP). This shows how much a lender is willing to lend you. A decision is made based on your income/outgoings and by checking your credit rating
- Weigh up the running costs of owning a home such as household bills, council tax, insurance and maintenance
- Lenders ask for household bills, any dependents and personal expenses. They want proof that you will be able to keep up repayments if interest rates rise. A mortgage offer may be refused if they don’t think you’ll be able to afford it
When buying a property, you will need to pay a deposit. This amount goes towards the cost of the property you’re purchasing. Putting a down a larger deposit will either allow you to increase your budget, or have a smaller mortgage, which could lead to getting a lower interest rate.
The terminology that you may hear when discussing mortgages is “loan to value” (LTV). This is the ratio between the amount of your home you own outright compared to the amount that is secured against a mortgage. LTV is usually shown in the form of a percentage.
For example, with £30,000 deposit on a £300,000 property, the deposit is 10% of the price of the property, and the loan to value is the remaining 90%. The mortgage is secured against this 90%, so the lower the LTV, the lower your interest rate is likely to be. This is due to the lender taking less risk with a smaller loan. The cheapest rates are usually available for people with a 40% deposit.