A beginner’s guide to the mortgage market

Banking | 22 Mar |

Unless you’re sitting on a casual $252,300 — the median price of a home in Arizona — or £230,630—the average price of a property in the UK in November 2018 — if you buy a home, it will be with a mortgage.

A mortgage is a long-term loan used to buy a property or land, typically running 25 years, but occasionally up to 35, secured against the value of the property until it’s paid off. That means if you fail to keep up with the monthly payments, your property can be repossessed by the lender.

How much can you borrow with a mortgage?

With a mortgage, you can borrow a percentage of property’s value, the exact amount of which will depend on your income, outgoings, and financial situation. Typically, lenders will extend you a loan of typically 3 times—but occasionally 4.5 times—your salary, but they’ll also account for your expenses and credit rating when evaluating you as a borrower.

To obtain a mortgage, you’ll typically have to show evidence of your earnings: if you’re employed the P60 form you receive from your employer, showing how much you’re paid and how much salary is deducted, should be sufficient. If you’re self-employed, the process will be trickier and will require three full years of accounts—and some lenders will still balk at lending to you.

You can vouch for your expenses with three months of bank statements.

It’s important to remember that you generally can’t borrow the full purchase price of the property. You’ll typically have to put down at least a 5% deposit, but the larger deposit you can muster, and the lower loan to value ratio (LTV) you have, the better mortgage rates you’ll qualify for. The best mortgage deals are reserved for those who can put down at least 25% of the value of the property. About those rates in a second…

Interest on mortgages

Like any loan, form your overdraft to one for a car, you’ll pay interest on your mortgage. There are two broad types of mortgages based on their interest rates:

• Fixed rate mortgages: the percentage interest you pay will remain static for a set period of time, usually two to five years

• Variable rate mortgages: the interest rate will fluctuate, based on the assessment of your lender, or, if you have a tracker mortgage, a specific type of variable rate mortgage, on the Bank of England’s base rate.

How mortgages are paid

There are two ways to pay a mortgage:

• Repayment: You pay off a portion of the principal of the loan and interest each month and own the property outright at the end of the term.

• Interest-only: You pay just the interest on the loan each month, which results in significantly lower bills, but you then have to pay off the principal of the loan in a lump sum at the end fo the term. Interest-only mortgages have become harder to obtain for owner-occupiers (you’ll have to show a repayment plan, usually investments, and your lender will periodically check in to see if it’s performing as expected) but are standard on buy to let mortgages (obtained by landlords purchasing a property to rent out).

How do I find a mortgage?

To obtain a mortgage, you should consult your bank or a mortgage broker, which can direct you to deals available from lenders across the market.

Mortgage comparison sites can also give you the lay of the land, but be cautious about applying until you’ve received advice about your eligibility.

You’ll typically obtain a mortgage agreement in principle first—a statement from a lender about how much they can theoretically lend you, based on preliminary checks into your financial situation. This document will give you a firm idea of your budget, helping you narrow down your home search, and will make you more compelling to sellers and their estate agents, when it comes time to make an offer.

Once you’ve had an offer accepted on a property, you’ll need to fill out a full application for a mortgage, a process that will involve a more detailed assessment of your financial circumstances and also, typically, the lender obtaining a valuation of the property—as it’s their investment too.

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