Looking to buy your first home? Get to grips with how mortgages work
Taking out a mortgage is a big financial commitment so it’s important to know what you’re doing and how mortgages work. You must also be sure that you can afford the repayments.
What is a mortgage?
A mortgage is loan taken out to buy property or land. The loan is ’secured’ against the property, which means that if you fail to keep up the repayments on the mortgage – called falling into ‘arrears’ – the lender could repossess your home. Most mortgages run for 25 years but the term can be shorter or longer.
Taking out a mortgage
You can get a mortgage from a bank, building society or a specialist mortgage lender. Before they agree to lend, they will check that you can afford the monthly mortgage payments, and that the property you’re buying is worth the amount of money they are lending you.
Almost all mortgage products require you to put down a deposit. The mortgage that makes up the difference is expressed as the percentage ‘loan-to-value’.
If you put down a £10,000 deposit on a £100,000 property, the deposit would be 10% of the purchase price and the mortgage loan-to-value would be 90%.
In general, the higher the deposit you can save, the lower the mortgage interest rate you’ll be offered.
How you repay your mortgage
A mortgage has two parts:
- the capital, which is the money you borrow, and
- the interest, which is the charge made by the lender until the loan is paid back.
When you take out a mortgage you have to say how you will pay it back. This can be either via repayment (capital plus interest), interest-only or a combination of the two. With an interest-only mortgage you have to be able to show how you will repay the capital at the end of the term. Read our guide below to find out more about the different ways you can repay a mortgage.
Mortgage rates – the different types
Different types of interest rate
Mortgages come with fixed or variable interest rates. With a fixed-rate mortgage your repayments will be the same for a certain period of time regardless of what interest rates are doing in the wider market. If you have a variable rate mortgage, the rate you pay could move up or down. Find out more in our guide below.
Working out what you can afford
Work out what you can afford. Your home may be repossessed if you don’t keep up with mortgage repayments.
Before you sign on the dotted line, you must be sure you can afford your mortgage repayments. If you fall into arrears, you may find it hard to borrow in the future – and in the worst case you could lose your home.
Lenders carry out affordability assessments as part of the mortgage application, where they look at your income and your lifestyle, whether you have any dependants and your financial commitments. Follow the links below to check the true cost of buying a home and to see how much you could afford.
How much you can afford to borrow?
Estimate your overall buying and moving costs
Where to get a mortgage
You can apply for a mortgage direct from a lender, such as a bank, building society or specialist mortgage lender – however, they can only give you a mortgage from their limited product range so you’ll need to have done your research first.
As an alternative you can use a mortgage broker or financial adviser who can compare the different mortgages available to you. Some brokers look at mortgages from the whole market while others look at products from a limited number of lenders. And some offer an ‘information only’ service while others will offer advice and recommend the most suitable mortgage for your situation. Find out more by following the first link below.
Choosing a mortgage – how to get the right deal
Tips if you’re struggling to get a mortgage
This article is provided by the Money Advice Service.