How Mortgages Work An insight into how a home loan may work for you.

It’s easy to assume everyone knows about home loans, but that’s not the case. If you’re young or you’ve never had cause to find out about buying your own property before, chances are you may have lots of questions about this type of loan. This article is an ideal starting point for you if you are new to this area. We take things back to basics, so you will understand the meaning of the word ‘mortgage’, what it is, and where to begin if you are thinking about buying.  Few people are lucky enough to have the money needed to buy a property outright. A property is often said to be the biggest thing we will ever buy in our lifetime. No surprise, then, that most people require some financial assistance to make home ownership a reality. These products are loans offered by a lender. The lender will agree to lend the money you need to buy a property, on condition they have a charge against that property until the loan is repaid in full. If you default on repaying the loan by falling behind in payments, there is a chance the lender will repossess your home and then sell the property to get their money back. This is a last resort and the lender has a responsibility to try and help you get back on track first. They will lend the cash required to make the property purchase, while adding an agreed interest payment to the sum to enable them to make a profit on the deal.  Yes. However, it is viewed as an acceptable debt in that most people would need a loan to help them buy a property to live in. If you can afford the monthly repayments and you manage your money well, it should not be a strain on your finances. Bear this in mind as you begin to crunch the numbers. A mortgage broker will assist you with the figures needed to understand the cost of a mortgage and the fees involved in purchasing a property.  Many people are unsure how these financial products work in the UK. There are different types, so it makes sense to highlight the differences between them. However, in all cases it will be comprised of two components: It’s important as well to recognise you will need to provide a deposit to be considered for most home loans of this nature. This could be as little as 5% or far more. People moving from one home to another are likely to have enough equity in their current property who will use this as a deposit, this is usually a bigger deposit. However, those who are purchasing their first home will very likely have a much smaller deposit they will have saved for. The loan required in relation to the purchase price of the property is called LTV or loan to value. The bigger the deposit you can provide, the less the lender will need to provide you with. An LTV of, say, 60% will very likely result in a nicer interest rate for you than an LTV of 95%, where you only provide a 5% deposit instead of 40%. Most mortgages nowadays are on a repayment basis. In most circumstances, this is the best one to get, as it means you will pay off a portion of the loaned amount and the interest each month. It will take a few years for the amount owing to begin reducing; the closer you get to the end of the term, the faster it will reduce. In simple terms a repayment mortgage means you are paying off the capital and the interest on a monthly basis. Interest-only products were popular in years gone by, as they meant you would have cheaper monthly payments as you are only paying the interest. However, they also meant – as the name suggests – the interest would be paid each month and the amount loaned wouldn’t reduce. The idea was that you would arrange an investment that would grow over the years and be enough to cover the loan you took out once it was due to be repaid. However, since these products rarely met expectations, this left many homeowners in financial dire straits. As a result interest-only offers are now much harder to obtain and often need a much bigger deposit. When you are accepted for the loan, you will make a monthly payment towards paying it off. The term of the loan is likely to be over 25 years, although your adviser would discuss the lowest terms available to you, that fit your budget. The longer the term, the smaller the monthly payment will be. However, this also means you will pay far more in interest over the length of the term. The bigger the deposit you have could mean you can afford a shorter mortgage term and receive a lower interest rate, the better the outcome is for you. Of course, some people will have far fewer options in this scenario, but it is a good point to remember when you are going through the possibilities.  It can be very difficult and overwhelming to start looking through information about loans designed to help you buy a home. With so many lenders out there, numerous products to consider, and finances to look at, it’s no wonder some people are daunted by the task of getting a property of their own with a loan of this kind. In many ways, these loans are very similar to other loans you might get during your lifetime. However, the size of the loan makes it very important for the lender to ascertain whether you can afford it or not. Fortunately, checking that you can afford the loan is something you can begin to look at before you even approach a lender. The first step is to look at your finances. You may want to get a copy of your credit report too, as this will help you understand how good (or bad) your credit score is. The better it is the more likely it is you will be approved for a home loan at a competitive rate of interest. However, this is only part of the process you will go through when you reach the stage of making a formal application for a loan. The lender or broker will need to ascertain two things: In the past, many people applied to lenders where few checks were made to establish whether they could afford to repay such an advance or not. They may have been fine all the while interest rates were low, but as soon as they rose, many people discovered they could no longer afford the monthly payments. This led to many defaults and people losing their homes. This led to the Mortgage Market Review where new rules issued were far stricter. This was with one eye on the future and the possibility that people may end up paying more each month than they will to begin with. The process you go through to obtain a mortgage may seem intrusive. Your monthly outgoings will be scrutinised to see if you can indeed afford the loan you want, both now and in the months and years to come. Hence why it is vital for you to look closely at your finances before you apply for a mortgage. By doing so, you can take steps to pay off any debts, cut down on unnecessary purchases, and present a healthier financial picture to a lender when the time comes to apply for that all-important loan. You may well be glad you put the work in first, as it could save you a lot of time and disappointment later. The lender will refer your application to an underwriter who will review all these areas of risk and will check your documentation to ensure you meet their criteria and affordability guidelines. Also, the lender will instruct a valuation of the property to ensure it is suitable for lending purposes. Once the underwriter has assessed your financial circumstances and received the surveyor’s valuation report the lender will issue a formal mortgage offer. This is an offer for the funds required to purchase the property.

Published on 27 July 2018

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