How does a mortgage work?
Whether you’re a first-time buyer or a seasoned investor, at some point you’ve probably wondered how mortgages work. To the average person, they can be confusing and even overwhelming. After all, there’s lots to consider, like interest rates, deposits, fixed-terms, brokers and more. So, let’s start with the simple stuff first…
What is a mortgage?
They come in various shapes and sizes, but in its simplest form, a mortgage is essentially a specific loan that’s used to buy property or land.
How mortgages work
Generally speaking, a mortgage application requires potential borrowers to come up with a deposit. Deposits are often at least 5% of the property value with a lender providing the rest. Coming up with a larger deposit often opens you up to better deals and rates, and can also reduce your loan time.
The borrower then pays back the loan over the agreed term. 25 years is the average length, but they can be higher or lower depending on what you agree with your lender.
Oh, and don’t forget that you’ll pay interest on your mortgage too.
The interest you pay is determined by the deal you’ve chosen. There are two main types of mortgage:
1. Fixed rate mortgages
Here, your interest stays the same for a fixed period. It’ll stay the same throughout the period and makes budgeting your outgoings easier. This type of mortgage is popular for that reason.
2. Variable rate mortgages
These deals mean that interest rates fluctuate over time according to either the Bank of England’s base rate or the lender’s variable rate. If rates are low, your repayments reflect that. However, if rates climb, expect your repayments to do the same.
Bank mortgage advisors Vs Mortgage brokers
Fortunately, there are experts out there to help you navigate the best deals on the market. Mortgage advisors provide insightful and professional information so that clients feel assured about their options and can make informed decisions about their investment. Their services are limited in terms of providing mortgages with competitive offers.
Mortgage brokers, Mortgage Matters Direct on the other hand, go a step further and source specific deals for you. Mortgage Matters Direct, for example, has exclusive access to offers and mortgage deals that might otherwise be unavailable through the likes of your average high street lender.
Cubitt & West’s advisors and brokers offer free and impartial advice. So feel free to get in touch with your local branch for more information.
What do I need to get a mortgage?
A mortgage broker or lender will consider the following when you apply for a mortgage:
Your credit rating
It goes without saying that those with well-paid, stable jobs are favoured among lenders. However, a broker might be able to help low-earning or self-employed applicants. Mortgage Matters Direct can steer you in the right direction when it comes to finding the best deal for your circumstances.
Essentially, the fewer outgoings you have, the better you may look. Try and pay off large debts, or prepare to prove that you can afford the payments.
The property itself
The lender wants to make sure that their investment is secure. If you’re buying a property that’s say, timber-framed or has a thatched roof, you may require a mortgage from a specialist lender.
Just a number to some, but for lenders the ideal candidates are aged between 21 and 75. That being said, your broker will likely know a deal if you fall outside these parameters.
What happens if I don’t pay my mortgage?
The mortgage is secured against your home until it’s paid off. This means that if you can’t keep up with your payments, the lender may repossess your home. They’ll then sell it and recoup their money.
How much can you afford?
You’ll need to think about the associated running costs of owning a home such as household bills, council tax, insurance and maintenance and take them into consideration. What’s more, you’ll also have to consider current financial commitments, like a car or unsecured loan and your phone bill in order to work a budget.
Our mortgage calculator might give you an idea of what you can afford.
Summary of how mortgages work
Mortgages are secured loans that allow you to borrow money and buy your home. They’re paid back in installments, include interest and often require a deposit or downpayment. You’ll be subject to a credit check, which a mortgage advisor or broker can talk you through. And finally, you must keep up with your payments or risk losing your home.
That’s everything you need to know about how mortgages work. If you have any more questions pop into your local Cubitt & West branch or give us a call on 0800 854 499. Alternatively, we recommend seeking legal and financial advice where necessary. Finally, you could always read our how to buy a house guide or what to do when making an offer article in the meantime.