What is a Mortgage?
A mortgage is a loan taken out to buy property or land. Most run for 25 years but the term can be shorter or longer.
The loan is ‘secured’ against the value of your home until it’s paid off. If you can’t keep up your repayments the lender can repossess (take back) your home and sell it so they get their money back.
How does getting a mortgage work if you’re a first-time buyer?
Don’t stretch yourself if you think you’ll struggle to keep up repayments. Also, think about the running costs of owning a home such as household bills, council tax, insurance and maintenance. Lenders will want to see proof of your income and certain expenditure, and if you have any debts.
They might ask for information about household bills, child maintenance and personal expenses. Lenders want proof that you will be able to keep up repayments if interest rates rise. They might refuse to offer you a mortgage if they don’t think you’ll be able to afford it.
How does getting a mortgage work if you’re a first-time buyer?
When getting a first-time mortgage, you should start by finding out how much you’re able to use as a deposit, and how much you can borrow. When you apply for a mortgage, it will typically involve a review of your salary, as well as any other income or outgoings.
It may also include an affordability and eligibility review, which looks at your spending habits, so that your lender can be sure you’re responsible with money and can handle borrowing such a large sum.
Once you’ve found out how much you’re able to borrow, you’ll have an idea of the type of first home you can afford.
Your deposit – size matters
When buying a property, you will need to pay a deposit. This is a chunk of money that goes towards the cost of the property you’re buying. The more deposit you have, the lower your interest rate could be.
When talking about mortgages, you might hear people mentioning “Loan to Value” or LTV.
This might sound complicated, but it’s simply the amount of your home you own outright, compared to the amount that is secured against a mortgage.
For example, with a £20,000 deposit on a £200,000 property, the deposit is 10% of the price of the property, and the LTV is the remaining 90%. The mortgage is secured against this 90% portion.
The lower the LTV, the lower your interest rate is likely to be. This is because the lender takes less risk with a smaller loan. The cheapest rates are typically available for people with a 40% deposit.
How does a mortgage work?
The money you borrow is called the capital and the lender then charges you interest on it till it is repaid. The type of mortgage you are able to apply for will depend on whether you want to repay interest only or interest and capital.
Repayment mortgage
With repayment mortgages you pay the interest and part of the capital off every month. At the end of the term, typically 25 years, you should manage to have paid it all off and own your home.
Interest-only mortgage
With interest-only mortgages, you pay only the interest on the loan and nothing off the capital (the amount you borrowed). These mortgages are becoming much harder to come by as lenders and regulators are worried about homeowners being left with a huge debt and no way of repaying it. You will have to have a separate plan for how you will repay the original loan at the end of the mortgage term.
Passionate about putting what she knows best into practice so that her clients can protect their little world, Joanna has been described as “bold, blunt and brilliant” and “a financial wonder woman” by those who have benefited from her expertise and straight-talking advice. Working with everyone from company directors to families of all kinds, Joanna’s mission is to help families leave a legacy and protect what they’ve worked so hard for.
“I don’t ever want anyone to face what we did. The trauma of losing a parent, followed by the stress of not being able to make ends meet was the most horrendous experience and it doesn’t have to be that way. It doesn’t matter what you’re bringing in, with some sound financial planning, you and your loved ones can be secure, without breaking the bank.”
Joanna and the Velvet team translate the mortgage and insurance world into easy to understand terms, holding people's hands as much as they need it, giving the right advice and making sure families are protected BEFORE they need it and not when it's too late.
