A MORTGAGE can help you afford your own home but how do you choose between different rates and loan types?
Here is how to find the best deals to give you a leg-up onto the property ladder.
How do mortgages work?
The average property price in the UK is £250,341.
That’s a lot of money but you don’t necessarily need the whole amount to buy a property.
Most people use a mortgage to help get on the property ladder.
A mortgage is a loan you get from a bank or building society that helps you purchase a property.
Mortgage rates have fallen in recent months but you need a large deposit for the best deals
A bank or building society will lend you a certain amount depending on how much it feels the property is worth.
This is known as the loan-to-value (LTV) and you will need to put down a deposit to cover the rest.
For example, a lender may advertise a mortgage at 75% LTV and in this case you would need to come up with a 25% deposit.
So if you are purchasing a £300,000 home with a 75% LTV mortgage, a lender would lend you £225,000 and your deposit would be £75,000.
You will need to repay the loan each month over an agreed period and the lender will also charge interest.
A tracker mortgage gets cheaper if interest rates fall but more expensive if they rise
The mortgage is secured on your home until the debt is paid off, and your property may be repossessed if yoeu fall behind on your repayments.
There are two ways you can repay your mortgage.
A repayment mortgage includes the capital and interest in your monthly repayments.
This reduces the amount you have borrowed each month. meaning that it is fully paid off at the end of the mortgage.
In contrast, an interest-only mortgage lets you only pay the interest.
This makes your monthly payments cheaper but the amount you borrowed still remains unpaid once you come to the end of the term so you would need to be able to repay this as well.
Many borrowers were caught out by this during the housing market crash in 2008, as they had been allowed to self-certify their own income and get interest-only loans but then struggled to repay if they lost their jobs or their property fell in value.
Now borrowers are required to have a repayment strategy in place to get an interest-only loan, such as selling the property or repaying with the proceeds from a Stocks and Shares Isa.
Lenders also have stricter and high income requirements for interest-only loans.
What mortgage do I need?
The type of mortgage you need will depend on your circumstances.
Most banks and building societies will have a standard range of products that will loan different amounts depending on your deposit and loan to value ratio.
These are typically aimed at homebuyers as well as those switching to a new deal, known as remortgaging.