How Much Can I Borrow?
If it is your first time getting a mortgage in the UK you will need to find out how much you can borrow. The good news is that banks are now more relaxed about borrowing levels. They will no longer just consider simple income multiples. Most major building societies look at affordability. This means considering the various income and expenses you face. Therefore, if you can minimize monthly outgoings it may increase your chance of getting a good mortgage.
Deposit for Mortgage
Most mortgages require that you have a deposit equal to at least 5% of the value of your house. The problem is that with average house prices rising so rapidly this can prove difficult. E.g. 5% of a £200,000 house is a £10,000; to save £10,000 is no small feat for first time buyers paying large rents. If you are unable to save a deposit of 5% you may be able to take out 100% mortgages that are currently available from various mortgage dealers. However it is worth bearing in mind these tend to be more expensive; they have higher interest rates and usually require you to pay mortgage indemnity insurance. To get around the difficulty of saving for a deposit some first time buyers borrow from friends and family’s to get on the mortgage ladder.
Which Mortgage to Chose?
There is an increasing array of mortgages on offer. To a newcomer the choice can at times appear bewildering. However the different mortgage options allow you to choose the best mortgage for your circumstances.
2 Basic types of Mortgages
- Repayment mortgages. Most mortgages are repayment. This means you pay interest on the loan plus an amount to repay capital.
- Interest only mortgages. This is a mortgage where your monthly repayments consist of only interest payments. The advantage is that your monthly payments will be cheaper. The disadvantage is that at the end of the mortgage term you still owe the full amount. Interest mortgages can work if you have an alternative investment plan to pay off the mortgage. However interest only mortgages are sometimes used as a mortgage of last resort for those who struggle to meet monthly payments.
How Long to Get a mortgage for?
Traditionally mortgages used to be for a term of 25 years, increasingly mortgage lenders are offering a wider choice of mortgage terms. For people in the 20s it might be possible to get 50 year mortgage terms. This is in response to UK house prices rising faster than incomes. It makes getting a mortgage more realistic as it enables lower monthly mortgage interest payments. However the disadvantage is that if the mortgage is stretched over 50 years rather than 25 you will end up paying far more interest over the course of the mortgage term.
Choosing a Mortgage Dealer.
Mortgage dealers can advise on different types of products. Some dealers may only be able to offer products related to the firm they work for. Other dealers may be able to search through various deals to find the best one for you. Under FSA regulations mortgage advisors should offer impartial advice and not try to sell a particular product. The emphasis is on the customer to find the best mortgage for them. Some mortgage dealers make a commission from the mortgage lender when a deal is signed. Some will make an additional charge to you when the mortgage is taken out. There are many mortgage dealers who will offer free mortgage quotes without any compulsion to buy.
Fixed Rate Mortgages.
The great advantage of fixed rate mortgages is that the monthly interest repayments do not vary over the course of the mortgage term. This allows homeowners to plan their monthly expenditure without having to worry about rising interest rates rising making their mortgage unaffordable. Recently fixed rate mortgages have become more popular. The desirability of a fixed rate mortgage depends on future interest rate movements. It is hard to predict interest rate levels more than a year in advance; however it is worth bearing in mind that since the Bank of England was made independent in 1997, interest rates and inflation have been more stable and less prone to fluctuations than in previous years. Fixed rate mortgages are good for those who are risk averse and couldn’t afford a mortgage if interest rates were to rise by a certain amount.
When getting a mortgage bear in mind that to make the best use of your mortgage it is probably worth remortgaging after a few years. Usually banks offer an attractive introductory rate and then put you onto the standard variable rate. It is important to know whether there will be any exit costs of switching your mortgage. Sometimes the mortgage is tied for a certain time period like 2 years. This means that leaving within this time period incurs additional costs. It is worth noting when your introductory rate ends so you can look into remortgage this enables you to continue having the lowest possible mortgage rates for the entire duration of the mortgage term.
Difficulty getting a mortgage?
If you have difficulties getting a mortgage then don’t give up. Certain mortgage dealers specialise in bad credit mortgages. Self certification mortgages can also be a good option for those who struggle to prove their income. However it is worth always bearing in mind that if you take out a mortgage that is too large and you are unable to meet repayments your home could be at risk of repossession.
When Is a good time to Buy?
Many are put off buying a house because they hear rumours that UK house prices are grossly overvalued and liable to fall. (UK House Prices set to fall) To some extent house prices are overvalued. The ratio of house prices to income has increased significantly. However if you are buying a house to live in (rather than an investment) I would not allow concerns over falling house prices to deter buying. If house prices do fall in the short term it doesn’t make any real difference so long as you can afford mortgage interest payments. In the long term housing is likely to be a good investment; it is probably a better financial bet than renting. It is also worth noting that back in 2003 many so called “experts” were predicting an imminent collapse in the UK property market. Since then house prices have continued to rise by 15% a year.
Types of Mortgages UK
1. Variable Mortgage
2. Fixed Rate Mortgage
3. Capped Mortgage
4. Self Certification Mortgage
5. Cashback Mortgage
6. Flexible Mortgages
7. Current Account Mortgage
8. Interest Only Mortgage
9. Offset Mortgage