Residential Mortgages Explained
Mortgages are straightforward; they are simply loans to buy a home. The complications come from the strings attached to the deal by mortgage lenders who want to make sure any money they lend is protected against falling property values and that a borrower can afford to keep up repayments on the loan.
Mortgages come in lots of types: fixed, variable, tracker and offset to name a few. The trick is not to worry about how the mortgage works, but to figure out how much you can comfortably borrow first. The best way to demystify a mortgage is to breakdown the application into parts:
Work out your borrowing power: Mortgage repayments depend on income and the amount that's left after deducting any other financial commitments like credit cards and car loans.
Calculate how much you can put in as a cash deposit: The average deposit is 25% of the property, so to buy an average home that costs around £165,000, a buyer needs £41,250 cash plus extra money to cover legal fees. The mortgage may come with fees as well, but many lenders will let you 'roll up' the costs or add them to the loan if you prefer to keep your cash for moving in.
Check out your credit rating: Look at your credit rating online or write to one of the firms that keep the files to check that you have no defaults, missed payments or county court judgements. Missed payments for mobile phone bills are one of the most common reasons for people with an otherwise clean credit history losing the chance of a mortgage.
Working out your borrowing power and amount of available deposit sets the value of the home you can look for. For example: if your available income for a mortgage with a partner is £35,000 and you can borrow three times that amount, your maximum borrowing is £105,000. If that represents 75% of a property's value, then the most expensive property you can buy should be around £140,000.
This leaves you with a £35,000 deposit to find. You can see how the amount of income and deposit a borrower has affects the value of the home they can buy.
Once you have done your best to present yourself to a lender by doing your sums and checking your credit record, you can spend time working out the best type of mortgage that suits your financial circumstances.