A mortgage is a loan that is taken out to buy a property or piece of land. The loan is then paid back to the lender in monthly instalments over a set term. If the borrower defaults on payments, the lender can ultimately repossess the property and resell it to recover the money.
Borrowing a large amount of money to buy a property is a big commitment, and a mortgage can last for as long as 30 years. This means it can a huge impact on your daily life, as it will form a large part of the household’s monthly outgoings. If taking on a mortgage is in your mind here are some important steps you can take to get off to a good start.
Save for a deposit
The larger the down payment you make toward purchasing a property, the lower your monthly repayment rate will be. In addition, putting down a larger deposit gives you more mortgage types to choose from, allowing you the possibility of finding a lower interest rate.
Improve your credit history
Lenders will look at your credit report before they agree to lend you money, so a good credit score is essential. You can check a credit record online free of charge through various companies. The report shows any bankruptcies, other applications that have been made for credit, and missed payments on other loans. Before applying for a mortgage, be sure to correct any errors in your report. To improve your score, register to vote at your current address (lenders use the electoral roll to protect themselves against fraud).
Understand your options
The two most common types of mortgage loans are interest-only and repayment mortgages. With an interest-only mortgage the capital debt is not repaid and at the end of the term the full amount will still be outstanding. These used to run alongside endowment insurance policies where the sum assured was set to accrue enough funds to pay off the capital sum when the mortgage term ended. With reducing income on investments and low interest rates endowment mortgages have fallen out of favour.
With a repayment mortgage, payments are made to pay off the capital and the interest so that at the end of the term, the borrower owns the property outright. Interest charges take precedence in the early years so it is some time before inroads are made into the sum owed. Mortgage life insurance is essential with such a big financial commitment. If the borrower dies during the mortgage term the sum assured will pay off the outstanding debt. Some borrowers also take out insurance to cover mortgage repayments in the event of redundancy or an inability to work due to long-term illness.
Research different mortgage packages
Mortgage packages have either a fixed rate (for a set term) or a variable rate. With a variable rate, the rate can increase or decrease with the Bank of England’s base rate. Make sure to perform adequate research to find the best deal.
Start by using comparison websites to determine the different mortgage packages available for first-time buyers. You can also use an online affordability calculator to determine how much you can afford to borrow. Finally, talk to a specialist mortgage broker and consult at least one financial adviser for advice before taking out a mortgage.
Taking out a mortgage can be a daunting task; it can also be very exciting. As long as you carefully consider your options and seek sound professional advice, you can finally own your own home and have a good investment for your future.