An Easy Guide to Understanding Mortgages
14/01/2024 / by The MortgageHelp
A mortgage is a tool that helps many people achieve the dream of owning a home, with the value of mortgage lending being over £1,600 Billion in 2023 in the UK alone. Whether you’re buying your first home or you are experienced in in the property market, it’s crucial to understand how mortgages work to make sure you are getting the best deal for you.
Understanding Mortgages - What are they?
A mortgage is a type of loan specifically designed for the purchase of real estate, such as a house or apartment. It is a financial arrangement between a borrower (the homebuyer) and a lender (usually a bank or building society). The primary purpose of a mortgage is to provide the borrower with the funds needed to buy a property, and the property itself serves as collateral for the mortgage.
What are the Key Components of a Mortgage?
Loan Amount:
The loan amount is the initial amount borrowed to purchase a home or property. It is the actual cost of the property minus the deposit.
Interest Rate:
The interest rate represents the cost of borrowing money and is expressed as a percentage. It determines the total interest paid by the borrower over the loan’s duration. Interest rates can either be fixed, remaining constant throughout the term, or variable, subject to fluctuations based on market conditions. The most common choice of interest rate is fixed, as this allows borrowers to have a fixed mortgage payment.
Loan Term:
The loan term refers to the lenth of time over which the borrower agrees to repay the loan. Common mortgage terms in the UK include 15, 20, or 30 years, each impacting monthly payments and the overall amount repaid.
Deposit:
The deposit is the amount borrower has to give the bank when purchasing a home, expressed as a percentage of the property’s purchase price. A higher deposit often results in more favorable loan terms. Deposit amounts can come in all sizes, with the minimum amount a lender will usually accept being 5% of the property value. Use the mortgage calculator below to simply work out how much you of a mortgage you will need.
Mortgage Calculator
Security:
The property being acquired serves as a securift for the mortgage lender against the loan. In case of a mortgage default, Which is when the borrower can’t pay back the mortgage, the lender can take possession of the property through legal processes.
What types of Mortgage are there?
There are three main types of mortgages:
Fixed-Rate Mortgages:
These mortgages maintain a consistent interest rate throughout the loan term, offering fixed monthly payments. These are popular for budgetting, with over
Adjustable-Rate Mortgages (ARMs):
ARMs feature an interest rate that may change over time, typically after an initial fixed period. While offering potentially lower initial rates, ARMs carry the risk of rate changes, which could result in your monthly payment increasing or decreasing. Products that fall in this category at ones such as Tracker Mortgages, Discount Mortgages and Variable Rate Mortgages.
Government-Backed Mortgages:
Programmes such as the Help to Buy scheme and government-backed initiatives provide favorable mortgage terms for eligible borrowers.
Mortgage Process in the UK
1. Pre-Approval (Decision In Principle):
A buyer asks a Mortgage Advisor for help getting a certain mortgage amount. The advisor then asks the buyer important questions needed by the lender to decide whether to approve the loan. After that, the advisor takes this information to the lender to check if they can get a pre-approval, also known as a Decision in Principle. You can find a Mortgage Advisor here.
2. Home Search and Offer:
Following pre-approval, if the buyer hasn’t already found a property, they would then search the market for one and make an offer. Once an offer is accepted, the buying process begins!
3. Mortgage Application:
Once the offer is accepted, the buyer will tell the Mortgage Advisor that they are willing to proceed with the mortgage, and the advisor begins the process of submitting the full mortgage application. At this stage, the advisor may request additional documents from the buyer, such as bank statements, payslips, and identification, as required by the bank
4. Mortgage Processing and Underwriting:
The lender reviews the application, verifies information, and assesses the borrower’s creditworthiness. At this point, the lender may deny the application, adjust the available borrowing amount, or accept it.
Denial – The lender may reject the application due to various factors such as the applicant’s credit history, debt amount, or possibly the property they wish to purchase not being suitable security for the mortgage.
Change the amount available to borrow – This means they are willing to lend but not the full amount requested, possibly for the same reasons as a denial.
Offer – This indicates that the lender is content with all the information received, including details about the property, and extends a mortgage offer. The buyer will receive an illustration outlining the offer, including details such as monthly repayments, interest rate, and other features of the mortgage. If the buyer is satisfied with the offer, they can proceed with the application without making any changes.
5. Completion:
Completion represents the final step. The buyer signs the mortgage documents, and ownership of the property is transferred.
Conclusion:
In short, a mortgage is a money tool that helps people achieve the dream of owning a home. Understanding things like interest rates, loan terms, and types of mortgages is important for making good choices. Like any big money decision, it’s crucial to think carefully, do thorough research, and talk to financial experts for a successful and lasting journey to homeownership.
This article was assisted by AI technology.
Find the Best Mortgage Advisor, for free.
Whether you need a remortgage, new mortgage or an investment mortgage, our advisors can help.