A Simple Definition Of A Mortgage
Before we dive in, let’s talk about some mortgage basics. First, what does the word “mortgage” even mean?
A simple definition of a mortgage is a type of loan you can use to buy or refinance a home. Mortgages are also referred to as “mortgage loans.” Mortgages are a way to buy a home without having all the cash upfront.
Who Gets A Mortgage?
Most people who buy a home do so with a mortgage. A mortgage is a necessity if you can’t pay the full cost of a home out of pocket. There are some cases where it makes sense to have a mortgage on your home even though you have the money to pay it off. For example, investors sometimes mortgage properties to free up funds for other investments.
First Time Buyer (FTB)
A person is generally classified as a first-time-buyer if they’re buying their only or main residence, and have never owned a freehold or have a leasehold interest in a residential property in the UK or abroad.
A mortgage is a loan taken out to buy property or land. Most run for 25 years, but the term can be shorter or longer.
You’ll need to save up to 5% or more of the purchase price as a deposit, and borrow the rest of the money (the mortgage) from a lender such as a bank or building society.
The loan is ‘secured’ against the value of your home until it’s paid off.
If you can’t keep up your repayments, the lender can repossess (take back) your home and sell it so they get their money back.
How much deposit do I need to buy a home?
Before looking at properties, you need to save for a deposit.
Generally, you need to try to save at least 5% - 10% of the cost of the home you’d like to buy.
For example, if you want to buy a home costing £150,000, you’ll need to save at least £7,500 (5%) for the deposit.
Saving more than 5%- 10% may give you access to a wider range of cheaper mortgages available on the market and a lower interest rate.
Help for first-time buyers
There are a range of schemes available to help first-time buyers to help you get on the housing ladder, particularly if you only have a small deposit.
Loan to Value
When talking about mortgages, you might hear people mentioning ‘Loan to Value’ or LTV.
This is simply the amount you’ve borrowed to buy your home (the loan) compared with the mortgage lender valuation of the property.
For example, if you buy a home for £200,000, put down £20,000 as a deposit and have a mortgage of £180,000 – your LTV is 90%. This is because the amount you’ve borrowed (£180,000) is 90% of the home’s value (£200,000).
The lower the LTV, the lower your interest rate is likely to be. This is because the lender takes less risk with a smaller loan.
The cheapest rates are typically available for people with a 40% deposit, which works out as 60% LTV.
Budget for the other costs of buying a home
Apart from your monthly mortgage payments, there are others costs when buying a home.
These include:
- survey costs
- solicitor or conveyancer fees (this often includes extra costs, such as search and Land Registry fees)
- mortgage arrangement and valuation fees
- removal and moving in costs
- buildings insurance
- initial furnishing and decorating costs
- Stamp Duty (Land and Buildings Transaction Tax in Scotland, or Land Transaction Tax in Wales).
Finding a mortgage
You can apply for mortgages directly from a bank or building society.
But you might also want to think about using a regulated mortgage adviser. Advisers know a lot about the mortgage market and can help you find the mortgage that best suits your needs.
This is particularly useful if:
- you only have a small deposit
- are self-employed
- there are other circumstances such as the type of property, for example, you need a mortgage for a shared ownership scheme.
You can apply for mortgages from a mortgage broker, or directly from a bank or building society.
You may be better off talking to a regulated mortgage adviser via Twoow. Our panel of independent mortgage advisers can provide information from the whole of the market and can help you find the mortgage that best suits your needs.
This is particularly useful if:
- you only have a small deposit
- are self-employed
- there are other circumstances such as the type of property, for example, you need a mortgage for a shared ownership scheme.