Mortgages: a basic introduction
Buying a home is one of the biggest purchases you'll make. Learn all there is to know about mortgages here.
Last updated on
May 23, 2022 13:38
Buying a home is the biggest purchase most of us will make. And getting a mortgage can feel pretty daunting – complex, expensive, huge. It can be hard to know where to begin.
The good news? You can start right here.
A mortgage is a loan you take out to buy a property. You usually borrow the money from a bank or building society, aka the lender. But the lender doesn’t own your home. You do.
To get a mortgage, you’ll need a big upfront payment, called a deposit, which is usually a minimum of 5% of the total price of the property you want to buy. The bigger the percentage you come up with upfront, the less of the loan you have to pay off over the mortgage term. Plus, many mortgage rates reduce for every 5% you can put down in your deposit.
Your mortgage can be between 5 and 40 years (most go up to 35). The number of years you take to pay back your loan is called your mortgage term. It’s usually best to take the shortest term you can afford. The shorter the term, the more you pay off each year and the sooner you become mortgage-free.
A shorter term usually means bigger monthly payments, as you have to pay off more of the loan each month. But it might mean a lower total cost over the life of your loan – ie the total you’ll have paid at the end of your term, as you’ll probably have paid less in interest. A mortgage broker will be able to help you work out the best term for you.
You can choose how to pay your mortgage back:
Interest-only: (though this is near impossible for first time buyers) every month you only pay the interest on your loan. Your monthly payments will be lower, but they won’t make a dent in the loan itself. At the end of the term, you’ll get a bill for the total loan amount, which means you’ll either need to have saved up in the meantime, or sell your home to pay it back.
Capital and interest, aka repayment: every month, you pay an amount off the debt itself (the capital) and the interest as well. Month on month, your balance (the amount left on your loan) will go down and by the end of your term, you’ll have paid the loan off in full.
You can also choose the type of interest rate you’d like applied to your loan. Broadly, there are two types: fixed rates, that guarantee exactly what you pay over a particular length of time, e.g. 2 or 5 years, or your full mortgage term; and variable rates, that tend to be cheaper (though that’s not always the case) but are less predictable.
A mortgage is ‘secured’ against the property you’re buying. That means if you stop paying back the loan, the lender can repossess your home. Usually, they’ll step in to try to help you pay it back first – if they can’t, they may repossess your home to get back the money.
There are three main ways to own a property:
If you don’t have a specific property in mind, that’s OK. You can still start thinking about your mortgage in broad terms, and apply for a mortgage in principle to give you peace of mind that your budget is accurate and to give estate agents when you start bidding on a new home. But you won’t be able to apply for a mortgage until you’ve found a specific home to secure the loan against.
If it’s your first time buying, you can get government support to help you buy your home, especially if you have a limited deposit.
A mortgage is a long-term loan. It’s designed to help you buy a property. It can sound complex and scary but it doesn’t have to be.
How do you apply for a mortgage? What do you need? And how easy is it to get one? Here’s everything you need to know.
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