The 10 most popular questions about mortgages
Getting a mortgage, especially for the first time, can be time-consuming and exhausting. There are countless unfamiliar terms to navigate, and circumstances beyond your control can slow down the process. Here, we look at the 10 most common questions associated with getting a mortgage, and give you concise answers.
1. How much money can I borrow for a mortgage?
This is an inexact science and it varies between countries. For example, in the UK, it is possible to borrow up to four-and-a-half times your income. This would mean that a person on a salary of £35,000 a year would be able to borrow £157,500 towards their property. In the US, you may only be able to borrow two-and-a-half times your earnings. Other factors are also taken into account, such as your credit score and levels of debt.
2. What’s a variable rate mortgage and what’s a fixed mortgage?
This relates to the amount of interest you’ll pay on top of your monthly repayments. A fixed-rate mortgage can be set for a period of several years – meaning that even if a central bank’s base rate changes, your bills will stay the same. While this can be beneficial if the cost of borrowing for everyone else increases, it can mean you’ll be paying more than the market average if interest rates fall. A variable rate mortgage, also known as a tracker, follows the base rate. As a result, there’s a risk of your monthly outgoings rising at short notice. If you’re on a tight budget, it might be worth going for a fixed-rate mortgage to prevent any nasty surprises.
3. How long do mortgages last?
To an extent, you have control over how long your mortgage lasts, but anywhere between 25 and 35 years is common. Although a longer arrangement may seem tempting, never lose sight of the fact that you’ll be paying interest throughout. Sure, your monthly repayments are going to be lower if you borrow for an extra decade, but you’ll also end up lining the lender’s pockets with thousands of dollars or pounds in interest.
4. I don’t want to have a mortgage for 25 years! What can I do?
Don’t worry about it. Thankfully, many lenders will allow you to make additional payments towards the cost of your mortgage. The odd $50 here and there might not seem to make a difference, but it can shave months – even years – off the length of your home loan. Of course, banks don’t want to encourage this behaviour too much because it means they will be missing out on interest payments. As a result, it’s rare for a lender to allow a homeowner to overpay by more than 10 percent in any given year. Those who do can end up facing financial penalties, meaning it can be better to just stow that money away in a pension instead.
5. What is loan to value?
This refers to a ratio that is used to calculate how much money is being borrowed versus the value of a home. Let’s say Emma is hoping to buy a £200,000 house but she already has a deposit of £50,000. Because she would only need a mortgage of £150,000, the loan-to-value (LTV) ratio stands at 75 percent. Although saving up for a deposit can seem like an arduous process that merely delays picking up the keys to your first home, it’s worth remembering that you’ll have the opportunity to access preferential interest rates and better deals if you have a sizeable deposit. When planning for a mortgage, aim to achieve an LTV of less than 80 percent – and be prepared to pay through the nose if you’re looking for mortgages with 90 percent LTV.
6. How can I save for a deposit?
Understandably, saving tens of thousands towards a new home can be a big ask – especially considering you may already be paying rent, bills and other monthly expenses. However, by becoming a little more financially savvy, it is possible to build up a decent nest egg more quickly. Here are some quick top tips on how to save for a deposit. First, always shop around and make sure you are getting the best value for money with your gas, electricity and mobile phone bills. Consider giving up that takeaway cup of coffee on the way to work, sell unwanted items on eBay, and go through your bank statements with a fine toothcomb. There’s always fat to trim, and putting this cash into a high-interest savings account can help your money grow faster.
7. Should I buy a new-build house?
There are pros and cons associated with investing in a brand-new property. The good thing is that there will be little maintenance or decorative work to worry about when you move in, developers will likely have provided you with the latest amenities, and there are often initiatives that reduce taxes and the money you need to pay upfront. That said, there is a risk that the value of your home could actually decrease in the short term – and snags can include small, annoying issues such as squeaky doors or loose tiles that need to be addressed.
8. What are the pros and cons of an older property?
Just to add to the confusion, there are upsides and downsides to selecting a property that’s been standing for a few years or more. You’ll have the chance to benefit from beautiful architecture, exposed brick and nice, large windows – plus communities are often better established. There’s a better chance that you’ll get a spacious garden, and you’ll be able to redecorate and really make it your own. On the other hand, property chains – where the seller needs to wait for the person they’re buying from to get their mortgage approved, and so on – can really slow things down. You might also end up paying higher energy bills, and maintenance may be an immediate issue.
9. What if I can’t afford to pay my mortgage?
Most importantly, you need to make sure that your lender is aware of what’s going on. Burying your head in the sand and ignoring any letters that might be coming through the post is a bad idea. Check to see whether or not the government can provide any assistance, and if repossession is looking inevitable, consider selling the home yourself.
10. Can I transfer my mortgage?
It is possible for your current mortgage to come with you if you decide to move. However, it isn’t guaranteed. You might be unable to borrow more money, you might need to reapply, and it is possible that your interest payments could rise.
FURTHER READING: Can you afford a mortgage?