If you're ready for your first mortgage, you have some questions to ask.
Here are some of the most important.
1. How much can I borrow?
The amount you can borrow with a mortgage in relation to your salary depends on several factors, including your income, debts, credit score, down payment, and the lender's specific criteria. However, the basic rule is that lenders typically allow borrowers to take out mortgages that are 3 to 4.5 times their gross annual income. The lender will carry out an affordability check on your actual financial situation, and in some circumstances, it might be possible to borrow more.
2. What kind of mortgage do I need?
There are several kinds of mortgage to consider.
Fixed-rate mortgages guarantee your interest rate for a set period of time. Your monthly payments remain the same for a specified period and wonโt change until an agreed date. Most people take out either a two-year or five-year fixed-rate mortgage. Five-year deals are currently cheaper due to the anticipation that mortgage rates will fall. These deals give longer-term rate security, but less flexibility to switch.
Tracker mortgages have an interest rate thatโs usually linked to the Bank of Englandโs Base Rate, plus a percentage set by the lender. That means the mortgage interest rate can vary throughout the tracker period, depending on movements in the Base Rate.
Standard Variable Rate mortgages (SVR)โฏhave an interest rate thatโs set by your lender, and itโs usually the rate you would automatically move onto at the end of your fixed or tracker product. As SVRs are variable, and not directly linked to Base Rate, the lender has more discretion about the rate and when it changes. SVRs tend to have higher rates than a lenderโs fixed or tracker products.
In June last year, the average five-year fixed-rate loan for a 75% loan-to-value mortgage peaked at 5.8%, Today, that same mortgage has now fallen to an average rate of 4.4%
Discount Standard Variable Rate mortgages give you discount on the lenderโs SVR, for a set period of time. The discounted rate will move up and down, in line with the lenderโs SVR.
3. Repayment or interest only?
Repayment mortgages let you pay off some of the capital as well as interest each month. An interest only mortgage lets you pay off just the interest, which means much smaller repayments, but at the end of the loan term, you still have all the capital to pay off. This means paying in to a separate endowment or other investment to build up the cash. An endowment is a riskier option because the maturity amount isnโt guaranteed and with some investments you may run the risk of the value of your investment going down.
4. How long can I borrow for?
Many first-time buyers choose to spread their loan over a longer period to make the monthly repayments more affordable. You can borrow for up to 40 years, but this will depend on your age and the lender. Saving now comes at a cost later. Borrowing for longer means you'll pay more interest overall.
5. What will happen with rates?
Inflation is the main reason interest rates are high in the UK at the moment.
At the end of 2021, the Bank of England began to raise the base rate to reduce inflation and help slow down price rises for everyday items including food, petrol, gas and electricity.
Inflation may now be at around the 2% target, and the bank has made a cautious 0.25% cut. The next move in rate will probably also be downwards, but it may also be small. Lendersโ expectations of lower interest rates are already priced into fixed rate mortgages today.
The cost of your mortgage could fall in the future โ but it is impossible to say when and by how much.
6. Do I have enough saved?ย
Youโll need a deposit of at least 5% of the value of the home you want to buy. 10% or more is better still. This means some saving will probably be required โ but remember, the bigger your deposit the smaller the mortgage you will need.
As well as your deposit, you'll need to cover stamp duty (if you're buying a property above the first-time buyer price threshold), house surveys, legal costs and mortgage fees.
7. How is my credit looking?
Before starting your mortgage application process, check your credit report to ensure everything is up to date and accurate. An old, missed utility bill or not being on the electoral roll can damage your mortgage prospects.
8. Where can I get help?
The mortgage market is complicated, and having an expert guide who can help answer your questions and help you find the mortgage that is appropriate for you means saving worry as well as saving cash.
At Continuum, as independent advisers, we can search the entire market to find the answers for you.
Call us today.
Will mortgage rates go down in 2024? - Zoopla
Bank of England cuts interest rates for first time in four years (telegraph.co.uk)
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to a particular mortgage product or investment strategy and you should seek independent financial advice before embarking on any course of action.
Your home or property may be repossessed if you do not keep up repayments on your mortgage.
When investing your capital is at risk.
