Buying your first home can be tricky, especially if you don’t have financial backing from your family. For the vast majority of buyers, it’s appropriate to borrow the price of your property. This is typically done through a mortgage. Mortgages come in many forms – and they’re set to get more expensive, overall. Before you take yours out, it’s worth making yourself aware of the options.
What is a mortgage?
A mortgage is a special kind of secured loan. It’s used for the purchase of property – be this a house, a block of flats, or an empty patch of land. As the borrower, you’ll agree to pay back the full value of the loan, plus interest, over the course of the agreed-upon period.
If you can’t pay back the loan, then the property itself will serve as collateral – meaning that it could be repossessed. It’s this that allows loans of this size to be made safely. After all, if there was no collateral, this amount of money would constitute an unacceptable risk for the lender.
Getting a mortgage with a partner
For couples looking to move into a new home together, obtaining finance might be that little bit easier. You’ll be able to pool your income and savings, and thereby reduce the risk for the lender. In this way, you might be able to borrow more, or to get by with a smaller deposit.
Saving for your deposit
In practice, it’s rare for a lender to cover the entire purchase cost of the property. They’ll typically want a deposit of around 10% of the mortgage value. This means that larger properties will require a larger deposit. Entry-level new homes for sale might command a fee of around £200,000, meaning that you’d need to find £20,000 to get on the ladder.
The deposit is there to reduce risk for both borrower and lender. It will help to ensure that you aren’t going to run into negative equityA situation where the value of the property is less than the... – where the value of your property isn’t enough to cover the amount owed.
Of course, you can view that 10% figure as a minimum, rather than a target. The more you’re able to pay up-front, the less you’ll be borrowing, and the lower your interest payments will be.
If you’re able to demonstrate that you’re earning more money, then you may have an easier time securing the mortgage you really want. So, if you feel that you’re on the cusp of some financial good fortune – be it in the form of a promotion or a new job – then it might make sense to delay applying for the mortgage.
Using accounts and savings
A Help to Buy ISA or a Lifetime ISA will help you to save for that first house. The government will match a portion of your savings, making it easier to scrape together that deposit.