A mortgage is a loan take out to buy property or land. Most mortgages run for 25 years but can be shorter or longer. Over this period, the borrower pays interest on the loan and a portion of the capital – the money they borrowed – each month.
The loan is secured against the value of the property until it is paid off. If the borrower does not repay the loan the lender can take the property back and sell it in order to get their money back.
What mortgage do I need?
Depending on your plan for the property you intend to purchase, you may need to get a different type of mortgage.
Repayment mortgages are the most common. With these, you pay the interest and part of the capital each month. By the end of the term, you should have paid back all of the capital.
If you apply for an interest-only mortgage, you would only pay back the interest on the loan, and none of the capital, each month. At the end of the term you will need a separate plan to pay back the amount you borrowed. These mortgages are less common as lenders are worried about homeowners being left with large debts at the end of the term.
Your mortgage could come with a fixed or variable interest rate.
For the fixed rate, your repayments will be the same for a set period of time – usually 2 to 5 years – regardless of changes to the interest rate in the wider market.
For the variable rate, your repayments could go up or down in line with changes to the base rate of interest set by the Bank of England.
If you intend to rent out the property, you must apply for a buy-to-let mortgage. For this, the ability to pay back the mortgage is based on the property’s rental income rather than the borrower’s income, so most lenders will require your annual rent to be at least 125% of the annual repayment.
How much can I borrow?
The amount you can borrow is based on a number of factors including but not limited to your annual salary, credit history and the value of the property you are looking to purchase.
Rightmove has a mortgage calculator which can show you roughly how much you can borrow and how much you would need to pay back each month.
It is important not to over-stretch yourself if you think you may not be able to keep up repayments. You should also take into account monthly running costs including bills, council tax, and maintenance.
For a more accurate assessment of how much you are able to borrow, why not contact a specialist mortgage advisor, such as our recommended consultants at Capricorn.
Next month we will discuss the process of applying for a mortgage, and the best places to go to apply for one.