Taking out a mortgage is one of the biggest financial commitments you will ever make. Mortgages are best seen as an investment; the value of your investment can go up and down just like any other, and depend a lot on housing market conditions.
One thing you do have control of is the type of mortgage you have for your future home. Mortgages can be a minefield, so it’s important to gain a good understanding of what you need to consider when applying for a mortgage with a bank or building society.
Here are the basics. You’ll need to consider all of these elements, and do some your own research, but it’s all good practice when making such a big financial commitment.
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How much can you afford?
This should be the first thing you consider. Take a look at your income and expenditure and work out what you can realistically afford, in terms of a mortgage payment. You need to remember that depending on the mortgage that you take out, interest rates can go up and down during this period. Ensure that you have enough flexibility in your finances when calculating what you can afford. Mortgage calculators can help, but these will vary from bank to building society, so try and use an independent one.
What are ‘Repayment’ types?
There are two basic types of mortgages that offer you two very different repayment types. These are:
- Capital and Interest Mortgages: This will allow you to pay off both the interest on your borrowing and your capital. When you first take out a mortgage the sum of interest that you pay will be higher; however, this decreases when you start to pay more on your capital (the sum borrowed on your mortgage).
- Interest Only Mortgages: This is where you only pay the interest on your mortgage capital. The lender, either a bank of building society, will want to see how you intend to repay the capital. This is usually done through an investment product; ISA, Pension or Endowment. You should seek further advice before you make a decision on how; the type product you will invest into pay back your mortgage capital.
What are my options on interest rates?
Now that you’ve decided on how much you can afford to borrow, and how best to repay the mortgage, it’s now time to take a look at the interest rates that could be available to you.
These options vary from lender to lender and depending on your own circumstances. For example, are you a first time buyer, or that you have a big or small deposit.
It’s best to shop around for the best deal, so take some time to do this before making a decision on which lender you want to apply to.
What charges am I likely to have to pay?
Charges are very much linked to the mortgage rate you apply to. As stated, these vary hugely from lender to lender. You may find a lender offers no arrangement fee, like the Clydesdale Bank, or others may offer no charges on taking out a fixed rate mortgage.
What else do I need to consider?
The above covers the basics, but it’s recommended that you research all available options to you. There are an abundance of different types of mortgages out there, especially if your circumstances are different. If you’re self-employed, there are different options available to you, or if you want to take out a mortgage to then rent out a property (buy to let).
Mortgages are about your individual circumstances, so take this into consideration when you’re looking for the mortgage that’s right for you.