Buying your first home is one of the biggest milestones of adulthood and a great investment for the future. However, going into the process for the first time can be a little daunting, with a lot of new financial terms and legal situations to navigate. So, how should a first-time buyer prepare?
What is a Mortgage?
When it comes to buying your first home it is likely you will have to borrow from the bank to help cover the cost. A mortgage is a type of borrowing most buyers choose, which involves putting the home/apartment being purchased up as collateral. Over the years the borrower pays off the mortgage, which includes interest added to the loaned amount; if the borrower fails to pay their mortgage over time the bank has the power to seize the property and sell it to recover the debt.
What Should My Deposit Be?
Although you can borrow from the bank to help pay for your first home, the amount you can borrow will be limited by your chosen lender. One area a lender will look at when deciding how much they are willing to lend, will be the size of the deposit you personally put down. Your deposit is the amount you put towards the property up front, with many lenders expecting the deposit to be at least 10-15% of the total house price.
It’s also important to note that a bank will usually only lend up to what the property is valued at and not what you pay for it; this means if a home is valued at £100,000 the bank will only loan, say, £90,000 – once the deposit is considered – even if you pay, say, £110,000 in the end.
Are there Different Types of Mortgage?
There are a few types of mortgage you may come across with two of the more common being a repayment mortgage and an interest-only mortgage. A repayment mortgage is the most common and involves paying off part of the loaned amount, plus part of the interest, every month. An interest-only mortgage, now much harder to come by as banks are much warier when it comes to lending, is when the borrower only pays off the interest every month, with the total amount being left unpaid until a much later date.
How to Apply for a Mortgage
The start of the mortgage application process will normally focus on your eligibility for a mortgage and how much you can afford to borrow. The first stage will also normally cover the length of the mortgage and the type of mortgage you wish to apply for. If the initial stage goes well and you’re eligible for a mortgage, the second stage will normally focus on the exact details of your current financial situation; mortgage providers will want to see evidence of your income, your outgoings and any plans for your future which may impact your finances.
Unsure of what you can afford? There are many helpful online mortgage calculators which will show you what you can expect to pay monthly depending on the amount you’re borrowing, the rate you’re borrowing it at and for how long you’re borrowing.