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A mortgage is a loan that you can get to help you buy a property. Because, let’s face it, few hundred thousand pounds tucked away down the back of the sofa to help us buy a place outright.
Here’s how they work – what deposit you need, how to actually get a mortgage, and the different types of mortgages out there.
A mortgage loan can cover most of the money you need to buy your dream home, as long as you can provide a deposit (an amount of cash upfront).
The deposit will usually need to be at least 5% of the value of the property you want to buy (although most lenders ask for 10% or more). For example, to get a mortgage on a £300,000 house you might need a 5% deposit of £15,000, or a 10% deposit of £30,000.
The mortgage loan then covers the rest of the property value. So if your deposit is 5%, a mortgage would cover 95% of the property value. If your deposit is 10%, a mortgage would cover 90% of the property value. You get the picture.
In our example with a £300,000 house, you’d need a mortgage of £285,000 if your deposit was 5%, and a mortgage of £270,000 if you put down 10%.
The size of deposit you can put in compared to the size of the mortgage is known as the loan to value ratio (or LTV). LTV is one way that lenders work out how risky it is to lend to you. To a lender, a low LTV (bigger deposit, smaller loan) means a lower risk customer.
That’s why you’ll often see lenders offer lower mortgage interest rates to customers with bigger deposits – because they see those customers as less of a lending risk. (Interest is essentially the fee that you pay to “hire” the lender’s money. It’s charged as a percentage of what you owe in total.)
If you’ve put in a bigger deposit (meaning a lower risk to the lender), your mortgage interest rate will typically be lower. If you’ve put in a smaller deposit (meaning a higher risk to the lender), your interest will be higher.
Let’s take a look at the different types of mortgage available in the UK.1
The vast majority of mortgages available on the market are repayment mortgages. This means that each month you’ll pay back a chunk of your mortgage loan, plus any interest (the fee your lender is charging you to “hire” their money).
With a repayment mortgage, you’re aiming to pay off the full amount you borrowed by the end of the mortgage term (usually 25 years or so).
If you have an interest only mortgage, your monthly payments will only cover the interest on your loan. You’ll still need to pay off the full amount you borrowed at the end of the mortgage term.
Why go for an interest only mortgage? Well, you might decide that you’d rather pay off your loan all at once, using something like your savings or shares. Also, most buy-to-let mortgages are interest only (that’s the type of mortgage you get for a property you’re letting out, rather than living in).
The vast majority of mortgages available on the market are repayment mortgages. This means that each month you’ll pay back a chunk of your mortgage loan, plus any interest (the fee your lender is charging you to “hire” their money).
With a repayment mortgage, you’re aiming to pay off the full amount you borrowed by the end of the mortgage term (usually 25 years or so).
If you have an interest only mortgage, your monthly payments will only cover the interest on your loan. You’ll still need to pay off the full amount you borrowed at the end of the mortgage term.
Why go for an interest only mortgage? Well, you might decide that you’d rather pay off your loan all at once, using something like your savings or shares. Also, most buy-to-let mortgages are interest only (that’s the type of mortgage you get for a property you’re letting out, rather than living in).
That’s right, there’s more. There are mortgages out there for specific financial or life situations, like if you’re a first-time buyer or you want to get a mortgage with a friend. Here are a few.
Lorem Ipsum is simply dummy text of the printing and typesetting industry
Lorem Ipsum is simply dummy text of the printing and typesetting industry. Lorem Ipsum has been the industry's standard dummy text ever since the 1500s, when an unknown printer took a galley of type and scrambled it to make a type specimen book. It has survived not only five centuries, but also the leap into electronic typesetting, remaining essentially unchanged.
Lorem Ipsum is simply dummy text of the printing and typesetting industry. Lorem Ipsum has been the industry's standard dummy text ever since the 1500s, when an unknown printer took a galley of type and scrambled it to make a type specimen book. It has survived not only five centuries, but also the leap into electronic typesetting, remaining essentially unchanged.
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