Unless you’re royalty or part of the Hollywood A-List set, there’s a good chance that, at some point, you’ll need a guide to mortgages in order to buy a home. For most of us, this is the biggest financial commitment we’ll ever make and one which should never be taken lightly. A mortgage – literally translated as ‘death pledge’ is a loan which is granted by a bank for a home purchase and is repaid over an average of 25 years. The loan or mortgage is guaranteed by the property that you purchase and so, it’s essential that you repay on time to avoid the risk of losing your home.
Despite the fact that most people will, at some stage, require a mortgage, many are still confused over the different options available. We’ve put together our straightforward guide to all you need to know about this complex and ever-changing financial product.
Doing the sums
The first step, when considering a mortgage, is to figure out what you can afford to borrow. Although the general rule is up to two and a half times your salary, it’s up to the individual to decide what will be affordable. Most banks feature an affordability and mortgage calculator on their website in order to give you an idea of how much you’ll be able to borrow. Once you reach the application stage, the lender will want to see proof of your income along with information about existing debt and current expenditure so it’s a good idea to have all of this to hand before making your application.
Before you get those fingers tapping looking for a mortgage, you’ll need to make sure that you have – or have access to – your deposit. Except in very rare cases, you’ll be expected to put down a fair chunk of change a a deposit on a property purchase. The amount of the deposit is very much dependent on the price of the property you intend to buy and can start from as little as a few thousands dollars to around $50,000 for standard residential properties. When applying for your mortgage, your lender will want to see proof that you either have the deposit ready or, you’re able to raise it.
Where do I go for a mortgage?
There are a number of different financial organizations which deal with mortgages and, these include:
- Your bank
- A building society
- Financial advisors / brokers
- Independent mortgage lenders
Although using the services of a broker or advisor can be helpful, their fees can mount up so, make sure that you know what you’ll be paying up front.
Whichever option you decide on, you’ll need to know what kind of mortgage you would like. There are a number of different kinds of mortgage available and, the following is a quick guide to what they are and, what they entail:
This may sound strange as, of course, all mortgages do need to be repaid. In the case of the repayment mortgage, the name refers to the fact the interest and part of the capital is repaid every month. The most common kind of mortgage, a repayment mortgage is designed to be fully repaid after around 25 years.
Increasingly rare due to the risk factor, with an interest-only mortgage, you pay only the interest on the original loan every month with the capital becoming payable at the end of the term. This kind of mortgage has cheaper monthly payments and relies on the homeowner putting away the required amount each month to ensure that they have the funds available once payment becomes due.
Combination repayment and interest only mortgages
No prizes for guessing what this one is all about! A combination mortgage allows you to repay the interest on your loan, plus part of the capital each month. The benefit of this is that it reduces the amount of capital left to pay at the end – leaving more money for that retirement fund.
Applying for a mortgage
OK, so you’ve decided what kind of mortgage you want and, you’ve got your deposit tucked away – it’s time to start your application.
With many banks and building societies, you can do a ‘quick application’ online – during this process, the system will make basic checks on you and will then let you have a quote or ‘mortgage promise’ detailing how much you may be able to borrow. Armed with this info, you can then move onto the application proper. At this stage, you need to make sure that you have all the relevant paperwork pertaining to your finances and employment ready.
In order to progress your application, you’ll usually be asked to make an appointment with the mortgage advisor who will instigate more in-depth credit checks and quiz you about your past and present finances as well as asking about future career changes and anything else which may affect your repayments.
Once all the appropriate checks have been made, you’ll be told whether or not your application has been accepted. If you’ve been successful, you’ll normally be given seven days to accept the offer. During this period, the lender will not be able to withdraw the offer unless you have been found to be dishonest or fraudulent in your application.
What happens if your mortgage application is rejected?
Although this decision is usually final, you can ask to be told why you were rejected as this will help you with further applications. Before making a new application elsewhere, increase your chances by:
- Viewing your credit rating – this costs next to nothing and may illuminate issues which you weren’t aware of
- Reducing your current lending – the less debt you have, the better your chances of being accepted for a mortgage
- Hiring a broker – a finance professional may be able to help you to improve your chances of a successful application
For most people, the mortgage will be the largest financial commitment to be made in their lifetime – which may sound scary but, with a little planning and, by making sure you know all the facts, you can ensure that you make the right decision for you and your family.