First Time Buyers Guide to Choosing a Mortgage
A mortgage is a kind of loan used to pay for your home and is likely to be one of the biggest expenses in your life. Like all loans, you borrow an initial amount and pay it back over a period of time with the addition of interest. The meaningful difference between mortgages and other types of lending is that they’re secured against your home – consequently the lender may sell it to retrieve their money if you are unable to repay the funds.
As a first time buyer, you will want to think about your budget carefully to see how much money you have incoming and outgoing, and how much money you have spare. The most urgent things to consider are the overall size of the loan, the rate and kind of interest and what you’ll need to pay each month.
Although mortgages vary greatly, there are two main kinds: “repayment” and “interest only”. With a repayment mortgage, each month you will repay both the original sum borrowed and the interest. Over time you’ll reduce the whole sum you owe, and if you make all the payments you’ll own your character outright. With an interest-only mortgage, your monthly repayments cover the just the interest on the loan. You will later pay off the complete amount, generally by placing funds in a long-term investment.
You’ll also want to look at types of interest-rate deals. Interest rates that are variable, like the standard variable rate, average that your interest may change. This change could be at the discretion of your lender, or it could be set to the Bank of England Base Rate. These kinds of mortgages can be a good idea as you could be paying less when rates are down. Just make sure you are obtain enough to pay more should the interest rate go up too.
With a fixed-rate mortgage however, your payments will stay the same for the agreed period, already if interest rates go up. This gives you the security of knowing you can make your payments and will also make it easier to budget.
Another mortgage option obtainable is for a flexible offset mortgage which allows you to overpay, underpay, in some situations take payment holidays and offset your current and savings account balances to help you repay your mortgage early. Business accounts can also be used in certain circumstances.
To help make your choice it’s a great idea to use a mortgage calculator. If you’re confused by the figures this is a handy way of comparing mortgages as it works out how much you’ll be paying back each month on the amount you want to borrow with different rates. It will also help you see how much your monthly payments will increase or decline if your interest rate was to change.
Ultimately, the most important thing to consider when choosing your mortgage is whether you can make your payments comfortably. With the loan secured against your home, it’s a good idea to be careful in your choice.