Wednesday, July 6, 2022

6 Things You Should Know When Taking A Mortgage For The First Time

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When looking to buy a house, you will likely require a mortgage to fund the purchase. And if you are buying your first home, understanding the basics of mortgage lending can be pretty confusing, especially some of the aspects like how much deposit you have to pay, how much you can borrow, what are the costs involved in the mortgage, and so on. To help you out, we list out six important things you must know about when taking a mortgage for the first time.

Borrowing Capacity

To begin with, you must have a good idea as to how much money you can borrow. Usually, a debt-to-income ratio is used by many lenders to determine how much to lend to you. To calculate this ratio, you will first have to calculate all the debt payments you have to make every month together with your monthly salary. Once done, just divide the monthly salary by the debt payments and multiply it by 100. You now have the debt-to-income ratio that shows how much of your income is spent on repaying the outstanding debts. Usually, the higher the ratio, the riskier you will appear to the borrower, thereby decreasing your chances of getting a mortgage. So, make sure that your debt-to-income ratio is pretty low. This will also help you negotiate for better interest rates.

Down payment

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Another aspect you have to look at before taking the mortgage is the down payment. Usually, mortgage lenders will expect you to put at least 20% of the total home value out of your own pocket while the remaining 80% will be funded by them. So you need to check the value of the home you wish to buy and see whether you are in a financial position to come up with 20% of its value. However, you may qualify for lower down payment under certain government schemes if you meet certain financial criteria. But generally speaking, no lender will give you a mortgage without you chipping in with 20% down payment.

Interest Rate

When it comes to interest rates, you will have two options – fixed and variable rates. With a fixed rate mortgage, you will be expected to pay the same interest rate for the full term of the mortgage. But with a variable rate, your interest rate will keep changing with market conditions, sometimes spiking and sometimes falling. A fixed rate is suitable in case you don’t want to take any risk of rates suddenly spiking. In contrast, if you choose the variable option, you can enjoy lower interest rate when market conditions are weak. However, this also means that you will have to pay a higher interest in some market conditions.  

Hidden Fee And Charges  

There will be many fees and charges that you may not account for when planning to take a loan. These hidden costs will only come into the picture later on. For example, valuation and surveyor fees are two costs that you will have to bear in order to ensure the physical strength of the property and to know the exact home value. You will also be required to meet other hidden costs like moving costs, stamp duty, and legal fees, etc. all by yourself.  However, first time home buyers are exempted from paying stamp duty in case the property they wish to purchase is valued at less than 300,000 pounds. Consult a good financial advisor like to know more about all the costs you will have to bear when taking a mortgage.

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Required Documents

You also need to ensure that you have all the necessary documents ready for the mortgage application. This will speed up the approval process and let you know quickly whether you are qualified for a mortgage or not. Typically, you will need bank statements of at least six months, pay slips for at least three months, and the recent P60. However, if you are self-employed, the lenders will be keen to check your long-term income history. As such, you will be required to submit about two years of accounts (vetted by a professional accountant) in addition to the SA302 tax form.

Don’t Focus On Big Lenders Alone

Many people make the mistake of solely focusing on the big lenders to get a mortgage. The bigger lenders will typically have stricter conditions for approving a mortgage. And you may not be able to get an approval for it. However, smaller lenders will likely have a more relaxed set of rules to approve a mortgage, which will increase your chances of getting one. So, check for all the reputed lenders in your area and apply for a mortgage to all of them, whether they are big or small lenders.  

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Sara Revonia
Sara Revonia
Entrepreneur, Speaker, Author, and Mom. Sara Revonia’s articles are about business, life, and Entrepreneurship.
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