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Understanding mortgages

In our last blog we looked at ways to save for a deposit on a house. Whilst the deposit is important and may cause a great deal of stress, it makes up just a small percentage of the total cost of your home – the rest you may need to borrow.

What is a mortgage?
It is very rare that first time buyers can afford to buy a new property with their own funds due to the high cost of buying a home compared to most people’s wages. As of August 2014 the average house price in the UK is £189,306 according to the Nationwide, whereas the average annual wage in the UK is believed to be around £26,500. As such, most first time buyers, unless they are very fortunate, will have to apply for a mortgage.

A mortgage is a loan which is secured against a property – this means if you don’t keep up with repayments then your home can be repossessed by the lender.

A mortgage is made up of capital - money that you borrow, and interest which is charged by the lender until you finish repayment.

Finding the right mortgage for you
When looking for a mortgage you should consider the amount of money you need to borrow, the deposit you have saved and most importantly – the amount you can afford to pay back per month.

Repayment mortgage
With a repayment mortgage, the most popular kind, your monthly re-payments will include both the interest that the lender charges you as well as some of the original amount you borrowed. This gives you some peace of mind as you know you are making some progress towards paying off your mortgage.

Interest-only mortgage
Alternatively, you could pursue an interest-only mortgage which means you only pay the interest on the amount you borrowed each month. The upside is that you will pay less back per month than a repayment mortgage but the downside is you won’t be eating away at the original amount you borrowed for your home.

With this kind of mortgage a lender will require you to have a repayment plan – such as savings or investments.

Managing your repayments
It’s very important that you keep up to date with your mortgage repayments otherwise you run the risk of losing your home. It’s recommended that you build up an emergency fund just in case you get sick or lose your job. You might also want to consider what options are available to you in terms of insurance for these types of scenarios.

For more information on buying a house for the first time take a look at our in depth first time buyers guide.
 

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