You will have saved up your deposit, but in most cases, you’ll need to borrow the remainder of the property value from a lender – this is called a mortgage. The next step is to work out how much you could afford to borrow.
What is a mortgage?
A mortgage is a loan secured against your property, which you pay back over a period of time (known as the term) usually between 25 to 35 years. As the property is used as security, your home may be repossessed if you do not keep up repayments on your mortgage.
What is a Mortgage in Principle?
A Mortgage in Principle is an official estimate of how much you could borrow as a mortgage. While it’s not essential to have one, a Mortgage in Principle can differentiate you as a serious buyer in the eyes of estate agents and sellers, by showing you can afford the property you want to buy. According to Which, 62% of first-time buyers got a Mortgage in Principle before applying for a mortgage.
A Mortgage in Principle isn’t a guarantee of a mortgage – you will still need to complete a full mortgage application. However, it’s a great step towards your goal and a way to position yourself as a savvy first-time buyer.
When you get a Mortgage in Principle, you’ll be asked to provide details of your income, savings and outgoings. A mortgage adviser will use this information to help find the right mortgage for you. With Moneybox Mortgage Advice, you can now complete a Mortgage in Principle all within the Moneybox app.
What does ‘LTV’ mean?
When you’re shopping around for a mortgage, you might hear the term ‘LTV’ or ‘loan-to-value’. LTV is the size of the mortgage compared to the value of the property – essentially how much is paid for by the mortgage. It’s expressed as a percentage figure. LTV is an important factor in working out the mortgages and interest rate brackets you’ll be eligible for. The lower the LTV, the lower the monthly mortgage repayment will be. It becomes even more important when you come to sell your property or remortgage.
How do I work out my LTV?
To calculate your LTV, divide your mortgage by the property value and multiply the number by 100 to get a percentage figure. Say you’re buying a property worth £200,000 with a mortgage of £150,000. Your LTV is 75% and your equity is £50,000 (your deposit).
Why are mortgage interest rates important?
A mortgage is a loan so you’ll pay interest on the amount you’ve borrowed (the ‘capital’). Interest rate changes can impact the cost of your mortgage and your repayment amounts. There are various interest rates to bear in mind:
- The Bank of England base rate – The Bank of England sets the ‘base rate’ of interest for the UK. Financial lenders borrow money from the Bank of England and pay interest at this rate. If you have a variable rate mortgage, a base rate change could impact your repayment amounts. This is because lenders use the base rate as a guide to set their own standard variable rate.
- Standard variable rate (SVR) – The interest rate you’re most likely to move onto after an introductory fixed, tracker or discounted deal ends. Each lender sets their own SVR.
- Annual percentage rate (APR) – Your total cost of borrowing over a year, including any standard fees. A ‘representative’ APR is the APR that a lender will offer to 51% of successful applicants. It’s an advertising term that can help you when you’re comparing mortgage products.
It’s worth considering what would happen to your monthly mortgage repayments if interest rates were to rise. Would you still be able to afford them? It’s important to find a mortgage that fits within your budget, because you could lose your home if you can’t keep up your mortgage repayments. 📈
Check your credit score
A high credit score shows lenders that you’re able to make credit repayments on time and boosting your score could improve your chances of a mortgage offer. You can get a credit report from many places – usually for free! The three most well-known credit agencies are Experian, Equifax and TransUnion, where you’ll also find tips on how to improve your score. Be careful not to take out credit such as loans and car finance when you’re planning to apply for a mortgage, as it may impact your affordability. It’s important to check that you’re on the electoral roll at your current address and that your address is up to date on all your bank accounts, as address history issues can lead to red flags when you apply for a mortgage. 🚩
🟠 Time for a check in!
- You’ve got a Mortgage in Principle and know your borrowing capacity
- You understand what LTV means and what your LTV ratio is
- You’re confident you could afford your mortgage repayments if interest rates were to rise
- You’ve checked your credit score and know how to improve it, if necessary
Let’s move to step 3, where you’ll start to talk to the experts – your mortgage adviser and your solicitor.
Moneybox Mortgage Advice is provided by Moneybox Mortgages Ltd.
Your home may be repossessed if you do not keep up repayments on your mortgage.