The Basics of House Buying (Deposits and Mortgages)
Most people looking to purchase a property are going to need two main things. A deposit and a mortgage. When put together, these will produce the total cost of the property and let you buy it off the previous owner or building firm.
A mortgage is another name for a loan, but is specific to housing and purchasing properties. It comes from a lender such as a bank or building society. The deposit comes from you, the buyer, and is arguably the hardest part to acquire. It is a lump sum to pay for a percentage of the property value and the amount is decided by the lender of the mortgage and what deals they are willing to offer.
First time buyers are realistically going to be looking at 10 – 20% deposits (so a deposit of £13,000 – £26,000 on a property valued at £130,000), assuming they have a good credit history, but deposits can be larger still.
The higher the deposit, the more likely you are to get a good deal because lenders will see you as a ‘low risk customer’. 25% plus deposits will usually get you the best deals.
In the case of a 10% deposit, the mortgage would have to be 90% in order to make the total sum to buy the property.
You will have to eventually pay all the money you borrowed back, plus interest. This is how the lenders make their money from the deal.
Going back to the example of a £130,000 property, the mortgage would have to be 90%, so £117,000. If the mortgage is 4.9% APR then the interest in the first year would be £5,733 in addition to the amount of the mortgage that needs to be paid back.
Mortgages come in two main types: Fixed Rate and Variable Rate. The choice between them is entirely up to you and depends on which deals you can find.
Fixed rate mortgages
The fixed rate mortgages have an interest APR that is set and cannot be changed for a predetermined amount of time. This means that the interest rates cannot go up, but conversely also cannot drop.
The main advantage is that borrowers know exactly how much they will be paying and work out their finances precisely in advance. The fixed rates offered are based on the base rate that the lenders use, which can change.
If the base rate is at an all time high, fixed rates often come with discounts to make them more attractive so that when the base rate drops again, customers are still paying high interest.
If the base rate is low however, fixed rates tend to stay high as the base rate is likely to increase and the lenders do not want to be receiving low interest when their base rates are high.
Variable rate mortgages
Variable rates have an interest rate that can fluctuate to match the lender’s base rate. The main advantage of this is that the interest rates the borrower has to pay can drop, and the lenders receive an interest payment that remains constant relative to the current climate.
In order to get the best mortgage deals that are suitable for you, you will have to shop around and compare them. The main banks’ websites would be a good place to start or use our mortgage calculator to see what prices you could be looking at.