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What is mortgage?

Mortgage? What’s that?

It’s everybody’s dream to live in their own house one day. The need to buy a first home motivates an individual to work hard. In the UK, thousands of properties are changing hands every minute. Some properties are sold for more than what they’re worth. So, it would be worth your while to get a proper house valuation done to ensure that you’re not wasting good money. Once this is done, you start scanning the market for a suitable mortgage product.

A mortgage is a home loan. A lender lends you the loan but they ask that your house act as the collateral. This is a part of the terms and conditions of every mortgage agreement. A home loan is a secured loan. The lender does not want to bear the risk of losing thousands of pounds. If you stop making payments comprising of interest and capital, they are legally allowed to take over your house and sell it to anybody.

 Principal? Mortgage Insurance? I don’t understand…

You should read up about what is mortgage and the terms used by lenders before applying for a loan. No doubt lenders will patiently explain things to you if you don’t understand, but you can’t expect them to tell you every small detail. A few commonly used terms in mortgage dealings are

1. Principal

The principal is the loan amount you’re applying for. If your house costs a lot, your principal amount will be that much higher than if your house came cheap. The amount you want to borrow depends on how much money you’ve managed to save. These savings can go towards your deposit money. If you have more money saved up, you need to borrow less. And a small principal amount will also have a low-interest rate. 

2. Interest

You can get a home loan easily. But at a certain price that is called interest. Interest rates vary for different mortgage products and also for different lenders. There is a direct relationship between the principal and interest rate. If one is high, the other will also be high. 

3. Taxes

Taxes refer to the property taxes that the Government collects. Every homeowner has to pay a tax on property. 

4. Mortgage insurance

Insurance is basically a way of protecting someone financially. In the same way, a mortgage insurance protects a mortgage lender from the risk of default. You may be asked to pay for mortgage insurance if you have less than a 20% deposit.

 Mortgage calculator? Is it of use?

We use a calculator to make additions and subtractions. In the same way, a mortgage calculator lets you compare your incomes and expenses to find out your affordability. Some people may afford to make higher monthly repayments while others may not be able to. It can also be used to compare several mortgage deals at once and see which one is the best fit for you.

 Mortgage types?

The mortgage is such a product you’re spoiled for choice. Repayment mortgages allow you to repay the interest and principal in small, fixed parts. With interest-only deals, you have to repay only the interest every month and the capital at the end of the term. For this, you need to be confident you’ll have thousands of pounds saved or inherited when the time comes. While fixed-rate mortgages’ interest rates remain fixed, variable rate mortgages’ interest rates vary with the Bank of England’s base rates.

 Documents for the mortgage application?

You need the following documents.

1.     Identification proof

2.     Address proof

3.     Income proof (If self-employed, profit statements of the last three years)