Buying your first property is a significant and memorable moment, and if you’re lucky enough to be able to get your foot on the property ladder, you’ll most likely require a mortgage. I’m sure you’ve heard the term a lot whether you own property or not; but what actually is it, and how do they work? Not to worry - Incredible’s got you covered, so all of your mortgage questions will be answered if you keep reading. 😌
What is it?
When it comes to mortgages, there’s a lot of misinformation. So, let's make it easy - a mortgage is simply a loan that is used to purchase a property. The property acts as collateral for the loan, which means that if you are unable to pay your mortgage payments, the lender can repossess your home.
Now that we have a clear understanding of what a mortgage is, let's take a look at how you actually get one…
How do I get one?
The first step is to speak with a mortgage advisor, who will help you figure out how much you can afford to borrow. They'll also take a look at your financial history (e.g. your credit score), to make sure you're a dependable borrower who is able to make the monthly repayments. Once you've found the property you want to buy, you then need a mortgage offer from a lender. This is a legal and formal document that outlines how much they're willing to lend you, as well as the terms and conditions of the loan. Be sure to read this extremely carefully, making sure you understand your repayment dates and the consequences you face if you fail to meet them! It’ll also detail whether you’re paying a fixed-rate mortgage, meaning that the interest rate on your loan will stay the same regardless of market fluctuation.
How do I pay it off?
Once you've accepted the mortgage offer and purchased the property, it's time to start making repayments. These repayments are typically made on a monthly basis, and you'll need to make them for the duration of your loan term - which is usually between 10-35 years, but this can vary from lender to lender.
You are able to make overpayments, meaning you pay more than the minimum amount each month, as this can help you repay your debt sooner. However, you should be aware that some lenders charge fees for doing this in an attempt to make back some of the money they will lose in interest. 💸
It’s also important to remember that even if you have access to money to pay off your mortgage sooner, it can be advantageous to instead invest this disposable cash to improve your liquidity (your assets); and have quick access to these funds rather than having them tied up in equity (how much of the property you own) - which could be useful in case of future money emergencies. What’s more, although a mortgage is a form of debt - it’s what we call good debt. If you’re paying it off in full and on time each month, it can improve your credit score as you’re seen as reliable and low-risk to lenders. If you want to read more about good vs bad debt, check out our blog on it here!
Once the loan term has come to an end and the mortgage has been paid off in full, assuming you have no other debts secured against the property, you will own the entirety of the property’s equity! 🏡
What’s a remortgage?
There is also an option to remortgage your property. Although some define it as borrowing more money from your current lender if you find yourself unable to make the monthly repayments, it is more widely defined (in the UK at least) as applying for a new mortgage with a different lender - whilst staying in the current property. It allows you to find a new deal that’s a better fit for your circumstances, however there’s a lot to go over before applying for one.
As we mentioned previously, you could be charged large sums of money by your present lender if you leave your contract before it ends - including exit fees. Therefore if you’re looking to remortgage to pay it off sooner, it’s worth calculating how much money you’d really save by exiting the contract; compared to overpaying your current mortgage as well as paying the early repayment charges. There are other hidden fees when it comes to remortgaging that need to be considered too; including application, valuation and solicitors’ fees!
You also need to make sure you have a good credit score, as lenders are less likely to enter a contract with you if you have a history of missing payments; especially if you’re remortgaging to lower your monthly repayments and extend your time in debt.
So there you have it - all your questions about mortgages answered.😎 Just remember to shop around and compare offers from different lenders before making a decision, and definitely speak with a mortgage advisor before signing any contracts! What’s more, although not a feature quite yet on our Incredible app, in the future it’s rumoured you’ll be able to manage your mortgage repayments easily with us - so sign up now to avoid missing out! 👀