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Insights on money, career and trading

MORTGAGE 101

Posted on January 21, 2015 by Daniel at 7:20 pm

What is a Mortgage

You dream of it every night. You imagine fixing it, painting it and showing it off to your friends and family. Your dream house! Do wishes come true?

Well, you have two ways of achieving it. First, win the lottery! Hey, there’s no harm in trying, right?! Kidding aside, if you have instant cash, buy the house right away. Another way is to apply for a mortgage. If this concept is new to you, let me help you out.

What is a Mortgage? (Yep, I’m going right back to the basics!)

What is a Mortgage

Image courtesy of Vichaya Kiatying-Angsulee and freedigitalphotos.net

A mortgage is a loan involving two parties – a lender (a bank in most cases) and a borrower.  The mortgage is given to a borrower so he or she can buy a property. If the loan isn’t paid in time, the lender can repossess the property.

Here’s the catch: in the famous words of Spiderman, “With great mortgage comes great responsibility”. WHAT?! No joke. Getting a mortgage is a HUGE responsibility. Are you ready for it? Before you start signing contracts, read all the documents, ask your friends and family for advice, sleep on it for a couple of days (weeks or even months if needed) and then decide. Remember, once you sign your name on the dotted lines, there is no turning back!

How Much Can I Borrow?

Following the general rule of thumb, banks can give four times your wages. But because banks are cautious nowadays, they base their decision on the targeted property price. Don’t get insulted if they investigate your overheads carefully. Read the 2014 Affordability Rules and learn the kind of information they need. The lender can ask about personal expenses, child maintenance, hobbies, debts, and proof of income among other things. Why? They just want to make sure they lend an amount that borrowers can pay back. If you wish to know the exact amount you can borrow, try Santander’s helpful mortgage calculator for a general idea.

How Long Do I Get to Pay it Back?

Banks give enough time to return the money plus interest. Basically, you, the borrower, will decide the time frame. Two years? Five years? Twenty five years? The borrower and the lender must make the paying process part crystal clear. You must know exactly how much to pay every month and what particular day you need to pay it. Don’t gamble by making promises you cannot keep. Remember the flip side of mortgage: repossession!

What Other Things Should You Consider?

Well, aside from the loan interest, consider the taxes and house insurance. How about household maintenance, like utility expenses? The daily needs of the family, like food, clothes and, in the case of myself, the latest X-Box? Is the idea of responsibility now sinking in? If you can say everything is ‘covered’, then by all means sign the dotted lines!

Is it just Banks that Give Mortgages?

Nope. You can go to banks, but if that isn’t your style, then go to a building society, a mortgage broker, or hire an Independent Financial Adviser or I.F.A.  These people can help you choose the best mortgage deal by checking and comparing different options.

What Type of Mortgage?

By the way, there are two mortgage types to choose from.  A Fixed-Rate Mortgage is when repayments won’t budge a bit even if the interest rates in the world market goes up or down. A Variable Rate Mortgage would be the opposite; repayments may increase or decrease depending on the base rate of Bank of England.

Do I Need to have a Deposit?

Ooops! I almost forgot the tricky part of the deal. When applying for a mortgage, you must deposit a certain amount of money. If the deposit is big, then the interest rate you pay within your monthly repayments will be lower. Small deposits get higher interest rate. This is definitely something you need to look into and discuss with your mortgage provider before signing away your soul to them.

That’s it! Mortgage concept simplified for people who wish to fulfill their dreams. Remember, mortgage means only one thing – responsibility! Don’t take the plunge unless you definitely have the finances to back it up!

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