We all have our dream homes – projects we have been working on for years within the confines of our imaginations. The best thing about this type of dreamy project management is that there are very rarely budget constraints…
In the real world, your build is constrained by your budget.
And for most of us who don’t have access to bountiful savings, this means applying for a mortgage from the bank…
In this guide, we will look at the basics of mortgages – what they are and how they work.
What is a mortgage?
Mortgages are basically just loans that are taken out in order to buy a property.
As most of us do not have anywhere near enough money in the bank to buy a property outright, it leaves us to borrow what we cannot afford.
Most commonly, we in the UK will pay the deposit from our own savings (around 10%) and then apply to a mortgage lender for the remaining money – usually a bank for a building society.
How do mortgages work?
Mortgages are large loans on your property that will be paid back in chunks each and every month. The terms of repayment will be set out in your original agreement, with monthly fees including the interest that needs to be paid on the loan.
Most mortgages take about 25 years to repay, but they come in longer or shorter periods of time depending on your needs.
The total amount of the mortgage including interest will be split over the years taken to repay it, which is how monthly repayments are calculated.
How to calculate mortgage repayments
Here is a worked example to help understand how interest can begin to seriously add up over time.
A customer buys a property worth £200,000. For the deposit (10%) they need to pay £20,000 upfront.
This means the customer needs a mortgage of £180,000 to cover the rest.
The interest for their loan is set at 2% – the interest alone is £48,922
The total sum to repay is now £228,882
For a standard mortgage term of 25 years, this would mean the monthly repayments would be £763.
It is advised to use an online mortgage calculator to help work out what your monthly repayments will be, as the maths can be tricky.
Repayment or interest only
Repayment mortgages are aimed at getting your monthly payments working towards paying off both the property value and the interest that you owe. By the end of the term – you own the property and the interest has been paid off in full.
Interest-only mortgages are slightly different in that you only pay the interest on the loan, not put any equity into your property. At the end of the loan term, you still don’t own the property and owe the lender the full amount. This type of loan is most common for buy to let properties.