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Having decided where you want to live and which house to buy, the next stage of buying a property is finding the money to pay for it. For anyone except the very rich, this will involve taking out a mortgage.
First you need to get together enough money to be able to pay a deposit. Unless you are a first-time buyer, this will be a lot of money. You may need up to 25% of the total amount of the property in order to get reasonable terms on the mortgage. Given that the average house price is currently around £240,000, this means you will be expected to find a deposit of £60,000. To be eligible for a mortgage, you will also need to have a good credit score with the mortgage provider. Credit scores are, broadly, a measure of how likely you are to make the lender money.
How much money can you borrow? Typically, if you are single, your mortgage can be up to four times your salary. If you are buying with a partner, the amount decreases to three times your salary. Using the figures above gives a mortgage of £240,000-£60,000 = £180,000. The lender will be prepared to lend you this amount if you and your partner have a total salary of roughly £60,000. Meanwhile, if you are single, your salary will need to be in the area of £45,000.
The two main types of mortgage in the UK are called ‘repayment’ and ‘interest only’. With a repayment mortgage, the more popular type, you pay back a portion of the amount you owe – together with the interest that is accumulating – every month. With a repayment mortgage, the loan is secured on your house. This means that if you fall too far behind with your repayments, the lender will have the authority to repossess your house and sell it to regain the money it lost.
As the name suggests, with an interest only mortgage, you only pay back the interest that accrues over the term of the loan. This means that you still the entire house price at the end of the term. The lender should help you to set up a saving plan in order to cover the full cost of the mortgage at the end of the term. This kind of mortgage means that you are able to put your savings in a high interest savings account and slowly build up the amount of money you need. However, if you have not accumulated enough money to pay for the house at the end of the term, you can also expect an order for repossession.
How easy is it to get a good mortgage deal? The credit crunch was partly caused by banks and building societies giving mortgages to people who had poor credit and simply had no ability to pay. After several of these institutions went under, the others have become far more cautious about who they lend money to, meaning that getting a good deal for a mortgage has become harder since then. How reliable a repayer you might be is now partly assessed by your credit score.
Once your mortgage has been arranged you will need to pay a mortgage arrangement (or administration) fee. This has risen sharply in the last few years, as lenders have taken advantage of the government initiative to lower mortgage rates. The average mortgage arrangement fee is now more than £1,500. Legal fees for conveyancing, that is, performing all the administration necessary to ensure transfer of the two properties, should be in the region of £500-£800, depending on the house size.
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