If you’re considering getting a first time buyer mortgage in the New Year, it can be a good idea to brush up on some of the jargon that you’re likely to hear during the mortgage process.
A mortgage can seem overwhelming at first and although it certainly isn’t anything to be taken lightly, getting approved and finding the best rates can be a lot easier once you learn the lingo.
Now, let’s break down the buzzwords…
LTV (Loan to value rate)
You’ll hear this one a lot…
LTV (loan to value) is the amount of loan that a lender will provide you as a percentage of the value of the property.
If a property is valued at £200,000 and you have a 20% deposit of £40,000, you would need to borrow £160,000 from your lender. If they agree, the LTV rate would be 80%.
So, the higher the deposit, the lower the LTV rate (unless you need additional borrowing for renovations!)
That being said, the amount that any given lender may loan you can vary widely depending on your own circumstances. One lender may agree to loan you 80% while another may only be prepared to loan you 70%.
To find a competitive LTV rate, it can be a good idea to compare various sources including banks, high street lenders and specialist lenders.
But before you roll your eyes (because yes we know, who has time for this?!) it can be helpful to know that there are mortgage advisers who can compare lenders and rates on your behalf. That means less time on comparison sites and more time catching up on Peaky Blinders.
Lenders look at our credit reports to assess whether we are a good borrowers, after all, if they’re going to lend thousands of pounds, they’ll want to be sure that you’ll pay it back on time and in full.
Your credit report can be negatively affected by many factors which may include:
- Late or partial payments on your credit report
- Unpaid utility bills
- Debts that have been transferred to debt collection agencies
- Being too close to your credit limit on credit cards or catalogue accounts
Some lenders can be more open to lending to first time buyers with bad credit, although you may find that the rate you are offered is higher because of the associated risk of loss to the lender if you default on your payments.
If you’re concerned that bad credit could stop you from getting a mortgage, chat with an adviser who can talk you through your options.
Helpful to know…
A lot of first time buyers make the rookie mistake of finding their dream property and applying to multiple lenders but this can lead to mortgage rejections on your file.
Each time you apply for a loan or line of credit, your credit report can change. With the majority of lenders placing heavy importance on your credit score, this is not something you want to do…
To avoid changes on your report that could affect your eligibility for a mortgage, find out how much you can borrow and whether you would be accepted ahead of applying.
You might also hear this being referred to as a mortgage in principle.
Essentially, a pre-approval is like gaining promise from a lender that they’ll loan you up to a certain amount of money at a specific interest rate, subject to a property appraisal and other requirements.
During the pre-approval process, your chosen lender will assess your affordability among other factors to determine whether you fit their criteria and can afford to repay.
If successful, your lender will provide you with a pre-approval letter as evidence that you have a lender in place and usually, the offer and therefore the terms in the agreement, will last for sixty to ninety days.
This is the one that usually (and understandably) makes people want to fall asleep. Don’t doze off just yet though, knowing how interest rates work could save you a lot of money and potentially a future headache.
So what is an interest rate?
In order to make a profit and minimise the risks associated with loaning large amounts of money, lenders will charge a percentage of the loan as interest. The lower the interest rate, the less money you pay back on top of your loan repayments.
The interest rate you are offered on a mortgage can depend on many factors including:
- The lender’s appetite to loan to someone with your circumstances
- Current and future projections for the economy
- Your credit score
- The size of the loan you are applying for
- The size of your deposit (The higher the deposit, the less money you have to borrow. This can give you access to lower interest rates and deals)
Your equity is the value of the share of your property that you actually own.
For example, if you were to buy a property worth £200,000 with a £60,000 deposit, you could own 30% of the properties value as equity. The additional 70% would be borrowed as a repayable debt.
Having a larger deposit means that you can own more of the property upfront and for many lenders, this is favourable as it means you borrow less money.
Over time as you pay your mortgage off, your debt reduces and you equity increases.
Have a niggling question?
Our advisers know how important it is that you understand how each decision and step could impact your application and loan terms.
A trustworthy broker will always keep you in the loop which is why we give our clients 24/7 access to our client portal, allowing you to monitor the progress of your mortgage application and have direct contact with your mortgage adviser.
Your home may be repossessed if you do not keep up repayments on your mortgage.