Buying a home is the largest purchase you’re likely to make. Before you arrange your mortgage, make sure you know what you can afford to borrow. Find out where to get a mortgage, the different types and how the process works.

What is a mortgage?

A mortgage is a loan taken out to buy property or land. Most run for 25 years but the term can be shorter or longer.

The loan is ‘secured’ against the value of your home until it’s paid off. If you can’t keep up your repayments the lender can repossess (take back) your home and sell it so they get their money back.

Working out what you can afford

Don’t stretch yourself if you think you’ll struggle to keep up repayments. Also, think about the running costs of owning a home such as household bills, council tax, insurance and maintenance.

Lenders will want to see proof of your income and certain expenditure, and if you have any debts. They may ask for information about household bills, child maintenance and personal expenses.

Lenders want proof that you will be able to keep up repayments if interest rates rise. They may refuse to offer you a mortgage if they don’t think you’ll be able to afford it.

To find out how much you could borrow……

Your deposit – size matters

When buying a property, you will need to pay a deposit. This is a chunk of money that goes towards the cost of the property you’re buying.

The more deposit you have, the lower your interest rate could be. When talking about mortgages, you might hear people mentioning “Loan to Value” or LTV. This may sound complicated, but it’s simply the amount of your home you own outright, compared to the amount that is secured against a mortgage.

For example, with a £20,000 deposit on a £200,000 property, the deposit is 10% of the price of the property, and the LTV is the remaining 90%. The mortgage is secured against this 90% portion.

The lower the LTV, the lower your interest rate is likely to be. This is because the lender takes less risk with a smaller loan. The cheapest rates are typically available for people with a 40% deposit.

How does a mortgage work?

The money you borrow is called the capital and the lender then charges you interest on it till it is repaid. The type of mortgage you are able to apply for will depend on whether you want to repay interest only or interest and capital.

Your home may be repossessed if you do not keep up repayments on your mortgage

Please click here to view our useful glossary of terms