If you have an inkling that you might like to own your own place one day, then it's worth having a wee bit of knowledge about mortgages now.
A mortgage is a loan you take out to buy your home. It can be for any length of time agreed between you and the lender (i.e. bank or buildling society).
If you get into difficulties making the repayments and fall into arrears (you owe money), the lender can, as a last resort, sell your home to get their money back.
Getting a mortgage can be daunting but here is some information you need to know. Here comes the maths bit!
Typically, a lender will offer to lend:
- Up to 3.5 times the main earner's income before tax, plus one times any second earner's income
- 2.5 times joint incomes (if this is larger)
It may be tempting to borrow as much as possible when the initial cost is manageable, but you could get into difficulties if your circumstances change (e.g. if you earn less money), or if interest rates rise.
Types of mortgage
There are two types of mortgage:
- Repayment
- Interest-only
Repayment mortgage - This is also called a capital and interest loan. Your monthly payments gradually repay the amount of money you have borrowed, as well as the interest on the loan. Provided you make all the agreed payments, the loan will be fully repaid by the end of the mortgage term (the amount of time you agreed with your lender e.g. 25 years)
Interest-Only mortgage - With this type of mortgage your monthly payments cover only the interest on the loan. They do not repay any of the money you have borrowed (the capital). You will need to arrange another way to repay the capital at the end of the mortgage term, for example by paying money into a savings or investment plan. With this one it is your responsibility to arrange how you will repay your mortgage at the end of the term, otherwise you might fall short and you could lose your home.
Golden rules
- Always read the small print
- Always check the interest rate
- Understand the total amount of money you will have to repay
Advice
When the time comes you can get lots more advice about mortgages, and buying a home, so don't fret about it too much.
More help and information
Young Scot InfoLine - To find out more about mortgages, or your money in general, phone Young Scot InfoLine on 0808 801 0338 (Mon to Fri 10am - 6pm). Calls are FREE from landlines and mobile phones.
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