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House Financing Options

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Purchasing a home is just about everyone’s dream, and the prospect of owning a home can be truly exciting. Choosing the right finance option to cover the cost for your dream home, however, may be overwhelming.

There are a number of options to consider when considering financing your home. Before making a choice though, you should ensure that some boxes are ticked. 

What is your financial standing?
Understanding your financial capacity now and in the future is the first step to selecting a financing option, and the homes you are looking at. How much do you earn? Are your earnings enough to offset the monthly payments on the house you really want? Answers to these questions will help you plan. Nick at The House Shop suggests, “Being able to afford a house is not just about the size of your deposit, but how well you can manage the monthly payments afterwards. A life where every penny goes out every month is stressful.”

You also need to carefully pick the right property to go for.

Do you have the necessary documents and a healthy credit rating? 
Whether you decide to go for a traditional loan or an unconventional finance option, some form of documentation is always required. You should compile relevant documents and be aware of the state of your credit rating, before deciding on an option. The credit rating is an important factor if you choose to go with traditional financing options. 

Will the house get a mortgage?
As well as applicants jumping through hoops, the property must also meet certain criteria to have a mortgage arranged for it. For example, it will need to be of constructed of certain materials, will need to be in reasonable condition (not subsiding), and will need to be sold at a price befitting its value. Sometimes you have to look outside traditional financing options in order to buy a house. You will probably have noticed some houses saying “cash buyer only” in property listings.
There are three main financing options available to you. They are covered below.

Banks do offer no mortgage finance for properties. The process of obtaining a loan can be burdensome. Documents, such as pay slips, identification, financial statements and more, are required. Bank loans attract interest and the bank must be convinced that you can pay back the capital and interest before it is approved. Commercial loans are sometimes used for commercial properties, but generally loans are designed for smaller levels of funding, which is why there are mortgages.

Most people decide to use a mortgage loan to raise funds to finance their property. There are a number of forms in which mortgages come. Two of the most common categories of mortgage loan are fixed-rates mortgage and tracker mortgages. A fixed-rate loan has an interest rate that remains constant for a specific period of time, before reverting to the standard variable rate. It is predictable over the fixed term period because it has a constant interest rate, thus creating a level of certainty about repayments. Getting long fixed rates at the moment can be expensive. With low interest rates currently shorter fixed terms often work best. You need to watch out for tie in periods and early redemption penalties, as you will probably want to remortgage on to another fixed rate when the standard variable rate is going to kick in.

Tracker mortgages have an interest rate that tracks at a certain percentage above the Bank of England Base rate. If the bank of England raises the base rate the mortgage goes up. Tracker mortgages are great if you think that interest rates are going to remain low.

Less conventional options

Beyond the banks and traditional mortgage providers, there are potential unconventional options to be explored. You may consider an ‘in-house’ option, such as a family loan for example. You may also consider other financial options, such as seller financing; where you pay the seller over a period of time. 

These options differ from a conventional loan in that, you are making more personal arrangements, and so your credit worthiness and deposit may not need to meet mortgage lender criteria.

In today’s day and age there are also additional options, like guarantor mortgages, and a plethora of lenders operating off the high street, and offering finance to borrowers with a chequered credit history, or unconventional situation. With more freelancers, contractors, remote workers and two-jobbers in the market lenders have had to evolve their products into new niche. 

Choosing the best financing option really depends on what you can afford, your financial state and which options you qualify for. Explore your options and get financial advice.

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by Joe Copley, the founder of OldHouses.com.

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