Almost all of us have to borrow money to get our first homes at least once in our lives. And a residential loan is the first step towards our dream place.
This detailed guide will explain what is residential loan and how they work along with their types and what you need to be aware of before getting a residential loan.
Residential Loan
Residential loan is a type of long term loan which is specially designed to aid an individual or more financially to buy a property to live in. It is a large loan which funds you to purchase a residential property. The loan has to be paid back to the lender timely, over the loan term which is 25 years approximately. The property must be used for living by the borrower meaning you can’t lend the property to tenants or use it for any commercial purposes.
Residential loans can be taken by anyone like first time buyers, those looking for a re-mortgage or those who are moving from the place. These types of loans generally require a cash deposit ranging from 10-30% of the total property value.
Let suppose you would need to make a deposit of £20,000 to £60,000 for a £30o,000 property.
Point to remember:
Residential loans are secured against the property. It simply means that if you are continuously unable to pay the loan return to the lender, your lender ultimately has a legal right to repossess your home. Thus, you will be forced to sell your home so the lender can recoup the money.
How To Get A Residential Loan
Residential loans are not easy to get and to make yourselves the perfect candidate for residential loan You can take several steps mentioned below before applying for a residential loan.
Tips to increase your chance of getting a residential loan
- Save a large sum of deposits
- Understand how much you can borrow
- Get your finances in order
- Keep a track of your credit score
- Take measures to improve your credit score
- Compare the residential loan in the market
- Consult a mortgage broker
Types Of Residential Loans
It’s important to choose the type of residential loan according to your budget and requirements. The types of residential loans are as follows:
Fixed Rate Loans
A fixed rate loan allows you to pay a fixed amount of interest rate for a set period of time, lasting from 2,3,5 to as long as 10 years.
Advantages
- The repayments remain the same each month, which makes it easier to budget.
- There are no worries circling the rise of interest rate during the term of the deal.
Tracker Loan
A tracker loan is a kind of variable rate loan which tracks the base rate and not interest rate. This means that the value of your interest rate can rise and fall with the movement of base rate, thus your monthly repayments can fluctuate.
Advantage
- It is generally cheaper than fixed rate loans
Disadvantage
- It is not suitable for people with tight budget
Variable Rate Loan
Variable rate loans fluctuate at the lender’s discretion. Lender’s standard variable rate (SVR) is the most common form which is the rate you will be moved onto after your existing loan deal has come to an end, for instance, after 2 or 5 years.
Advantage
- Easy to move off it
- You can remortgage as soon as you can
Disadvantage
- The SVR is more expensive
How Do Residential Loans Monthly Payments Work
For the repayment of the residential loans, there are two methods you will come across
Repayment Mortgage
In this your monthly payment includes a portion of the amount borrowed and interest.
Interest Only
In this, all you have to pay is interest monthly and no capital thus your repayments are lower.
How To Find The Most Suitable Residential Loan
Getting a residential loan can be a difficult task, there are there care several loan lenders in the market. So before moving forward with the loan practices, make sure to:
- Compare the loan/mortgage deals carefully and then choose the option which is most reliable and has a low setup fee and lowest interest rate
- Try to consider the full cost of the mortgages
- It’s cheaper to get a loan with high interest rate but a lower set-up fee
- Seek a broker who can advice you on the best deal suitable according to your requirements
Conclusion
To summarize what we have learnt, residential loan is a large loan designed to help in buying a residential property. The term of residential loans can lie anywhere between 25-30 years depending on the loan providers. Residential loans generally have three types, fixed rate mortgage, tracker mortgage and variable rate mortgage. Now choose your preferred loan type and take the first step towards your dream home.