The majority of those looking to get on the property ladder will need to take out a mortgage to buy their home. In this article we look at everything you need to know about the mortgage process, the different types of mortgages and how to find the deal that suits your individual circumstances.
The first thing to state is that this article is not represent any form of financial advice. It is for information only.
What is a mortgage?
A mortgage is a loan from a bank or building society that provides funds to buy a property. It is a secured loan, which means the bank has the right to take back and sell the property if you cannot keep up with your monthly repayments.
How do mortgages work?
Once you obtain a mortgage, you pay back the amount you have borrowed, plus interest, in monthly instalments over a set period according to the mortgage deal you have chosen. The mortgage is secured against your property until you have paid it off in full.
In the UK, you can get a mortgage in just your own name or you can take out a joint mortgage with another person or group of people.
It is important to understand the difference between a mortgage and a loan. A mortgage is a type of loan that is secured against your property.
A loan is a financial agreement between two parties. A lender or creditor loans money to the borrower and the borrower agrees to repay this amount, plus interest, in a series of monthly instalments over a set term. Loans can be secured against an asset, like a mortgage, but others are unsecured which means that you do not need to use an asset as collateral. However, the amounts borrowed with unsecured loans are usually smaller with higher interest rates.
What is a Deposit?
A deposit is a lump sum payment that you must pay towards the cost of the property that you are buying. The higher your deposit, the less you’ll need to borrow as a mortgage and the better the mortgage rate you’ll be offered.
A deposit is calculated as a percentage of the purchase price of the property. For example, if you bought a house for £200,000, a 10% deposit would come to £20,000. Your mortgage provider will then lend you the remaining 90% of the purchase price, in this case, £180,000. This is what is known as the Loan-to-Value (LTV).
Where can you find a mortgage?
In the UK, banks and building societies provide most mortgages. There are two ways you can source your mortgage;
Directly from the lender by contacting your chosen bank or building society.
Or, through a mortgage broker or independent financial adviser. Many brokers are ‘whole-of-market’, which means they can offer mortgage deals from hundreds of lenders – including very good exclusive deals.
At Cope & Co, we would always advise using a broker to source the best deal for your individual circumstances.
Our chosen mortgage partner is Peak Mortgages and Protection, a multi award winning mortgage broker covering the whole of Derbyshire. Visit their website HERE
What type of mortgage is best for me?
There are many different types of mortgages available through so many different lenders, that’s why we would always advise using a broker to find you the best deal.
Some mortgages are designed specifically for first-time buyers, others are designed for landlords, and others still are for remortgaging only.
Mortgages if you are a first-time buyer
First-time buyer mortgages can allow you buy a home even if you have a small deposit. There are also specific mortgages and schemes aimed at helping first-time buyers purchase their first home;
Guarantor mortgages are designed for people who might not be able to get a mortgage on their own. They can be an option if you have little or no deposit, are on a low income or have a poor credit rating. Essentially the guarantor – usually a family member or friend who is also a homeowner – agrees to pay the mortgage if you cannot. However, this is a significant undertaking that makes them jointly responsible for the debt and puts their own home or savings at risk.
What other types of mortgage are there?
There a several types of mortgages available for specific types of individuals who may not fit the profile of a ‘normal’ borrower. These mortgages are very specific and it is advisable to obtain independent advice on these.
Interest only and repayment mortgages?
The majority of mortgages these days are repayment mortgages. Your monthly payments will go towards both the interest charged on your mortgage and clearing the outstanding balance. By the end of the mortgage term, you will have paid off the full amount borrowed.
With an interest only mortgage, your monthly repayments only cover the interest owed, so your balance will not go down. At the end of the term, you will need to pay off the full balance. This means you will need to have saved up this amount separately using a repayment vehicle like savings, shares, an ISA or other investment.
How much does a mortgage cost?
The amount you have to pay each month and in total over the life of your mortgage depends on the deal you get and the cost of the property.
The interest rate will affect how much you have to repay overall and what you pay each month. It is calculated across the lifetime of the mortgage and is charged as a percentage rate on the amount you owe.
For example, if you took out a £200,000 mortgage with an interest of 4% over 25 years, you could pay interest of £116,702 and repay a total of £316,702. The mortgage in the above example could cost around £1,056 per month with an interest rate of 4%
Product fees are charged for taking out the mortgage and are dependant upon the lender
Application fees can be charged when you apply for a mortgage, whether you end up taking it out or not.
Valuation fees may be charged by your lender for working out how much your property is worth
Higher lending charges come with some mortgages if you have a small deposit
Telegraphic transfer fees are charged when the bank transfers the money they are lending to you
Broker fees can be charged if you take out a mortgage recommended by a broker
You may also have to pay fees on your old mortgage:
Early repayments charges if you pay it off before the end of its term
Exit fees are charged on some mortgages when you move to a new lender
What happens if you miss mortgage repayments?
Once you have your mortgage in place, if you miss a monthly repayment you will likely be charged a late payment fee by your lender. On top of this, the missed payment(s) will be reported to the credit reference agencies and this could have a negative impact on your credit score.
If you think you might miss a monthly repayment, or you already have, it’s crucial that you speak to your lender as soon as possible. They will work with you to find a solution to help you get back on track, whether that’s offering you a payment deferral for a short time, a period of reduced payments or an extension to your mortgage term.
Whatever you do, don’t buy your head in the sand – talk to your lender straightaway.
Should I get a fixed or variable mortgage?
There are several different ways that mortgages can set their interest rates. The best option for you will always come down to your own individual circumstances and goals so, when speaking to your broker, it is vital that you provide as much information as possible.
Variable mortgage rates can change at any point, although they usually rise and fall roughly in line with the Bank of England base rate.
Fixed rate mortgages guarantee that the interest rate will not change for a set period, usually between one and five years.
Tracker mortgages have variable rates that follow the Bank of England base rate exactly. A mortgage set at 2% above the base rate would be 2.5% with the base rate at 0.5%. If the base rate later went up to 1%, the mortgage rate would change to 3%.
Discount mortgages offer a rate set at around one or two percent less than the lender’s standard variable rate. The rate will rise and fall with the lender’s standard variable rate, and the discount will last for a set period of a year or more.
Mortgage in Principle
Estate agents will often ask if you have a mortgage in principle, so it’s good to have one sorted before you begin your property search in earnest. To obtain one, you provide your mortgage broker or potential lender with information about your finances and they give you an indication of how much you’ll be able to borrow.
Typically, you need to supply various details about yourself and anyone else you’re buying a property with. These include personal details, addresses for the past three years and details of your income and monthly outgoings. It will also be necessary to carry out a credit check which will look at your credit history, including any past or present loan or credit card debts, to work out whether you’re a suitable applicant.
The Mortgage in Principle is usually valid for up to 90 days but this can vary depending upon the lender.
What is the mortgage process?
Once you have a mortgage in principle and you’re ready to apply for your mortgage in full, you’ll need to take the steps below:
Get your documents ready, including your ID (such as a passport), your proof of address (such as a utility bill), proof of income (at least three months’ payslips and your P60), and proof of deposit. If you’re self-employed, you will usually need the last two to three years’ worth of accounts.
Complete your mortgage application. You will need to give your lender details of the property you want to buy, including the price you’ve agreed to pay.
Appoint a solicitor to draw up the contracts and handle searches.
Get a home survey. This needs to be carried out on the property you’re buying to check its value and condition. You can choose whether you want a more basic condition report, a more comprehensive homebuyer report or a full structural survey to give more detailed information about the property’s condition.
Exchange contracts. Once your mortgage is approved and you’re ready to make your purchase, your solicitor will exchange contracts of the sale with the seller’s solicitor.
Completion. This is the date the money is transferred to the seller and you legally own your new home and can move in.
Will you be accepted for a mortgage?
Mortgage lenders have different standards and requirements. The following factors will affect whether lenders will offer you a mortgage and how much they will be willing to lend to you:
The price of the property
Your deposit amount
The length of the mortgage term
Your credit report
Your current income and expenditure
If you are applying solely or jointly
How to manage your new mortgage
Once you move into your new home you will need to start making monthly repayments on your mortgage.
In an ideal world, try to have six months’ worth of mortgage payments, as well as basic household expenses in a savings account that can be accessed in an emergency. Even having a couple of months’ worth of expenses in savings can give you breathing space in case your circumstances change.
If you would like to discuss any aspect of selling or buying a home, our team are always available of offer any advice or support. Please call on 01332 300195
*Some information in this article has been used from money.co.uk