A Beginners Guide
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 about the different types or mortgages and how the process works.
What is a mortgage?
A mortgage is a loan taken out to buy property or land.
Most run for 20-30 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 might 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 might refuse to offer you a mortgage if they don’t think you’ll be able to afford it.
Applying for a mortgage
Applying for a mortgage is often a two-stage process.
The first stage involves talking to the Mortgage Gurus and completing a basic fact find to help you work out how much you can afford, and which type of mortgage(s) you might need.
The second stage is where the mortgage lender will conduct a more detailed affordability check, and if they haven’t already requested it, evidence of income.
Your Mortgage Guru will ask you a series of questions to work out what kind of mortgage you want, and how long you want it for. You will discuss your current and future plans and also your current financial situation, including income and expenditure to establish affordability.
Based on the information collected, your Mortgage Guru will begin searching the market for the most suitable mortgage option available. Once found, a recommendation will be provided to you detailing the mortgage, the lender, any fees or charges, monthly repayments etc. We will also provide you with our research and the reasons why we feel it is the most appropriate option for you at the time.
This is called a 'Mortgage in Principle', because at this stage the research conducted is based on the information provided to us verbally, with no formal checks having been carried out.
If you wish to move forward, we convert your 'Mortgage in Principle' to a 'Decision/Agreement in Principle'. At this stage we will ask you to provide physical documentation to back up the information previously provided.
This will include, but not limited to; photo identification, proof of address, proof of salary, proof of deposit, bank statements and a copy of your credit report.
Once we have received the items detailed above, we can apply to the lender for a 'Decision/Agreement in Principle'. This is an automated process that will assess the information provided verbally, plus a credit check and give a result concluding whether of not the lender would be prepared to lend the amount requested. This in NOT a mortgage application and a positive result is NOT a Mortgage offer and does not guarantee that the loan will be granted once converted to a full application.
When the 'Decision/Agreement in Principle' is converted to a full mortgage application, the lender will require copies of all documentation previously mentioned and will make a more detailed assessment of the applicant before making a formal mortgage offer.
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 might 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.
With repayment mortgages you pay the interest and part of the capital off every month.
At the end of the term, providing you don't miss any repayments, you should have paid it all off and own your home.
With interest-only mortgages, you pay only the interest on the loan and nothing off the capital (the amount you borrowed).
These mortgages are becoming much harder to come by as lenders and regulators are worried about homeowners being left with a huge debt and no way of repaying it.
You will have to have a separate plan for how you will repay the original loan at the end of the mortgage term.
Different types of mortgage
Once you’ve decided how to pay back the capital and interest, you need to think about the mortgage type.
Mortgages come with fixed or variable interest rates.
With a fixed-rate mortgage your repayments will be the same for a certain period of time – typically two to five years regardless of what interest rates are doing in the wider market.
If you have a variable rate mortgage, the rate you pay could move up or down, in line with the Bank of England base rate. There are various types of variable rate mortgages.