Introduction to Mortgages
What’s a mortgage?
A mortgage is a loan that you take out to buy a property. Most run for 25 years but can be shorter or longer. The money you borrow is called ‘capital ‘and the lender charges you interest on it until it is repaid. 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 your home and sell it so they get their money back. When it comes to monthly repayments, these can be interest and capital, referred to as a repayment mortgage, or just interest, referred to as an interest-only mortgage.
What is a Repayment Mortgage?
With a repayment mortgage, you make one payment each month to your lender, part of which goes towards paying off the interest and part goes towards repaying the capital borrowed. At the end of the term of the mortgage, as long as you have kept up repayments, your mortgage is paid off.
What is a Interest Only Mortgage?
With an interest-only mortgage you only pay interest each month, not the capital borrowed. This means at the end of the mortgage term you still owe the full amount that you originally borrowed and will need to make other arrangements to pay.
What types of mortgages are available?
Mortgages come in various types and we can help you find the one that would work best in your particular circumstances. We can explain the pros and cons of fixed rate, variable rate, standard rate, discount rate, capped rate, tracker, offset and cashback mortgages. We’ll also talk you through the finer detail of how repayment mortgages and interest-only mortgages work. We keep up-to-date with the deals the market has to offer, including those offering free surveys or reduced legal fees, so we’ll be able to explain how these might work for you.
How much deposit do I need?
Basically, the bigger the deposit you put down, the cheaper the mortgage. While some lenders are prepared to lend up to 95% of the property price, with the borrower putting in the remaining 5% as a deposit, better deals and rates are available to those who can put down, say, 20% or even more. It’s important to remember there are also fees and charges that you will be required to pay as part of the process of putting your mortgage in place, so you’ll need to have savings in place to pay for these too.
What does a solicitor or conveyancer do?
They undertake the conveyancing, the legal transfer of ownership from the seller to the buyer. They also review the terms of the contract, carry out searches to ensure there are no planning issues, or problems like flooding, obtain details of fixtures and fittings the seller is leaving behind, and obtain important documents such as Energy Performance Certificates. They arrange the exchange of contracts that commits you to the purchase, arrange your completion date, pay over the stamp duty and register your title with the Land Registry.
How much can I borrow?
Lenders calculate how much you can borrow based on both your income and your outgoings. They also take into account how much deposit you have available. That’s why it’s important to be able to show a potential lender that you manage your money well, don’t have huge debts, keep your spending under review and maintain your bank account in good order.
Our Top Tips
Speak to an mortgage adviser as early as possible
Before you start looking for a property to buy, it’s really worth speaking to us. We can help you work out how much you’re likely to be able to borrow and give you useful hints and tips that will help you prepare for the mortgage application process.
Your credit score matters
When a potential lender reviews your application, they’ll take a look at your credit report. Generally speaking, the higher your credit score the better your chances of getting a mortgage at a lower interest rate.
Simple steps like increasing your monthly credit card repayments, registering on the electoral roll and not taking on additional borrowing before you make your application can help improve your chances of having a good credit score.
Your finances need to be in good order – do your sums ahead of time
Mortgage lenders are required by the Financial Conduct Authority to adopt an affordability-based approach to lending. This means that banks and building societies now scrutinise borrowers’ incomes, outgoings and credit history closely and can ask searching questions about your finances.
They apply strict affordability criteria as they need to ensure that borrowers can comfortably afford their repayments now, and in the foreseeable future. It’s worth looking closely at what you spend and making sure your finances are in good order before making a mortgage application.
The bigger the deposit the better
Saving up for a deposit can be hard going, and the best advice is to start saving as much as you can as early as you can. The more you can put down as a deposit, the better the deal you can expect to be offered. Increasingly, more and more first-time buyers are offered financial help from their parents and grandparents.
It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. No part of this document may be reproduced in any manner without prior permission.