What is a mortgage?
If you’re looking to buy a home, you’ll probably need to apply for a mortgage.
It’s a loan which is secured against the value of the property.
The mortgage will either be:
- a repayment loan, where you pay back a proportion of the loan plus interest each month; or
- an interest-only loan, where you pay the interest on the loan each month but not the loan.
With interest-only loans, you need to have plans in place showing how you’ll pay back the amount you borrowed when the mortgage ends.
Saving for a deposit for a home
Mortgage lenders assess the amount you want to borrow against the value of a property. This is called Loan To Value (LTV). Most mortgages require a deposit of at least 5% of a property’s value, which is a LTV of 95%. The average deposit is usually around 20% to 25% of a property’s value which is a LTV of 80% to 75%. You’re likely to get a mortgage deal with a lower interest rate if the LTV is under 60%.
Affording mortgage repayments
To work out how much money you have available for mortgage payments, add up all of your monthly outgoings and take the total amount away from what you have coming in each month. You should include in your outgoings:
- any debts you’re paying off, e.g. credit card, store card or loan payments
- everyday and household spending, e.g. utility bills, travel costs, fuel and food
- money spent on going out and holidays
Buying a home costs
The costs you’ll need to set money aside for are:
- mortgage fees – fees paid to your lender for arranging your mortgage and valuing the property you want to buy
- a conveyancing fee – a fee paid to a conveyancer for sorting out the relevant legal work. See the section below called ‘The legal side of buying’ for details.
- Stamp Duty Land Tax (or Land and Buildings Transactions Tax in Scotland) – a tax paid to the Government when you buy a residential property over a certain price
- removal costs – the cost of moving your belongings to your new home
For the Stamp Duty Land Tax rates in England and Wales, see the gov.uk website
Improve your chances of getting a mortgage
Reducing your debts
If you have existing debts it may reduce the amount a mortgage lender will lend to you. To increase the amount you could borrow, you could reduce your debts before you apply for a mortgage.
Improving your credit history
- Your credit history will affect the mortgage amount a lender can offer you. You can check your credit history by getting a credit report from credit rating agencies such as Experian and Equifax
- If your credit history isn’t good, you can improve it by keeping up to date with payments on loans, phone contracts, utility payments and credit cards – missed or late payments are likely to affect your chances of getting mortgage
- If you have no or little credit history, lenders have little evidence that you can borrow responsibly and may be more reluctant to offer you a mortgage.
- Registering to vote: It’s important you register to vote so your name appears on the electoral register. Mortgage lenders use the register to check your identity. If you’re not on the register it’s likely that your mortgage application will be rejected.
- Cancel any unused store cards, credit cards and bank accounts.
Types of mortgage
The types of mortgages generally available are:
- Fixed rate mortgages where monthly payments are fixed for a set period of time.
- Tracker rate mortgages where payments are variable, meaning they could go up and down depending on the movement of the Bank of England’s Base Rate.
- Capped rate mortgages where interest payments can’t go above a certain amount but may vary depending on an interest rate set by the lender.
- Offset mortgages where your savings are placed in an offset savings account and help reduce the interest you pay on your mortgage debt.
With most mortgages when the initial period ends, you move onto a standard variable rate set by the lender which could go up and down
Mortgage advice and eligibility
A Mortgage Advisor can advise which type of mortgage best suits your needs. To do this, they’ll ask for details of:
- your deposit and required loan amount
- the age of each applicant and their income and outgoings
- your personal circumstances
Mortgage agreement in principle
When you put an offer on a property, you can show estate agents you’re serious about buying by getting an ‘agreement in principle’ (AIP) from a lender. The AIP states the amount the lender is likely to lend you. It’s not a legally binding agreement as it’s subject to a valuation of the property and you sending in any evidence the lender requires, such as payslips.
You shouldn’t ask many lenders for an AIP, as it requires a credit check against your credit file. The credit check leaves a footprint which can be seen by other lenders on your file and may affect your ability to get credit.
Making a full mortgage application
To make a full mortgage application, you’ll need to provide your lender with:
- details of the property
- proof of your employment and income, e.g. your most recent payslips
- proof of your identity and address
- copies of your bank statements for the last three months
If your lender is happy with the evidence you’ve provided and the purchase price of the property after a valuation, they’ll send you a formal mortgage offer.
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