Guide to Getting a Mortgage
What you need to know
- A mortgage is a loan that borrowers take out to buy property, usually a house or a plot of land. The amount that is borrowed is called capital and is repaid to the lender in regular installments
- Before making a decision for a mortgage you should get in touch with a mortgage broker or other financial adviser to evaluate all your options
- Not only banks and building societies offer mortgages but also home builders and developers and even some employers offer special mortgage deals for their staff
- When applying for a mortgage you will be asked for a range of documents to prove your regular income and expenses and evaluate your financial situation.
- Next to the monthly repayments, you will have to pay a deposit that goes towards the value of your property. The deposit you pay often determines the interest rate that you will be charged
- Failure to stick to the terms and conditions such as missing your regular repayments can lead to a repossession of your property so the lender can cover any outstanding debts
- Remember, a mortgage will almost certainly be the biggest financial commitment of your life, so be sure to do your homework and sign up for the best deal to suit your individual circumstances
What is a mortgage and how does it work?
Mortgages are loans that bank or building societies take out to buy a land or property. As the money taken out for the mortgage is invested in a high-value asset, this asset is automatically kept as a security against the loan. The sum that is borrowed is called the capital, which is repaid in regular monthly installments, usually over the time period of up to 25 years, with potentially shorter or longer terms.
As the lender charges interest along with the repayments, this is included in the installments. Depending on the deal that you choose, mortgages come with fixed or variable interest rates. In addition to your regular repayments, you will have to pay a deposit, which goes towards the value of the property you are buying. The amount of the deposit can determine the interest rates that you will be paying. Failure to stick to your regular repayments can lead to a repossession of the property, which means that the house will be sold in order to cover your outstanding debt. During the term of your mortgage, you are moreover unable to sell your property, as you only become the legal owner once you have paid off your mortgage.
How to apply for a mortgage
Mortgage deals depend to a fair degree on the financial situation of the borrower. Thus before making your decision, always make sure that you can afford a mortgage in the first place. With every mortgage application, your finances will be subject to a credit check. Mortgage lenders will be particularly interested if you have any defaulted other payments or have failed to repay a loan in the past.
Also your ability to pay a higher deposit helps you to successfully apply for a mortgage. In order to prepare yourself for this, you could run a simple credit check on yourself; you should be able to find such services online. This helps you to better evaluate your own situation and see which mortgage deals you are eligible for.
Do consider getting in touch with an official mortgage advisor to discuss your options. Service advice teams of banks and building societies should equally be able to give you professional advice in order to prevent future troubles or surprises. The advisor should also inform you about the necessary paperwork that needs to be done. In 2014, new rules were introduced that require a high degree of transparency on your personal financial situation.
So, before applying for a mortgage, you should consider your income, essential spending and other outgoing payments, including bills, family expenditures and any additional loans you may already have. While it may be tempting to claim you earn more than you actually do, honesty is almost always the best policy and will help stop you getting in financial difficulties further down the road.
If you are self-employed, your mortgage lender is likely to ask for proof of income from at least two years. If you are applying for a mortgage as a couple, both incomes will be evaluated and you will be jointly and severally liable for the mortgage. You will always need to provide the mortgage lender with official documents to give proof of your financial circumstances. Money lenders will reject your application if they think that you cannot afford repayments of your mortgage and that your general spending is too high.
Once you have decided that you want to apply for a mortgage, you can do so at a bank or building society, which will offer a broad of different mortgage types. Ideally you should fix a mortgage deal with a lender before you start searching or have decided on a property, in order to make sure you are in a powerful negotiating position. Again, in order to make a final decision you can get in touch with a mortgage broker or financial adviser. It's not just banks and building societies that offer mortgages, but also home builders and developers or even your employer might have special staff offers. They should give you a full and transparent overview of all options to choose from, but do check beforehand how much they will charge you. Once you have a range of quotes from mortgage lenders, make sure you compare them thoroughly and take into account possible deviations in regard to the terms and conditions of the mortgage.
You will then have to make a decision on the type of duration of your mortgage and you should know exactly which mortgage is suitable for you. Knowing important details such as the length and term of your deal, the interest rate you pay, the overall amount you are borrowing and the amount of monthly repayments is to make sure that you have a full grasp of the agreement you are entering.
An important factor to take into account when applying for a mortgage is the so called LTV or “Loan to Value”. While you put in a certain amount of money as a deposit, ideally at least 15% of the property’s value, the rest is covered by your mortgage. This amount is called the LTV and the lower the LTV, the lower your interest rate is likely to be. If you pay a deposit of less than 10%, you may be charged a Higher Lending Fee, which will be added to your mortgage.
Different types of mortgages
There is no such thing as a one-type-fits all mortgage, with a wide range of products available to borrowers. Here are some of the most popular:
- The execution-only mortgage
- A second option next to the regular application process is the execution-only mortgage, where you do not have to proof that you are receiving professional mortgage advice. In this case you will provide the same documents as for a regular mortgage but you will need to be particularly well informed about all the terms and conditions of the deal you are entering. This means that you will have to confirm yourself that you are aware of any possible consequences and in case of any future problems with your mortgage, it will be rather difficult to file a complaint.
- Repayment mortgage: A general distinction is furthermore made between a repayment mortgage and an interest-only mortgage. With the repayment mortgage you pay both interest and parts of the capital in monthly instalments. This means that at the official end of your mortgage period, often about 25 years, you have paid off your capital and now officially own your property.
- Interest-only mortgage: Different to the repayment mortgage, bank clients on an interest-only mortgage merely repay the interest on the loan. This means that you have an additional plan for the repayment of your capital. Commonly this type of loan is more difficult to get, as lenders are running a higher risk to be stuck with unpaid debts after the end of the mortgage term. Some banks and building societies will offer a middle-way, where you can combine interest-payments with occasional repayments of your capital.
- Sub Prime Mortgage: If your overall credit score is low, you might not be eligible for standard mortgages but you try and apply for a sub prime mortgage. Here you will probably have to pay a higher mortgage rate as you will be considered a risk borrower.
Is a mortgage the right thing for me?
Before applying for a mortgage, always evaluate your own financial situation and ask yourself a range of essential questions:
- Do I want to commit to a long-term repayment plan and am I able to make regular repayments? Are your general finances in order and how much can you afford to pay a deposit? Will your lifestyle have to change significantly if you have to make regular repayments for your mortgage?
- Next to paying monthly installments into your loan, potential costs for a mortgage broker and the deposit you need to pay, you need to take into account any other running costs that you will have to cover, such as household and energy bills, council tax, insurances and money you may want to set aside for children. Repaying a mortgage can constitute a long-term financial burden and you should be aware of this.
- Also consider that a mortgage is a long term commitment and some of your life-circumstances may change in the future. This might be change of employment or concern family planning. Plus, consider that if you enter a mortgage with variable interest rates, these can go up significantly.
Shopping around for the best deals
Everyone who is interested in a mortgage to become a homeowner or make a larger purchase on a mortgage should be aware that there is a vast range of different mortgage options available on the market. Even though a mortgage broker or financial advisor will assist you in making your choice, always make a financial plan beforehand and make sure you take all your regular expenses into account before making your choice.
Always be aware that the key to the best mortgage deals that suits all your needs and requirements is that you are well informed on the terms and conditions of your mortgage. This means that you will need to invest some time to shop around, to get different quotes from mortgage lenders and compare different offers, as your choice has serious repercussions for your future financial situation.
- The Mortgage Advice Bureau offers free, impartial advice for anyone looking to get a mortgage. They will help you get quotes from more than 6,000 lenders. Visit the website for more information.
- Similarly, the Money Advice Service offers some great introductory guides to how mortgages work and how you can get a loan.
- Halifax is the UK's biggest mortgage lender, so they should be a good place to start if you're shopping around for a loan. Check out the official Halifax website for more information. But do remember to not simply sign up for the first deal that suits your circumstances.