What is a mortgage?
A mortgage is a loan taken out specifically for the purpose of buying a property. Usually this is for a private residency, but you can also take out a mortgage for commercial premises if you're a business owner.
What types of mortgage are there?
There are many different types of mortgage, each with different rates, fees, and durations to consider. The most common types include fixed, variable, off-set, capped rate, interest-only, discount-rate, commercial, and buy-to-let mortgages. First-time buyer mortgages are also differentiated sometimes and tend to offer high loan to value (LTV) ratios.
Click here for Know Your Money's guide to different types of mortgage.
What is an APR?
'APR' stands for Annual Percentage Rate. It is the figure that lenders provide against debt products, including mortgages, which allows you to compare different products from different companies as a flat rate. The APR figure takes into account the interest rate that you have to pay, including compounding interest (where you pay extra interest on the interest you have accumulated) and also any other standard costs associated with the product, such as the arrangement fees.
What does LTV stand for?
'LTV' stands for loan to value. It describes the ratio between the amount you can borrow and the value of your home. It is often expressed as a percentage rate, for instance a '75% LTV'. This indicates that your mortgage would be for 75% of the value of your home, meaning you put down 25% as a deposit or, if you were remortgaging, you'd have 25% equity built up in your current property. In general terms, the lower your LTV ratio, the better the mortgage deal you are likely to find.
How much can I borrow?
A number of factors will impact how much you can borrow and different lenders use different strategies of approach. The first step will be to look at your annual salary and as a general rule lenders will offer between four and five times this figure. However, following the 2008 financial crash, lenders are much more cautious and take many more things into consideration, including your outgoing expenses and how flexible your other financial commitments are.
The other big factor that will impact how much you can borrow is the size of the deposit you're able to put down in relation to the value of the property. In most cases, the lower your loan to value ratio, the more you will be able to borrow. We've explored this point in more detail in our next section.
How much will I need for a deposit?
In the current mortgage market, you will need a minimum deposit of 5% of the property's value. This means that a lender would give you 95% of the property value, or a 95% LTV.
Not all lenders will give every applicant a 95% LTV mortgage, however. Whether or not you are deemed eligible will be dependant on your personal financial circumstances. Banks have become more cautious in recent years and low loan to value mortgages have become harder to access, but they are still available.
Guarantor agreements and government schemes such as the Help to Buy scheme can be a big help for individuals struggling to raise a big enough deposit. They are definitely worth looking into as in the majority of cases, the bigger the deposit you can put down, the greater your choice of mortgages will be.
How do lenders work out if I'm eligible for a mortgage?
Lenders are under strict regulatory obligations to satisfy themselves that you will be able to repay your mortgage. This means that they will not only check your income and weigh up whether you have had any financial difficulties in the past, they will also look at your other spending commitments such as other loans, childcare and even your usual entertainment budgets.
As with most financial products, lenders will assess your credit profile and look at how you've fared with financial products in the past. This can determine not only whether or not you'll be offered a mortgage, but also how much the bank will allow you to borrow and what kind of LTV ratio they will offer.
When should I apply for a mortgage?
When you choose to apply for a mortgage will depend on your own personal circumstances, however experts suggest that you should begin the process before you look seriously for somewhere you want to buy. This way you can check out the market with a good idea of how much you can afford, as well as ensuring that you can move quickly with a mortgage provider ready when you do find the right property.
What do I need to apply for a mortgage?
To apply for a mortgage, you will need to complete an application. These will differ slightly between providers but they generally involve providing your broker or bank with an overview of your financial circumstances, along with proof of your identity and current address.
The proof of identity could be a passport or driving license, whereas proof of an address could be a utility bill, or letter from the electoral role. Proof of your income usually comes in the form of your last three wage slips. However, if you are self-employed things become a bit trickier but most banks will be satisfied with your last three years of SA302s (the form summarising your tax return), although some may also ask to look through your last three months of bank statements as well and may also require a letter from your accountant.
How long does it take to get a mortgage?
The amount of time it takes for a mortgage to get approved will depend on the circumstances surrounding both the customer, and the lender. As a guide, allow a month for the mortgage process to complete - particularly if the lender is facing a busy period.
Tricky applications, such as those from self-employed individuals or people with particularly poor credit ratings or even fraud against their name can mean a longer application process.
What are the costs involved in getting a mortgage?
Mortgage fees are an uncomfortable, yet necessary part of investing in a new home for most consumers. From March 2016, all mortgage lenders are now required to include mortgage-related fees such as valuation and redemption charges on the bill.
Though some lenders will waive certain fees as part of special offers, the most common expenses include:
- A mortgage arrangement fee - the lender's charge for orchestrating the deal. Commonly anywhere from £0 to over £2,000.
- A mortgage application or booking fee - a charge applied to reserve your loan money. This is refunded if the deal ultimately falls through. Usually £99 - £250.
- The valuation and survey fee - a charge to cover the checks, usually carried out by a third party contractor, for ensuring the property is structurally sound and worth the money you are proposing to pay for it. This fee is highly dependent on the nature of the property, but will range from £150 to £1,500.
- Telegraphic transfer fees - Sometimes known as a CHAPS (clearing house automated payment system), this fee pays for the transfer of the money from your mortgage provider to your solicitor. The cost is usually between £25 and £50.
- Mortgage account fee - This pays for the lender's costs of administration in maintaining, and setting up your mortgage. Typically, this fee is between £100 and £300.
Don't forget that other fees may be included as part of your mortgage agreement over time, including an exit/closure fee, early-repayment charges, fees for buildings insurance arrangements, higher lending charges, and mortgage broker fees if you chose to hire one. What's more, you can expect to face further fees for missed or late payments. Some companies even ask for expenses to be paid on legal and survey fees in order to complete the application process.
Any residential property purchase also needs to factor in the cost of stamp duty for properties above an asking price of £125,000, although this is a fee associated with purchasing the house itself, rather than managing the mortgage.
How long can I borrow for?
The most common term for new mortgages is 25 years. However, 35 year mortgages are also widely available and shorter terms even down to as little as six months can also be agreed. Some lenders will now agree to offer first-time buyers mortgage terms of up to 40 years.
As you progress with your mortgage your term reduces accordingly, even if you move from one lender to another, although you may have the option to increase your term upon your renewals. You can opt to decrease your term by paying down lump sums or increasing your monthly repayment, usually by a maximum of 10 per cent per year before negotiating early repayment costs.
I'm self-employed - can I get a mortgage?
Though the financial crisis of the late 2000s has taken a heavy toll on self-employed individuals looking for a mortgage, it's still possible to secure a home loan.
In the past, self-certified mortgages were an option, however nowadays banks require plenty of proof that the self-employed applicant can really afford to make the repayments.
Self-employed people are required to provide evidence of their income through their tax records, bank statements and sometimes recommendations from their accountants. This can be complicated at first glance, but banks, independent mortgage advisors and accountants will help you to get things in order.
I have poor credit history - what can I do?
A poor credit history can be a barrier in getting a mortgage, but there are lenders available who are willing to help those whose applications might be refused by other banks.
If you have had County Court Judgements (CCJs) made against you within the last six years (the length of term they remain on your credit file), you may struggle to be accepted for a mortgage with the high street banks. But specialist lenders who focus on home loans for people with bad credit have grown in number over the last few years.
They may be able to help, although you'll face higher interest charges to hedge against your riskier credit profile. Recent bank charges or missed payments on credit cards and loans can prevent you from getting a mortgage in the short term, but keeping your finances under control for a few months should improve your chances of being accepted.
What if I can't pay my mortgage repayments?
If you fall behind with your mortgage repayments, you will run the risk of having your property repossessed by the lender and potentially being declared bankrupt. As well as the devastating short term effects, this could seriously inhibit your ability to access other financial and contractual based services in the future.
If you are having trouble paying your mortgage, contact your lender - as they will often help you find ways to meet your financial obligations. Keep in mind that the mortgage rescue scheme is no longer available in England, but there are forms of support out there, such as Support for Mortgage Interest - tailored to those on income-based Jobseeker's allowance, or income-related Employment and Support Allowance.
How can I protect myself against falling behind with my repayments?
A range of insurance products are available to protect you in the event of unforeseen circumstances which affect your ability to pay your mortgage. These include unemployment cover, critical illness cover, and life cover, which will ensure your debt does not affect your loved ones in the event of your passing. These options can be taken out with your lender or with a third party. Any mortgage applicant should give them serious consideration.
Can I have more than one mortgage?
Yes, you can have more than one mortgage, although if both are for private residences then your income will have to be large enough to satisfy the bank that you can maintain each comfortably. You will have to declare which of these is your 'main residence' as you can only have one and there will be additional stamp duty costs associated with the purchase of a second home.
If you rent out one or more of the properties then you can register it as a buy to let property, in which case the rental value of the property, not your income, is the main factor in your mortgage eligibility. You can have as many of these arrangements as you like.
Can I move my mortgage to a different lender?
You are free to move your mortgage from one lender to another at any time. If you are not tied into a fixed deal with your current lender, then you won't incur any financial penalties for moving. However, if you are in a fixed deal and you try to break away before the term ends then you can face severe costs for doing so. This may render moving to the 'better deal' more expensive overall. Check with your bank as to when you can move freely and the costs you'll incur otherwise.
I've been mistreated by my mortgage provider - what can I do?
If you feel you have been mistreated by a mortgage provider in any way you must first register a complaint with the company themselves. If no resolution has been made within eight weeks you can then escalate your complaint to the Financial Ombudsman Service which will launch an independent and objective investigation into your case.
Should I use a mortgage broker?
Independent mortgage brokers can help you to find the best mortgage deal on the market for your circumstances. Ideally you would seek a 'whole of market' broker, which means they have access to products from all of the banks, building societies and other specialist lenders.
There may be additional fees to pay for their services, but mortgage brokers can sometimes access better deals than those available to the general public, saving you money in the longer term.