Understanding mortgages

May 13, 2021

In our previous blog we discussed the process you go through to buy a house. Probably the most important part of the process is organising your mortgage, as without one, most people can’t buy a house.

This article doesn’t give you any advice on the mortgage for you (you’ll need a mortgage adviser for that) but guides you through the different products that are available and throws light on some of the technicalities.

What is a mortgage?

A mortgage is a type of loan that you can use to buy a property.  Typically, mortgages will be in place for 25 years or more and are secured against the property until you’ve repaid the loan amount and interest.  This means that if you can’t keep up with your mortgage payments, the lender may repossess your property so they can sell it to get their money back.

The application process

Typically done in two phases, the application process begins with a basic ‘fact find’ to help you understand how much you can afford and which type of mortgage you might need.

From here, the second phase involves a more detailed examination of your finances and associated paperwork to check if you can afford a future mortgage.

Phase 1

The bank or mortgage broker asks you a number of questions to establish what kind of mortgage would be most suited to your needs and how long you want it for.  They ask questions around your finances to work out your current financial position.  They do so to provide an indication of how much a lender might be prepared to offer you.

You also receive important information about any products discussed, along with details of the service and associated fees on offer.

Phase 2

By this point, you have worked with your lender or mortgage broker to establish the best product for you. Now you begin your application.

You are asked to provide evidence of your income (usually payslips, or if you’re self-employed, your SA302) and expenditure (bank statements), and complete a full ‘fact find’ to assess affordability and stress test your finances.

The lender also looks at future circumstances to assess your suitability:

  • Do you have any plans that may impact your future income negatively?
  • Can you afford repayments if interest rates rise?

Assuming you get through these checks and the lender is happy with the property you’re hoping to purchase, you receive a ‘binding offer’.

Things that affect your chance of getting a mortgage

There are many moving parts to the application process, all playing a part in your chances of success.

Value of the property

The property’s value is largely assessed by the estate agent who is selling the building on behalf of the seller.  You have your own idea of its value too, reflected in the price you are prepared to pay.

The lender looks at the value of the property and if, in their eyes, you’re paying more than the market value, it will impact your application.

The size of your deposit          

In this instance, size definitely matters.  Your deposit is your contribution to the house purchase.  The greater the deposit, the more choice of mortgages you have and the greater the chances of the interest rate you pay being lower.

In simple terms, your deposit is the amount of your home’s value that you own outright.  The remainder is secured against the property.

For example, if you are buying a house that is £100,000 and you put a 10% deposit down, the remaining £90,000 comes from the mortgage lender and is secured against your property. In this scenario, you would have a loan to value ratio (LTV) of 90%.

Having a greater deposit reduces your LTV ratio and in turn the risk to the lender, hence why you can often get cheaper mortgages if you have a larger deposit.

Your age

Mortgages are typically arranged over a long period of time, often 25 years or more.  Often, as you get older, you’re likely to be offered a shorter repayment period meaning your monthly repayments could be unaffordable.

Your credit rating

Your payslips and bank statements give an overview of your current financial position.  But what about the future?  Lenders will look to your credit history to predict how you might behave in the future, and gauge whether you’re a ‘safe’ borrower.

How responsible you’ve been with money and borrowing in the past may impact your ability to be offered a mortgage, or prevent you accessing the best rates.

Your income

The amount of money you earn directly impacts your potential lending.  The greater your income, the greater the loan amount.  If you’re applying as a couple, both incomes will be taken into account.

The ‘language’ of mortgages

The mortgage world isn’t necessarily known for its simplistic, jargon free language, so let’s explain a few things that commonly crop up.

First time buyer

Typically you can be considered as a first time buyer if you’ve never owned a residential property before in the UK or abroad.  If you’ve owned commercial property that didn’t have any living space, you can still qualify for first time buyer status.

You’re probably not a first-time buyer if:

  • You’re buying with someone who owns or has owned a residential property in the past
  • You’ve inherited a home
  • Someone is buying the property for you

Your mortgage broker or lender will help you understand if you qualify as a first time buyer.

Term

This is how long your mortgage lasts.  Historically a 25-year term would be typical, but your mortgage can be longer or shorter. Term is an important consideration. The longer the term the less your monthly repayments are, but you pay more in interest.  Work with your lender or mortgage broker to help you understand what term is best for you.

Deposit

A mortgage deposit is the cash you bring to the purchase.  You need to have your deposit available when your solicitor asks, normally just before exchange of contract.

Stamp Duty

Stamp Duty is a tax that is paid when a house is purchased.  The amount you pay depends on your circumstances and the value of the property.  To work out your stamp duty charge, use this handy calculator

Loan to value

Loan to value or LTV is the ratio between the value of the property and the amount you borrow to purchase it.  If the home you are buying costs £200,000 and you borrow £180,000, you have a 90% LTV ratio.

Repayment mortgage

A repayment mortgage is a mortgage where the monthly repayments are made up of two parts. Part of the repayment goes towards repaying the initial loan, the other towards the interest owed.  The amount you owe decreases with each repayment. By the time you get to the end of the mortgage term, you own the property outright.

Interest only mortgage

An interest only mortgage is a mortgage where the monthly repayments only cover the interest owed.  At the end of the mortgage term, the borrower still owes the initial loan amount.

Fixed rate

All mortgages have an interest rate.  If you have a fixed rate mortgage, that interest rate is fixed for a period of time and isn’t impacted by changes to the Bank of England base rate.

Tracker

The Bank of England sets the rate of interest at which banks borrow money.  A tracker mortgage interest rate is usually set against this measure.  If the Bank of England changes its base rate, your mortgage interest rate will also change. This means your monthly repayments can go up as well as down.

Standard variable

Often standard variable rates go hand in hand with fixed rate mortgages.  If you have a fixed rate mortgage, once the fixed period is over, it’s likely you’ll move to the bank’s standard variable rate.  Unlike tracker mortgages, standard variable rate mortgages don’t follow the Bank of England’s base rate at a set percentage.  Rates are set by the lender and can be changed at any time.

Remortgage

Remortgaging is the process of moving from one mortgage deal to another, either with your existing lender or a new one.  Often, people will remortgage in the following circumstances:

  • To take advantage of low interest rates
  • Your current fixed deal is up for renewal
  • You want to move from interest-only to repayment
  • You want to be on a better rate than you're currently on
  • You want to borrow more money

Where to get help with your mortgage application

There are two places you can go to get assistance and advice on your mortgage application:

  • The lender
  • A mortgage broker

Both sources will give you advice, but to a lesser or greater extent.

Advice from the lender

The advice you receive from your lender will only cover their products and won’t be an unbiased view of the market.  There could be cheaper deals elsewhere.

Advice from a mortgage broker

Generally, there are three types of broker:

  • Tied brokers only offer deals from a specific lender
  • Multi-tied brokers offer deals from a limited panel of mortgage lenders
  • Independent brokers, also known as ‘whole of market’ brokers can review the entire mortgage market for you.  Don’t let the term ‘whole of market’ fool you though, some lenders don’t deal with brokers

Brokers may charge fees for their services but this should be disclosed to you upfront before you decide to proceed.  There are also fee-free brokers available.

What to do now

If you haven’t already seen them, check out our blogs on the difference between freehold and leasehold and how to view a property.

Our next blogs will be on how to protect your family and how to negotiate a house purchase.

Follow us on Facebook and LinkedIn to see them as soon as they are released.

 

Mortgages:

Batsrock Limited, trading as Wisey, acts as an intermediary for the purposes of introducing its customers to Yes Mortgage Services Limited, part of the H L Partnership.

Yes Mortgage Services Limited is an appointed representative of H L Partnership Limited which is authorised and regulated by the Financial Conduct Authority. Yes Mortgages Services Limited is a company registered in England and Wales with company number 08872874. The registered office address is Yes Mortgage Services Limited, Four Winds, 22 Windmill Lane, Avon Castle, Ringwood, Hampshire, BH242DQ.

You will not receive advice or any recommendation from Batsrock Financial. Such services will be provided by Yes Mortgage Services Limited