Mortgages

Buying a house is, in all likelihood, the most expensive purchase you’ll ever make. As a result, most people will have to take out a mortgage as a means of funding – but, if you’re taking your first step onto the property ladder, understanding the whole mortgage process is often easier said than done. With that in mind, let’s take a closer look at how to approach arranging a mortgage, helping you understand the different types and, ultimately, how the whole process works…

What is a mortgage?

A mortgage is a loan taken out specifically to buy a property or plot of land. It is a secured loan type as the amount is held against the value of your home until the total is paid off – this repayment is usually spread out over a 25 year term, however, repayment windows can be shorter or longer.

How does a mortgage work?

Once approved for a mortgage, a lender will grant you an amount of capital and then charge you interest across the borrowing window. You can apply for two different types of mortgage:

Repayment mortgage

When taking out a repayment mortgage, you pay off part of the borrowed capital in addition to the interest charged each month. This means that, come the end of the term, you’ll have paid back all your mortgage (capital and interest included) and subsequently be the owner of your home.

Interest-only mortgage

Alternatively, interest-only mortgages enable the borrower to only pay the interest on the capital each month. Then, come the end of the term, the borrower will use savings, investments or other assets to pay off the original capital – these means of payment are commonly referred to as ‘repayment vehicles’.

Interest-only mortgages are becoming less and less common, however, due to lenders being increasingly concerned about leaving homeowners with large sums of debt that they can’t pay off.

How much can I borrow?

As with any type of loan, the amount you’ll be permitted to borrow depends on a number of factors. You’ll be asked for proof of income and expenditure during the application process, as well as information regarding household bills and personal expenses.

Lenders will require evidence that you’ll be able to keep up repayments, so it’s important you only apply for an affordable amount, as your ability to meet repayments is ultimately what decides whether or not your application is accepted. Be sure to factor in running costs such as bills, insurance, maintenance and tax when working out how much you can afford.

How to get a mortgage

The first step of applying for a mortgage is deciding which lender you want to use. You can apply directly with a bank or building society or, alternatively, you can utilise a mortgage broker or an IFA (independent financial adviser) to help you source the best fitting product on the market.

Seeking professional financial advice is often the best route to take unless you have a particular financial expertise, although it is possible to source a mortgage without advice – this is referred to as an ‘execution-only mortgage’. These are only offered under certain circumstances, however, and you’ll be expected to fully comprehend the following:

• The type of mortgage you want
• The property you wish to purchase
• The amount you want to borrow
• The length of time you want to repay
• The type of interest rate you wish to borrow at

In these instances, the lender will often need you to confirm that you are aware of the potential consequences of taking out a mortgage without expert consultation. As a result, it’s always a good idea to ensure you’ve received financial advice to be secure in the knowledge that you have an affordable and appropriate mortgage for your personal situation.

The process

The process of applying for a mortgage is often split into two distinct stages:

Stage 1

The first stage of the application process is a preliminary process that entails a basic check of your financial situation to work out the type of mortgage and amount of capital you can afford to borrow. Often, a lender will ask you a series of questions in order to establish this without going into much detail, providing an indication of how much you’re likely to receive (and the terms associated with it) informed by your answers.

Stage 2

The second stage of the process is where you’ll formally begin your application. The lender will carry out a full financial check with far greater scrutiny than that in stage 1, for which you’ll be expected to provide evidence of income and expenditure.

If your lender is happy with your ability to meet the appropriate repayments, your application will be accepted, upon which you’ll be provided with a binding offer and mortgage illustration documents. These will detail the terms of your mortgage and will come with a reflection period of at least seven days to allow you to assess and compare the lender’s offer – during this period, the lender is unable to withdraw or amend their offer apart from under specific circumstances. Of course, you can waive this period to speed up the process if desired.

What are the associated costs with a mortgage?

There are a number of associated costs when applying for a mortgage that you must be aware of:

• IFA or mortgage broker – It will come as little surprise that professional financial advice doesn’t come free. How much your consultation will cost you depends on the adviser in question – generally, the mandate cost is calculated as a percentage of the total loan amount (usually between 1-2%)
• Interest – Of course, the interest you pay throughout the repayment window is an additional cost on top of the borrowed capital. Mortgages can come with fixed or variable interest rates, with the latter increasing or decreasing in line with the Bank of England base rate
• Deposit – When buying a property, you’ll need to pay a deposit that goes towards the cost of the property. This cost is separate to your mortgage, with the mortgage being secured against whatever percentage of the property you don’t yet own. For example, if you were to put down a £25,000 deposit on a £250,000 property, your mortgage (or ‘loan to value’) would be secured against the 90% of the property you didn’t own. The lower the percentage you don’t yet own, the lower your interest tends to be, with the cheapest rates typically available for those who’ve put down a deposit of 40% or more

All information correct at the time of publication.

The Jolly Good Loans blog is full of helpful financial tips and advice, and remember, if you’re having financial difficulty, there is help available. Head over to the Citizens Advice website or call the free national debt helpline on 0808 808 4000.