A Beginners Guide to Mortgages
It is no overstatement to say that buying a first home is one of the biggest decisions that a person can make, our beginners guide to mortgages is designed to lay out the basics and help with some of the key terms. Whether you choose to do it as part of a couple or go it alone, it is a long lasting process, with consequences that could, potentially, affect the rest of your life. So, it is imperative that you make the right one. The question is, where do you start?
The mortgage process in the UK can be very intimidating for new buyers, particularly younger ones, and it isn’t getting any easier. The recession has made it tough for young people to get onto the property ladder and many are now convinced that the door is closed to them. Fortunately, this is not true. The key to success, however, is finding the right support.
You need a lender that is going to walk you through every part of the process and make sure that your best interests are being accommodated. If you need to start from scratch – with the basic features of UK mortgages and the finance needed to acquire them – don’t be afraid to move slowly. It is worth taking a little more time with negotiations, especially if it might land you a better, more secure deal.
In short, don’t let the mortgage process intimidate you. Ask questions, show an interest in what lenders are doing, keep an open mind when searching for a great rate, and remember that the ultimate prize is your beautiful, cosy new home. Keep reading this complete guide to UK mortgages for more information and advice. For more information on buying your first house, please see our ultimate guide to buying your first house.
Let’s start with the basics. It is worth having a solid knowledge of the product when shopping for the best mortgages. A mortgage is simply a loan given to somebody so that they can buy a property. Only a small percentage of the population is wealthy enough to be able to buy a house outright, with their own savings, which means that mortgages are the most common way to get on the property ladder.
As houses cost many hundreds of thousands of pounds, these loans stretch over 25 years or more. The buyer gets the house and becomes its legal owner, but they must keep up with monthly loan repayments or the property is taken back. So, essentially, a mortgage is allowing a bank or lender to purchase a house on your behalf and then paying them back for it over the course of your lifetime.
Mortgages can be taken out by an individual or a number of people, but they are most commonly purchased by couples who are hoping to start a family one day. This is just one of the reasons why making the right decisions throughout this process is very important. If you are thinking about investing in property and you want to find a mortgage, speak to a lender that specialises in helping first-time buyers to get on the property ladder.
What Do You Need to Apply for a Mortgage?
Before you start looking for a lender, you should think about whether or not you have the basics needed to take out a mortgage first. This process is all about finance. Even if you have a lot of money now, it is worth thinking about where you’ll be in ten years and what kind of payments you’ll be comfortable with on a long term basis.
It can be hard to make big decisions like this one, because nobody really knows where they’ll be in the future, but the secret is to choose a manageable, comfortable mortgage plan that could still be upheld, even if your salary were to drop or your circumstances changed. In order to get your hands on any mortgage, however, you first need to pay for a deposit and this is often the toughest step for first-time buyers.
Paying a Mortgage Deposit
The way that the mortgage process works in the UK is simple. The lender gives you the money to pay for a property and you, gradually, pay it back. It won’t give you the full sum though. You have to pay for a small proportion of the house using your own savings before you can take out a mortgage. This can be anywhere between 5-20%. It may be more if a buyer has the cash to pay off a bigger amount and wishes to do so in an upfront capacity.
While 10% doesn’t sound like much, it would be £20,000 on a £20,000 property. The remaining £180,000 would then be paid for with the mortgage. This is a big sum to have to find outright, which is why careful planning is essential. You can’t really just decide to buy a house on a whim. You need to be sure that you can afford it and, if you can’t, you need to spend some time saving up and working towards the goal.
Don’t forget that a deposit is not a freebie or a charge set by the lender. It is an amount that is paid off the price of the property. So, the larger the deposit, the smaller the monthly mortgage repayments. It is worth thinking about this if you do have a lot of money to invest outright.
The Size of the Mortgage
You also need to think carefully about how big the mortgage should be. In short, what kind of property can you afford? Many UK lenders are willing to let buyers borrow as much as three times their annual salary, but this option shouldn’t be chosen simply because it’s there. It isn’t always a good decision to borrow the maximum amount, as it just translates into hefty monthly repayments later on. You must be absolutely sure that you can afford to repay back the amount that you borrow.
The ultimate consequence of missed payments is repossession of your home. The bank simply takes it back and sells it to make back some of the money that it lost to you. Clearly, you want to avoid this at all costs and the key is to make sensible decisions right from the outset. Don’t set the bar too high and give yourself a mountain to climb. Single buyers looking to take out a mortgage will be offered a lower maximum amount than a couple, as the salary of each individual is combined when coming up with a viable figure.
There are actually two different kinds of mortgage options available to buyers. They are fixed rate and variable rate and these categories can be split into further subtypes. A fixed-rate mortgage carries a ‘frozen’ interest rate, which does not change for an agreed upon time. This is usually around 2-5 years. On the other hand, a variable mortgage carries an interest rate that is subject to change. Both come with their own advantages and disadvantages.
Fixed Rate Mortgages
The big selling point of a fixed rate mortgage is that it isn’t affected by peaks in the national interest rate; at least, for the period agreed. This can be a huge help during uncertain economic times, as mortgage repayments can’t rise. However, there is a flip side to this. If the UK interest rate falls, you won’t be able to benefit from a related drop in monthly payments.
So, essentially, you’re insuring yourself against price rises by giving up your right to price reductions. Your rate will remain unchanged. The majority of fixed rate mortgages don’t allow lenders to terminate the deal early. If you want to do this, you’ll have to pay for the privilege. It is also worth remembering that a lender will automatically move you onto a higher standard variable rate when the ‘freeze’ is over unless you make other arrangements.
Variable Rate Mortgages
Variable rate mortgages work in much the same way, but they are subject to change if the interest rate fluctuates. Your monthly payments can rise or fall at any time, but adjustments must be made according to the current UK interest rate. Your lender can’t just pick a figure at random. It does mean that buyers need to prepare for fluctuations by setting extra savings aside. On the positive side, variable deals can be terminated at any time.
Unlike fixed rate deals, you can leave a variable mortgage without incurring hefty fees and you have the option to pay off more of your mortgage sum than necessary (for example, if you come into money and want to take a chunk off the remaining figure). Standard variable rate mortgages (or SVRs) are the most common type. They are based on a standard interest rate set by the lender, which is usually offered for the duration of the agreement. This figure can, however, be affected by fluctuations in the national interest rate.
The term ‘discount mortgage’ refers to a perk that some lenders offer to try and encourage buyers to work with them. They temporarily lower their own Standard Variable Rate (SVR), so that mortgage repayments are smaller for a while. This typically lasts for 2-3 years and then the rate is returned to its normal level.
Discount mortgages can be very useful for young couples and first-time buyers who are worried keeping up with payments for the first few years. If you are looking for a mortgage of this type, try to shop around and browse the deals at different banks. There is always a chance that you’ll stumble upon a truly great deal if you consider more than just the big name lenders.
Tracker mortgages do away with the standard variable rate set by the bank and are closely governed by the base interest rate from the Bank of England. If the tracked rate falls, so too do the monthly mortgage repayments. On the flip side, if it fluctuates and rises, the payments will also get bigger. It is common for tracker mortgages to be very short lived (around 2-5 years), though some lenders do offer tracker deals that extend the life of a mortgage.
If this is the type of deal that you’re considering, just remember to read the small print. It is highly unethical for a lender to increase your repayment rates if the tracker sees no changes to the UK base rate. It is extremely uncommon, but it has happened in a few high profile cases and this is because the buyers didn’t scan the contracts for these dodgy terms first.
Capped Rate Mortgages
With this kind of mortgage, your payments are determined by the standard variable rate set by the lender, as is normal. The difference is that a cap is placed on them so that they can’t rise above a maximum amount. The obvious benefit of this deal is that buyers are never unsure about whether or not they can afford repayments.
If you know what the absolute maximum repayment amount is, you can take steps to make sure that you’ll always be able to afford it. The problem with capped rate deals is that they’re often less useful than they sound. For one thing, caps are generally set quite high. Also, repayments rates tend to be higher than with fixed rate deals or other kinds of variable deal.
This arrangement works by linking your current account and your savings to your mortgage so that you only pay interest on the difference. You are still free to pay off monthly sums, as and when you like, but your savings are lowering the sum at the same time. This is a good way to pay off a mortgage early, but it is worth thinking about whether you can afford to use your savings in this way.
Interest Only Mortgages
And finally, there are interest only mortgages. It must be pointed out, however, that this kind of deal has become extremely rare now. After the economic crash, many lenders simply stopped offering this type of loan, because it isn’t secure enough. The likelihood of a buyer paying it back is substantially smaller than for any other type of mortgage.
The reason for this is because an interest only mortgage involves no payment of the actual mortgage sum. Instead, buyers pay off the interest that accrues on it. The very obvious problem with the arrangement is that, when it comes time to pay off the mortgage sum in full at the end of the agreed term, many buyers simply don’t have it. They haven’t saved up correctly or they’ve had problems with their finance and can’t pay the mortgage back.
As such, you’re unlikely to find a good interest only mortgage deal. The lenders still offering them may not be entirely credible or as secure as more discerning companies. Nevertheless, it is up to you to decide which type of mortgage will suit your needs best. Remember, don’t rush into the decision. Take your time, discuss the options with helpful lenders, and never put your name on an agreement that you can’t keep.
Once you’ve found a lender that you feel happy and comfortable working with, the first step is arranging a sit-down consultation. This is usually quite an informal chat and it is designed to establish your needs and help the lender give you some advice on the best options. There are a number of documents and items that it is useful to take along to this meeting.
It is essential that you have your passport, a driving license, or some other form of official identification. A lender won’t take the mortgage process forward with seeing this. You may also need a copy of your birth certificate and your national insurance number. They’ll likely ask for proof of residence, so take a recent bill with your address on the top.
You may need a wage slip to prove that you’re employed and earning a regular income. You should also bring along details of the property that you’re hoping to purchase. Some of these items you’ll need immediately, others you might be asked for at a second consultation; it all depends on the lender really. Just listen carefully to the advice being given and follow instructions so that nothing hinders the mortgage process.
The application process is surprisingly simple. You’ll be asked to provide all kinds of things (including the documents listed above). Then, the lender will take some time to process your application and decide whether the details that you’ve given are compatible with being given a mortgage. It will then call you with a decision. The mortgage application will either be approved or rejected.
What Happens After the Mortgage Is Approved?
If an approval is granted, you’ll receive a document called a ‘Decision in Principle’ or an ‘Agreement in Principle.’ This is not a binding contract, but it is a paper that says the lender is prepared to give you a mortgage on the agreed terms. You can take this document to the owner of the property that you’re hoping to buy and then put an offer in to purchase it. The rest depends on how successful your offer turns out to be.
It is standard for lenders to review all of the case details a second time before the mortgage is finalised and the money is made available. This is perfectly normal and, as long as your salary or circumstances haven’t changed since the last review, it should lead to a full mortgage agreement. You can then start thinking about moving into your beautiful new home.
What Are the Legal Consequences of a Mortgage?
For the vast majority of homeowners, taking out a mortgage is a relatively stress-free process and it remains that way for the rest of their lives. The deal is simple. As long as you keep up with the agreed repayments, you’ll never have any trouble. Of course, this is often easier said than done, particularly during turbulent economic times. Interest rates fluctuate, wages fall, and the price of living rises.
All of these things can put a strain on households and make it harder to stick to a mortgage payment plan. However, it is imperative that you do everything in your power to uphold the agreement. If you do get into any financial difficulty, you must talk to your lender and try to find a solution together. It is always a bad idea to ignore signs of trouble or try and keep a lender in the dark about missed repayments.
In the most extreme of circumstances, a home can be repossessed (taken back) by the bank if payments aren’t made on time and as agreed. Just the thought of this is enough to worry prospective buyers, but it happens much less often than you might think. Plus, all lenders are legally obligated to do as much as they can to help customers manage payments and hold on to their properties. They certainly can’t just throw you out after one or two missed instalments.
Only you can decide whether a mortgage is a right choice for you, right now. While the process can be intimidating at times, lenders want to make it easy and stress-free. They’re there to guide you through the legal jargon and help you find a suitable deal. On the other hand, you’ve got to use your own initiative as well.
Be an informed consumer and look at offers critically. Shop around, speak with different lenders and don’t just opt for the first deal that you see. Many first time buyers get spooked by the mortgage process and they rush ahead at great speed. This might work for some, but it’s usually better to take it slow, assess all the options, and come to a measured, practical decision on the kind of deal that you want.
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