A mortgage is a legal charge over the property you purchase, effectively a loan secured against the property which means the lender will be named on the title deeds as having a financial interest in the property. The mortgage gives you the finance needed to purchase the property, and all the while the mortgage is outstanding, the lender’s charge allows them to repossess and sell the property to recoup their monies in the event that you get in to arrears which cannot be resolved.
The minimum deposit required is 5%, but it’s important to note that the lower the deposit in percentage terms, the higher the interest rate will be and the stricter the lender’s credit scoring process will be. The interest rates will improve and the credit scoring process will relax the bigger the deposit you put down (generally in increments of 5%).
It’s possible to get a mortgage now without physically putting down a deposit, several lenders currently offer ‘family assist’ products where a family member (more often than not a parent) can use their savings or equity as ‘linked collateral’ which acts as an interim deposit until such a time (normally 3-5 years) that you have built up enough equity in your property to move on to a ‘standard’ mortgage product.
With a repayment mortgage, every monthly payment you make you’re paying off some of the capital amount borrowed, as well as the interest on the loan. This ultimately means that assuming all repayments are made on time as agreed, once the mortgage term comes to an end your mortgage will be fully repaid and you will own the property outright.
With an interest only mortgage, you are simply paying the interest on the amount you borrow. This means your monthly payments will be much lower than if it were a repayment mortgage, however at the end of the mortgage term you will still owe the lender the original loan amount borrowed and will not own the property outright.
Most lenders allow you the facility to overpay your mortgage, normally by 10% of the amount owed each year (subject to their own terms). However, if you either overpay beyond this amount or repay the amount in full whilst within an initial product period (a 2 year fixed rate for example), there may be a penalty to redeem the mortgage amount. This is normally a percentage of the amount you owe, and will normally be anything between 1-5% of the balance.
Lenders assess the risk you represent to them as a potential borrower based on your credit history. Your credit score itself is not as important as your repayment history, not all people have a great credit score – for example someone who has never had a loan, never had a credit card, mortgage or phone contract etc won’t really have much of a credit history and as such may not have a great score.
However if for example you have defaulted on previous credit agreements, had a County Court Judgement or missed previous mortgage payments, lenders will consider you a greater risk and will generally require a larger deposit/amount of equity to ‘offset’ the risk, and/or charge you a higher rate of interest when lending you the money required. At the end of the day, the better your credit history the better your chances are of being accepted on the most favourable terms possible.
This will vary from one lender to the next and is something we can look into for you. Lenders do not have set LTI’s (Loan to Income ratios) such as 4x / 4.5x / 5x income, despite many people thinking this is the case. Although some use this as a guideline, the amount you can borrow will depend on many factors – such as your age and possible length of the mortgage term, how many children or financial dependants you have, what your monthly credit commitments will be on loans, vehicle finance, childcare costs etc – so your maximum loan amount could vary hugely from one lender to the next.
The lender will ultimately tell us the documents they require on application, but to an extent we can pre-empt what they’ll ask for and this will vary from one lender to the next. It will also depend on if you’re employed or self-employed, but as a minimum we will normally ask you to send us the following;
Proof of ID / Last 3 months personal bank statements (showing income being received and normal bills and direct debits going out) / Last 3 months payslips if employed, or last 3 years HMRC Tax Calculations & Tax Overviews if self-employed / Proof of Deposit (if buying a new property) which should evidence the source and build up of funds. This is not an extensive list but gives you an idea…
Most lenders are ok with online copies of documents and PDF copies, so getting these documents together should be pretty straight forward. Please always feel free to contact us if you have any concerns or need to clarify on anything, but once we’ve had a conversation with you and made a recommendation, we will specify exactly what documents we need you to send us and how to do this.
You would have to get permission from your lender if you want to rent your property out while it currently has a residential mortgage on it. Most lenders are agreeable to this but not all, and it will depend how long you’ve had the mortgage as well. It’s normally referred to as getting their ‘Consent to Let’, and as always, it can be more straight forward with some lenders than others – also they may increase your interest rate slightly to reflect the increased risk of the property being rented out but your lender will confirm if this is the case or not and for how long their consent is valid for.
Early Repayment Charges (ERC’s) would be detailed on your Key Facts Illustration and Mortgage Offer and these can vary in percentage from one lender to the next – typically they will apply if you redeem either all of your mortgage or a certain amount of it, whilst still within the initial product term – so for example, you’ve just got a 2 year fixed rate mortgage and 3 months later you win the lottery and pay the whole thing off. Chances are you’ll have a penalty which we’d estimate to be 2 or 3% of the balance owed.
It is perfectly possible to get a mortgage while having debts in the background, but naturally the more debt you have, the more challenging it will become. Lenders factor in ‘Debt to Income Ratio’ (DTI) in the background so if the amount of debts you owe total over or above a certain percentage of your income, they may automatically decline to lend – even if you feel the payments would be affordable. These ratios vary between lenders and therefore it is vital you seek advice to help get suited with the right lender for you. Any debts which will continue to run once you have a new mortgage, will be factored into the lender’s affordability calculations and will be likely to affect your potential borrowing amount.
This is a common misconception, there is no such thing as a ‘normal’ or standard mortgage term. We will generally look to structure the mortgage term around how much you are comfortable paying each month and will look to avoid an unnecessarily long term wherever possible as you just end up paying more interest over a longer period.
25 year mortgages used to be ‘the norm’ for reasons that are no longer relevant – back in the ‘80s and ‘90s a popular type of mortgage was an interest only with a linked endowment, so the mortgage would run alongside a separate investment policy with the idea being that the interest only mortgage payment plus the endowment policy payment, would come to a lower figure than a straight repayment mortgage – hence the appeal. The endowment policy was designed to mature over time, and provide a sufficient lump-sum amount to clear the interest only mortgage at the end of a pre-defined period – normally 25 years… Problems came about though when endowment policies fell short and left people with large chunks of mortgages which could not be repaid, and these setups lost popularity pretty quickly.
Most mortgages are ‘Portable’ but you will need to check this is the case with your current lender. When you port your mortgage you effectively take your existing product and borrowing with you to the new property. It’s important to remember that it’s not as simple as just switching the address though, the lender will still treat it like any other new application, so they will need to reassess your income, it will go through underwriting and a new valuation will be required for the new property. The main benefit to porting a mortgage though is that you’d typically avoid paying any Early Repayment Charges which might otherwise apply. It is normally possible to borrow more if required with a ‘top up’, as long as affordability allows for this. Also, if you require lower borrowing for the new property, an Early Repayment Charge percentage might apply against the reduction in borrowing against your current loan amount.
Loan to Value (LTV) is the difference between the value of a property and the mortgage balance owing against it – for example if you are applying for a mortgage of £90,000 on a property worth £100,000 this would be 90% LTV. The easiest way to work this out is to divide the loan amount by the property value, and x100 – eg, 90000 / 100000 x100 = 90%.
An Offset mortgage is a type of mortgage product that allows you to link your mortgage borrowing to your savings, and use the balance in savings to offset against the amount of interest that is charged on your mortgage. For example if you had £100,000 mortgage balance but £20,000 in the linked savings account, the lender would only charge interest on £80,000 – so without physically using your savings to pay off against the mortgage, it can help to reduce your mortgage quicker or reduce your monthly payments.
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