A Quick Guide To Mortgages in England
24th December 2017
Applying for a mortgage is a massive step towards owning your own home and for some, the only way they'll ever be able to own their own homes. However, that massive step doesn't need to be a difficult one if you do your research and get the facts you need to be in the best position to choose a mortgage that's right for you.
This guide will be suitable for you if you're looking to purchase your first home or have bought multiple homes in the past.
It is important to note that we aren't yet qualified mortgage advisors so this article should perhaps be taken with a pinch of salt and specialist mortgage advice should be sought, however, we have sourced our information from many reputable banks and financial organisations.
What is a mortgage?
A mortgage is effectively a loan, the money borrowed to buy a house is known as capital and you will pay a fee for borrowing that money (this fee is usually shown as a percentage of interest on the value of the money borrowed).
Any money you borrow, plus the interest, must be paid back over the course of the mortgage term.
Mortgages are secured against the home you buy, this means if you fail to adhere to the mortgage terms (informing them of your intention to rent the property out, making payments on time, etc) they can request the amount be paid back in full immediately or apply to the courts to repossess your home to recover the money owed, the lender usually does this by selling the home.
How do you get a mortgage?
There's a lot of key aspects to get your head around in regards to getting a mortgage. The first of which is the deposit. The deposit is the amount of your own money that you contribute to buying your home. The larger the deposit, the less you borrow, the lower your interest payments, etc.; though it looks appetising to wait and save up for a little while longer, it is important to weigh up the risk of rising house prices. It often goes without saying, though, that a lender will be more inclined to lend to those with bigger deposits than those with the minimal deposit.
There is something which is quite important to bear in mind at this point, the Loan-to-Value ration. This ratio is important because the loan amount should fall as you repay your mortgage and hopefully, the value will rise however, if the value falls dramatically and the value of the loan doesn't decrease significantly over time (for example, if you have an interest only mortgage), you may find you're paying back more than what your home is worth, this is known as negative equity. If you sell you home in negative equity, you may find that you still owe the bank a sizeable sum of money. One alternative may be to let your property out to generate a revenue from the property therefore cushioning the potential losses caused by falling into negative equity.
What about mortgage repayments?
When it comes to repaying mortgages, you usually have two main choices. A repayment mortgage and an interest only mortgage. The difference between the two is that repayment mortgages mean you pay back the mortgage over time and interest only mortgages, as the name suggests, you only pay back the interest.
Interest only mortgages have the benefit of significantly lower repayments, however, at the end of the mortgage term, the balance has to be repaid otherwise you may risk losing your home. Interest only mortgages are good for those with alternative means to repay the lump sum; either from savings or investments made during the term of the mortgage or selling the home near the end of the mortgage to cash in on capital gains.
Repayment mortgages involve paying the interest plus a fraction of the mortgage itself, this is better for those who aren't very good at long-term saving but have a steady, regular income. At the end of the term, provided repayment terms have been met on time, you should have paid off the mortgage in full. If you lapsed on any payments, these will be expected to be made in full before the end of the mortgage term. However, in both cases, you can apply for the mortgage term to be extended depending on who the lender is, the circumstances in which you require the extension and many other things. If you're looking to extend the term of your mortgage, seek advice from a CeMAP qualified mortgage advisor.
When you look at mortgage rates, you see lots of different terms bandied about like initial rate, standard variable, APR, etc., below is a quick Jargon Buster for Mortgages:
- Initial rate of Interest is the initial amount of interest you'll pay during the first year of your mortgage term, this will be adjusted for interest rates and inflation set by the Bank of England (BOE) as time goes on.
- Standard variable rate of interest is the amount of interest you'll pay in the following years.
- APR is Annual Percentage Rate, this is the amount of interest payed on fixed rate mortgages. It also takes into consideration admin fees and other costs associated with borrowing beyond interest payments, it also takes into consideration the lifetime of your mortgage term. APR is a good way to compare mortgages true costs of different mortgages. The lower the APR, the better the overall rate over the lifetime of your mortgage so it is certainly worth doing your research.
- Fixed rate mortgages are mortgages which the interest rate isn't adjusted in line with inflation for the duration of the fixed term before your mortgage becomes a variable rate mortgage.
Type of Mortgage
Mortgage lenders offer different kinds of mortgages but the three most common are;
- Fixed Rate Mortgages - As mentioned, these mortgages offer a fixed rate of interest for a period of term (usually a couple of years or more) regardless of changes in interest rates set by BOE.
- Tracker Mortgages - A tracker mortgage is the opposite of a fixed rate mortgage, repayments are based on BOE interest rates and are usually outside of the lenders control. This can seem really appealing in the current climate with such low interests rates but as noted in 2017, BOE interest rates are being increased steadily. It is important to budget properly for rises in interest rates set by the Bank of England; if interest rates rise too much, it will be great for savers but really difficult for those repaying their tracker rate mortgages if they didn't adequately budget during times of low interest.
- Offset Mortgages - This is worth thinking about if you have a large sum of money in your current or savings account that you could use to offset the amount you paid towards your mortgage depending on your circumstances offset mortgages can be a good way to reduce the interest you pay on the term of your loan
Depending on who your lender is, they may offer a range of free services, including free legal fees or property valuations as well as discounts on things like insurance products (which may not be taken into consideration when calculating APR).
What do lenders look at when considering mortgage applications?
Lenders review your mortgage application based on your income, outgoings, credit history, savings, other assets and overall financial position. They may also want to review rent account statements if you've lived in rented accommodation, in which case, it highlights the important of paying your rent in full and on time. Lenders then arrive at a figure they're prepared to lend you that they feel you can afford, this is called a mortgage agreement in principle. From this, plus your deposit, you arrive at the amount of money you have available to purchase a home.
In summary, the key things to think about when looking for a mortgage are:
- What type of mortgage do you want?
- How much deposit do you have?
- How do you want to repay it?
- How long do you want to repay it over?
- What are the rates of payment you need to make to your lender should they offer you a mortgage?
Doing your research and arming yourself with as much information as possible and shopping around, making comparisons and seeking professional, qualified mortgage advice will really pay off as you sit back to enjoy your new home.