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Your mortgage is likely to be one of the largest financial commitments of your life, so it’s important that you get the right mortgage for you. This guide will help you choose the right mortgage and understand the mortgage process and implications of your financial and legal commitments.
There are many different types of mortgages available, these are the main types:
Fixed Rate Mortgages
With a fixed rate mortgage, the monthly interest rate (and therefore your monthly mortgage payment) will stay the same for a set period of time, typically this will be approximately two, three or five years. At the end of the fixed rate period your rate will usually change to a lender’s standard variable rate.
Your rate will be exactly the same for the duration of the fixed rate period – even if other interest rates rise during this period. You can confidently plan your budget for the whole period, because you’ll know in advance exactly what your monthly outgoings for your mortgage will be. If interest rates fall during the fixed period, the amount you pay during the fixed rate period will not change, so you may end up paying a higher rate of interest than if you were on a variable rate mortgage.
Discount Rate Mortgages
Your payments are based on a discounted rate set at a certain level below a lender’s standard variable rate for a specific period of time, which means your payments may go up or down. For example, a 1% discount for 12 months off a lender’s standard variable rate of 5% would mean a pay rate of 4% for 12 months.
As the lender’s standard variable rate is variable this means that your rate and payments could go up and down during the discounted period. Sometimes these discounts are stepped over a period of time, for example, a discount of 2% in the first year followed by a discount of 1% in the second year. At the end of the discount period your rate will usually be changed to a lender’s standard variable rate.
On a tracker mortgage, your interest rate is usually directly linked to an external rate, such as the Bank of England base rate (BoEBR) for a set period of time. For example, your rate may be 1.5% above the BoEBR for a period of three years, from completion of your mortgage. Your rate will reflect the external rate being tracked. This means when the external rate falls, you will benefit from the rate reduction during the tracker period, but if the external rate increases then so will your rate. These changes also affect your monthly payment. Some products have floors, a level below which the interest rate cannot fall.
An Offset mortgage means you can use your savings to reduce the interest charged on your mortgage, while still having access to the money in your savings account. It has the effect of deducting the amount of your savings from your mortgage balance so you only pay the interest on the difference. There are also tax benefits if you are a taxpayer as you usually pay a higher rate of interest on the amount you borrow for a mortgage than you receive on your savings.
For more specific purposes you will need a specialist mortgage, especially if you’re looking for something a little more unconventional like self build and renovation, shared ownership, buy to let or credit repair mortgages.
Self Build Mortgages
Self build projects require funds to be made available in stages as the house is being built – these can either be made in arrears or in advance depending on the lender. Some lenders will also lend to purchase the land with outline planning permission. An advisor from Mortgage Advice Bureau will be able to search over 90 lenders to find the right self build mortgage for you.
Shared Ownership Mortgages
Shared ownership is a great way to get onto the property ladder. Simply put, you buy a share in a property and rent the rest. As a guide, you can normally buy between 25% and 75% of the property. When you can afford it, you’ll be able to buy more of the property – this is called ‘staircasing’ – and increase your investment to full ownership. You can buy a newly built house or one which is being sold by a housing association. You’ll need to take out a mortgage from a lender who specialises in this type of loan to pay for your share of the property’s purchase price.
Buy to Let Mortgages
When you buy property as an investment, you won’t be able to fund your purchase with a normal residential mortgage. Instead, you’ll need a specialist buy to let mortgage.
There are three types of buy to let mortgages – regulated buy to let this is when you or a member of your family will at some stage be a tenant; the consumer buy to let which is when you have lived in the property as your main residence or you inherit a property that was a main residence and then due to a change of circumstances you choose to let the property and will receive no other rental income; and business buy to let for purchasing property purely as a business transaction to generate income and yield.
Credit Repair Mortgages
If you’ve missed a few credit card payments, are in a debt management plan, have any CCJs or a poor credit rating for any other reason, credit repair mortgages may be an option for you.
You need to be aware of the costs connected to a mortgage. The following costs relate to buying your home, switching your mortgage without moving home and the ongoing administration of your mortgage.
If you are buying your home, the fee paid to your solicitor covers all legal work involved in transferring the ownership of the property to you. This is called conveyancing. This fee will often be a percentage of the cost of the home being purchased.
A Local Search is undertaken to check for plans for building and/or development of the land near to the property that may affect its value.
A bankruptcy search is carried out on you to ensure you are not bankrupt and therefore unable by law to borrow. A separate fee is charged for each search. Land Registry fees are paid in order to register you as the new owner of the property and to register your mortgage on the Land Registry’s Charges Register.
For remortgages, a fee is paid to your solicitor to act in removing the existing lender’s mortgage and adding your new mortgage to the Charges Register. Your solicitor will also carry out a local search and bankruptcy search (as above).
Your solicitor’s fees are paid on completion of the mortgage and must be paid from your own funds (fees for searches are usually paid up front). Some mortgage products may offer assistance with legal fees.
You will pay a Government tax called Stamp Duty if the value of the property is over the Government’s threshold. Stamp Duty is paid on completion of the mortgage and is normally paid as part of your solicitor’s overall bill. You do not usually pay Stamp Duty when you remortgage your home.
Estate agency fees
If you are selling a property you will usually appoint an estate agent. An estate agent may charge around 2% or a fixed price of the selling price and it is normally agreed before you appoint them. This fee is usually paid when the purchase money has been received by your solicitors.
Mortgage application fee
Some lenders will charge a fee which is payable as part of the cost of the product. This fee is paid with the application and is generally non-refundable.
Mortgage completion fee
This is to cover the cost of the administration associated with assessing your application and setting up your mortgage account. This is payable at legal completion and can be added to your loan.
A basic mortgage valuation is an inspection carried out by a valuer on behalf of the mortgage lender to make sure that the property is suitable security for the loan required. The amount of the fee is based on the purchase price or estimated value.
Some mortgage products may offer a free mortgage valuation, but if you would like a more detailed report there will be a supplement to pay.
Higher lending charge (HLC)
Some lenders charge a HLC if you are borrowing a high percentage of the valuation or purchase price of the property. This is to provide your lender with additional security if you cannot pay your mortgage and your property is taken into possession and sold for less than you owe. This charge is normally made on borrowing that exceeds 75% of the valuation or purchase price, although some lenders will pay this on a customer’s behalf. The charge may be used by the lender to purchase an insurance policy designed to protect the lender against loss in the event of you defaulting or ceasing to repay your mortgage.
The HLC is designed to protect the lender and does not protect you individually. You will remain liable to pay all the money owing, including arrears, interest and any legal fees. The insurers will normally have the right to recover the amount from you. The HLC is a one-off charge. It will not be refunded if you pay your mortgage off early. If you exercise portability and take another mortgage a further HLC may apply.
How is the interest on my mortgage calculated?
Most lenders charge interest on a daily basis on the total amount outstanding on the mortgage. As monthly repayments (and any overpayments) are made to the mortgage, they reduce the balance immediately and therefore the interest charged.
What is an Annual Percentage Rate of Charge (APRC)
The Annual Percentage Rate of Charge (APRC) is an industry wide method of comparing interest rates and charges for credit between lenders, so that you can make an informed decision on the price implications of your mortgage.
It is important to look at the APRC because it reflects the true cost of a mortgage over the long term. For example, some lenders may offer a good introductory rate but charge a higher than average standard variable mortgage interest rate at the end of it, which will increase the overall cost and therefore the APRC.
The APRC takes into account the costs of setting up the mortgage, the interest rate applied over the mortgage term and how that interest rate is charged (annually, monthly or daily).
A second APRC is included in the European Standardised Information Sheet (ESIS) as an illustrative example of the cost of the loan using a 20 year high interest rate to give borrowers an indication of the impact of a significant rise in interest rates.
Lenders have a general tariff of charges for services that are outside the basic administration of your mortgage account together with a tariff of charges for mortgage customers in arrears. You will be provided with a copy of these before you take out your mortgage.
Early Repayment Charge (ERC)
You can repay your mortgage at any time during the term. Lenders will charge interest up to the date you repay your mortgage. Sometimes, if you repay your mortgage early, in full or in part, an additional charge may be made as the mortgage has not run its full term. This charge is called an Early Repayment Charge. Early Repayment Charges are usually attached to preferential interest rates. If you have an Early Repayment Charge, it will be detailed in mortgage product literature, your European Standardised Information Sheet (ESIS) and your mortgage offer.
The buying process can be broken down into a number of key steps:
Decision in principle
When you decide to buy a property, you may want to know how much you can borrow and whether or not you qualify for a mortgage. Your mortgage advisor will look at your income and commitments and tell you how much you will be able to borrow based on that information.
This decision in principle means the details you provide will need to be verified when you apply for your mortgage and your advisor may require further information. You will receive a European Standardised Information Sheet (ESIS), which will give you detailed information of the mortgage product selected.
When you have found a suitable property and agreed a purchase price with the seller, your mortgage advisor will make a mortgage application on your behalf. The application form is used to assess your suitability for the mortgage you have requested. You will need to provide a number of supporting documents and so that your details can be verified by an independent source e.g. your employer.
A mortgage valuation is an inspection carried out by a valuer to make sure that the property is suitable security for the loan required. A valuation is carried out on every mortgage application and is usually instructed at the same time as the status enquiries are made.
A Homebuyer’s Report is a more detailed alternative to a mortgage valuation that will give you a more comprehensive survey to the condition of your property.
A full building or structural survey is a thorough and complete inspection of the property and tends to be carried out on older properties.
Once your mortgage has been approved by your lender a mortgage offer will be made to you. This document will explain the exact terms and conditions of the mortgage contract between you and the lender. This offer is binding (on the lender) and you will then have a reflection period of seven days to consider the mortgage offer. The reflection period does not affect how long your offer is valid for and you can accept the offer at any time. You will also be provided with a European Standardised Information Sheet (ESIS). At the same time as sending you your offer, a copy will be sent to your solicitor. The solicitor should have already started the legal process.
Once you have received the mortgage offer the legal documentation can be completed. Your solicitor will draw up a legal contract for you and the seller to sign. The signing of the contracts is called exchange of contracts.
A deposit (difference between mortgage and purchase price) is payable at this time. Once exchange of contracts has taken place, you are legally committed to buy and the seller is legally committed to sell. You should ensure your property is insured, as it is your responsibility. At this stage the completion date is agreed.
Completion is the point at which the mortgage deed is signed and executed and all its conditions come into effect. At this stage your solicitor sends a report to your lender requesting the monies to be released for the purchase. This report is called a Certificate of Title and includes the date the solicitor requires the monies to be sent.
This confirmation provides your lender with the knowledge that the property can safely be accepted as security for the loan and your lender can then arrange for the monies to be sent to the solicitor in time for completion and confirm to you the monthly payments required on the mortgage.
There are various factors to consider when approving your mortgage application.
Lenders take a responsible approach to lending to ensure that you are not overstretching yourself, so they will take into account your income as well as loans and other outgoings when considering how much you can borrow. All credit commitments, such as school fees and car loans, will be included in the calculation.
Amount of deposit
Lenders will consider the loan amount you have applied for as a percentage of the purchase price or valuation figure (whichever is lower). This is known as the Loan to Value (LTV). The lower the LTV, the larger the deposit and the greater stake you will have in your home.
For example, a £75,000 mortgage on a house valued at £100,000 would mean an LTV of 75%. There is a maximum loan amount mortgage providers will lend depending on the LTV, repayment method (e.g capital and interest or interest only) and type of property. These limits can vary depending on market conditions.
It is important to lenders that you have conducted any current or previous credit agreements satisfactorily. Mortgage providers will look at a number of things such as: your previous mortgage payment record; payment of other credit cards, loans etc. They do this by carrying out a credit search using a credit reference agency.
The credit search will highlight any county court judgements, property repossessions and defaults as well as credit agreements. The credit reference agency will keep details of the search made. If you apply for a mortgage jointly with another person, a financial association will be created at the credit reference agency and will continue to be taken into account in future credit searches for either or both of you.
Lenders need to ensure that you are in stable employment and will look at your type of work; your length of employment; type of contract e.g. permanent, fixed term, temporary and whether you have any employment gaps. Lenders may undertake an employment reference when assessing your mortgage application.
What repayment options are available?
Most mortgages can be arranged over a period of 5 to 40 years, depending on your personal circumstances and the type of mortgage you choose.
There are two standard ways to repay a mortgage:
Capital & interest repayment
The monthly mortgage payment is made up partly of a sum to repay a proportion of the amount borrowed (capital) and partly of a sum to repay the interest.
Given that a higher proportion of capital will be ‘owed’ in the early years of the mortgage, the interest element of the monthly payment is higher than it is in later years.
As the mortgage term progresses and the amount of capital owed begins to decrease, the proportion of the monthly mortgage payment representing interest decreases. This means that as the term progresses on a capital and interest repayment mortgage, the sum paid each month towards the capital becomes greater and the amount towards interest reduces.
Providing all repayments are made, the loan will be repaid at the end of the term. We recommend that you take out appropriate insurance to ensure your mortgage is repaid if you should die during the mortgage term.
Interest only mortgage
The monthly mortgage payment consists of an amount sufficient to pay just the interest due on the full amount of the loan (for the full term). You pay none of the outstanding capital and at the end of the mortgage you will still owe the amount you originally borrowed.
The capital element of the loan will normally be repaid at the end of the term using some form of repayment strategy. It is your responsibility to ensure that a repayment strategy is in place to repay the mortgage at the end of the mortgage term. You also need to ensure any repayment strategy is reviewed regularly to ensure it is on target to repay your mortgage at the end of the term.
You can also repay your mortgage using a combination of capital and interest and interest only payments. This is called part and part.
Can I reduce or repay my mortgage early?
Yes, you can always reduce or repay your mortgage at any time. However, early repayment of all or part of a mortgage may have financial consequences depending on the mortgage product you take (see mortgage offer for details).
To enable a lender to offer a favourable interest rate deal (e.g. fixed/discounted), a charge is sometimes applied if the mortgage is settled early. The charge will be a set amount or on a reducing scale depending on the terms of the product. This charge is called an Early Repayment Charge (ERC). If you do not have an early repayment charge on your mortgage, you can make overpayments and capital repayments without charge. An overpayment is an amount made in addition to your normal monthly repayment. If you make overpayments to your mortgage, you will find that, with interest rate changes, your registered monthly repayment may change more than expected, as overpayments are taken into account.
Buying a home is one of the biggest financial commitments you will make, so protecting that investment is a must. This is important and often a condition of your mortgage that you have buildings insurance in place and maintain at a sufficient level throughout the mortgage term. If you are buying a leasehold property, the buildings insurance is normally covered in the lease.
Buildings insurance covers the bricks and mortar of the property and the fittings, for example, sanitary ware. Buildings insurance should commence at exchange of contracts for house purchases because that is when you are legally committed to buying and the property. We also recommend you take out contents insurance. Although not compulsory, your home is characterised by the items you put in it, so you should want to protect these too.
Life assurance and income protection
Life assurance is not an automatic feature of your mortgage, unless you have an endowment policy in place. If you have any other kind of mortgage, you should consider taking out a life assurance policy to ensure your family is protected in the event of your death.
Income protection is a longer term insurance, which is tied to your salary rather than your mortgage (for example critical illness cover, permanent health insurance). It does not cover unemployment but does cover inability to work due to ill health. Many people consider what may happen to their family should they die but do not consider what may happen if they could not work due to ill health.
Can I take my mortgage with me when I move home?
Most mortgage loans are portable, which means that the terms and conditions of your current mortgage can be transferred to the mortgage on your new home. If there is an early repayment charge on your existing mortgage, your new mortgage needs to be for at least the same amount as the old one to avoid payment of a charge.
If you do borrow less, you only need to pay a proportion of the early repayment charge. You still need to complete an application form because the mortgage is based on a new property and is subject to your current status and valuation.
Borrowing extra on your mortgage
You may be able to borrow more money by taking out a further advance with your lender at a later date, subject to status and affordability. This is a further advance loan, which usually does not require a solicitor. Most people borrow extra money to do home improvements but sometimes you can borrow for other purposes.
Financial difficulties and changes in circumstances
Before buying a property or raising money on your home, it is important to consider your income and outgoings to ensure you can afford your mortgage repayments now and in the future. It is difficult to predict what may happen in the future but you should look at mortgage repayments based on the standard variable mortgage interest rate and above to see what the impact would be. Lenders will give you an illustration of mortgage costs based on the standard variable mortgage interest rate when you apply for your mortgage.
You should also consider how you would pay your mortgage if you are ill or made redundant. You can protect yourself and your family by taking out cover to pay your mortgage in the event of death, accident, illness and unemployment. If your circumstances change during the term of your mortgage it may affect your ability to repay. If you do experience difficulties, it is important to contact your lender as soon as possible.
Financial Services Compensation Scheme (FSCS)
The FSCS provides protection if an authorised mortgage firm is unable to pay claims against them. The FSCS will only pay for financial loss incurred. The maximum level of compensation for claims against firms declared in default on or after 1 January 2010 is 100% of the first £50,000 loss, per person, per firm.
The cost of the Scheme and compensation payments are funded by contributions from the businesses covered by the Scheme. Information about the Scheme is available on the FSCS website www.fscs.org.uk or telephone 0800 678 1100.
Buying a property and moving home can be difficult enough even if you have done it before, so you don’t want to be confused by the terminology used during the process. Here’s our simple guide to the jargon.
Additional secured borrowing Sometimes called second charge borrowing. This is where a lender offers a loan secured on the property which, if your property is sold, will be paid off after a First legal mortgage.
Annual Percentage Rate of Charge (APRC) The APRC is a single rate that takes into account the costs of setting up the mortgage, the interest rate applied over the mortgage term and how that interest rate is charged (annually, monthly or daily).
Bank of England Base Rate (BoEBR) This is the rate which is set on a monthly basis by the Monetary Policy Committee (MPC) of the Bank of England and is the rate that it charges for its borrowing.
Binding offer Your mortgage offer once the underwriting is complete.
Completion The point at which the mortgage money is released to remortgage your home or to buy your new home. Your solicitor or conveyancer will ensure that ownership is transferred to you.
Consumer Buy-to-let (CBTL) This is when you have lived in the property as your main residence or you inherit a property that was a main residence and then due to a change in circumstances you choose to let the property and you receive no other rental income.
Disbursements The fees your solicitor has to pay to others on your behalf e.g.Stamp Duty Land Tax, Land Registry fees, search fees.
Electronic Transfer This is the method by which your mortgage advance is paid to your conveyancer, solicitor or existing lender.
Equity The positive difference between the value of your property and the amount of any outstanding loans secured against it.
European Standardised Information Sheet (ESIS) This document must be provided to you by law and shows you all the key information you need when choosing a mortgage. You can use it to compare different mortgages with different lenders.
First legal mortgage Also known as a first charge mortgage. This means that the loan takes priority over any other borrowing secured on your property. If your property is sold the first charge will be paid off first.
Foreign currency lending Lending where, at the start of a new contract, a customer is not a UK resident or relies on income or assets which are not in sterling to repay the mortgage.
Lease A document which grants possession of a property for a fixed period of time and sets out the obligations of both parties, landlord and tenant, such as payment of rent, repairs and insurance.
Loan Sometimes called the advance. This is the actual amount of money that your mortgage provider agrees to lend you.
Loan to Value (LTV) This is the value of your loan as a proportion of your property’s value. For example, if you were purchasing a home for £100,000, and had a deposit of £15,000 then you would need to borrow £85,000. This would mean that you would require a mortgage product that offered an LTV of at least 85%.
Mortgage Discharge Fee (sometimes called a Mortgage Exit Fee) A fee charged by the lender for releasing the legal charge over your property following repayment of a mortgage.
Mortgagee The lender or institution which provides the funds for the mortgage.
Mortgagor The borrower taking out the mortgage.
Portable The process of transferring your current mortgage product to a new property when you move home on a ‘like for like’ basis. ‘Like for like’ means where your mortgage balance, mortgage term, mortgage repayment basis, loan to value ratio and mortgage type remain the same.
Redemption Administration The process of removing the charge on your home on repayment of the mortgage with your lender.
Reflection period This is a formal period of time which allows you to consider a mortgage offer. The reflection period does not affect how long your offer is valid for.
Repayment Strategy This is the means by which you choose to pay off the capital on an Interest Only mortgage when the mortgage term comes to an end. You need to check with your mortgage provider to make sure that your chosen repayment strategy is acceptable.
Retention If there are essential repairs required to be carried out on a property the lender may hold back some mortgage funds until the work has been completed. The retained funds will be released upon completion of the work.
Searches For example, enquiries made at the Land Registry, the Land Charges Register and local authorities to ensure there is nothing to cause concern about the property.
Subject to Contract A provisional agreement made between buyer and seller, before exchange of contracts, which allows either side to back out without penalty (England and Wales only).
Term The length of time over which your mortgage loan is to be repaid.
Title The legal right to ownership of a property.
Title Deeds The documents showing the ownership of property.
Transfer Deed The legal document which transfers ownership of registered land.
Vendor/Seller The person(s) selling the property.
To book an appointment please call 01664 494100 or take a look at our Mortgage Advice Bureau website where you can also see the latest deals, access mortgage calculators, meet the team, get expert advice and much more.