What Is A Mortgage?
Put simply it is a loan secured against a property. For most people it will be the biggest ongoing cost when purchasing a house. Before beginning your “house hunt” it is a good idea to get a mortgage agreed in principle with your lender so you know what you can afford to buy and to save you time later. If not, you might get beaten to a property by another buyer. These pages should help you to navigate the mortgage process.
What Can Be Mortgaged?
- Freehold (but as a general rule lenders are unlikely to loan on a freehold flat)
- Leasehold - must have at least 25 years beyond the term of the mortgage outstanding
- Shared equity
- Shared ownership
- Buy to Let
- Semi-commercial (>40% residential)
- Non-standard properties - always best to establish the precise nature of construction as some properties are acceptable if they have been renovated under an approved scheme
- Local occupancy restrictions (section 106 agreements) - Your lender will need to see a copy of the agreement which relates to the local occupancy clause. Not all lenders are familiar or comfortable with certain restrictions
Types Of Mortgage
The rate is fixed for the duration of the deal, typically 2 – 5 years. Fixed rates will often have a Completion Fee payable which needs to be considered carefully as this can turn what appears a low rate into effectively a higher one (APR). Fixed rate mortgages are usually recommended where the main objective is knowing that the mortgage payment cannot increase for a period of time and are very popular with first time buyers.
Rate tracks the Bank of England (BOE) rate which is reviewed each month. The borrower usually pays a premium above the BOE rate (typically 2 – 3%). Tracker mortgages have proven popular in recent times as the BOE rate at 0.50% is the lowest it has been for more than 200 years. The rate is, by definition, variable and thus suits people who are able to absorb interest rate increases.
Similar to a tracker mortgage but rather than being linked to the Bank of England rate is linked to the lender’s Standard Variable Rate (SVR). Borrowers will receive a discount for a period of time, typically 2 – 5 years. The rate is therefore variable.
Buy to let
A mortgage arranged to purchase a Buy to Let Property and is usually restricted to a maximum of around 70% loan-to-value. The remaining 30% deposit is often raised by remortgaging one’s own residential property. Most lenders insist that the rental income covers around 125% of the monthly interest payments on the mortgage and can therefore be deemed ‘self-financing’.
The term remortgage refers to a situation where a borrower is changing lenders or possibly raising a mortgage on a property that is already mortgaged. Remortgages generally attract the same rates of interest as standard purchase mortgages and as such, borrowers can review their deal on a regular basis. Most lenders will pay the valuation fee and legal fees as part of a remortgage package, making it an even more attractive option for borrowers.
Let to buy
The term Let to Buy describes a situation where a borrower cannot (or chooses not to) sell their existing house before purchasing another property. Usually the lender will need to be satisfied that the rental income more than covers the existing mortgage and will normally require a deposit of 10 – 20% on the new property. The deposit is often raised as a further advance on the existing property.
With this type of mortgage the borrower is guaranteed to repay the mortgage by the end of the term of the loan assuming they make all the required payments. The mortgage payment is made up of a combination of monthly interest and capital and the borrower will see a gradual reduction in their mortgage balance over the term of the loan. By definition, the rate at which capital is repaid speeds up towards the end of the mortgage as more of the capital element of the monthly repayment is applied to repaying the loan.
Your repayments with this type of mortgage only cover the interest on the amount you have borrowed and pay nothing off the original loan. You must put a plan in place to be able to pay off the capital at the end of the mortgage.
- With repayment vehicle – this is usually some kind of investment such as a stocks and shares ISA or endowment policy. The loan is therefore paid off right at the end of the term by using the investment
- Without repayment vehicle – these types of interest only mortgages usually rely on some other form of asset to repay the loan such as the sale of another property, or in the case of a Buy to Let property, the property being mortgaged when it is eventually sold
Part & part
This type of a mortgage is a combination of repayment and interest only. They are usually granted where someone has an asset they wish to use to repay the mortgage but not sufficient in value to repay it all. In recent years, borrowers have often converted part of their endowment mortgages into part and part mortgages in order to repay any potential shortfall.
How Much You Can Borrow ?
This is based on numerous factors and varies between different lenders. Below offers a rough guide of what might be needed and how the mortgage is calculated.
Evidence Of Employment
Usually evidenced by last P60 and latest payslip. Applicant must not be on probationary periods.
Self-employedA minimum of 2 years’ accounts are required and an upward trend in profits will generally be expected.
Company directorsCompany directors usually receive a PAYE salary and company dividends which will need to be seen.
How Is It Calculated?
Single applicantsAre normally able to borrow 3.75 to 4.25 times gross salary.
Joint applicantsAre normally able to borrow 3.0 to 3.25 times joint basic salaries.
Existing commitmentsAny loan payments are annualised (multiplied by 12) and deducted from gross salary before applying the usual income multipliers.
Secondary incomeTax Credits such as Child Tax Credit and Working Tax Credit are acceptable provided they will be received for a reasonable period of the loan.
Second jobsthese are acceptable provided it is reasonable to continue with both employments for a reasonable period of the loan.
Overtime / bonus / commissionThis is usually restricted to 50% and provided it is earned regularly over a reasonable period of time.
What Costs Can I Expect When Getting A Mortgage?
Valuation or survey feeThere are different types of reports depending on the nature of the inspection. Fees are typically around £150 – £200 (double for Homebuyers Reports).
Application or completion feeThese are payable upfront and not usually refundable. Completion Fees are only payable once a mortgage completes and can often be added to the mortgage.
Mortgage indemnity insurance
First mortgage paymentThis is normally a part payment which comprises interest from date of completion until the end of the current month. The first full monthly payment falls due in the following month.
Other Costs When Buying A House
Stamp duty land taxDon’t forget Stamp Duty Land Tax is paid on all residential properties above £125,000.
Legal feeCan vary widely so best to ask for several quotes. Legal fees are charged for both buying and selling properties and therefore dearer for people moving house. If you do not have a solicitor to act on your behalf then please do contact us and we can put you in touch with Chris Mowat, a property lawyer who works closely with Hackney & Leigh.
Estate agent’s feeThis will have been set with your agent before your property was put on the market.
Decision In Principle
A DIP is a Decision in Principle which is an agreement with your lender on how much you can borrow before a mortgage is finalised.
You need to produce evidence of income, identity and 3 months’ bank statement. In exchange the lender issues a mortgage certificate which indicates the maximum amount you can borrow. Anecdotal evidence suggests that estate agents are often looking for this type of reassurance before putting offers to vendors.
Impact of adverse creditAny adverse credit entries within the last 3 years will have a bearing on the decision to lend, particularly in high loan-to-value cases. Any cases are unlikely to proceed if there is any evidence of late / missed payments, CCJs or similar.
Buying at auctionBuyers need the reassurance that a mortgage offer will be made so usually the lender will carry out all the checks necessary (including valuation) beforehand. This is clearly an expensive exercise as the applicant has no way of knowing if any bid made will be acceptable to the vendor.
The Approval Process
- Initial screening against lending criteria
- Credit search
- Underwriting - the name given to the process of agreeing the loan
- Valuation / survey – Different types of survey exist from standard valuations, Homebuyers’ Report to full structural surveys
- Mortgage offer / acceptance
- Solicitor’s instructions
- Report on Title – the name given to the document / request from the acting solicitor to the Society for the mortgage funds to be released
- First mortgage payment