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UK Mortgage Guide
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Mortgage Guide

Understand how mortgages work, to help choose the type of mortgage that will suit your individual needs.

We all have different requirements and with so many lenders offering a huge range of complicated deals it is difficult to know where to start.

 

 

How Mortgages Work

A mortgage is a loan borrowed from a Bank or a Building Society for the purpose of buying a property. The loan is then paid back with interest on a monthly basis usually over a 25year period. At the end of this mortgage term the property will then belong to you.

 

Although 25 years is the usual timeframe but you can vary your mortgage term to suit your individual circumstances. The lender will normally require that you take out a mortgage for a minimum of five years and that it is paid back before you retire.

 

It is important to remember that if you take out a mortgage for a longer period your monthly repayments will be reduced but because you are borrowing for longer you will pay more interest on the loan. A longer term will however enable a first time buyer to get onto the property ladder sooner as the repayments will be more affordable.

 

Do not assume that the bank that you have a current account with is the best one to take out a mortgage with. Shop around. It is also advisable to take the time to get the advice of an Independent Financial Advisor or Mortgage Broker. A mortgage is a huge financial commitment and spending a few hours with an advisor is always worth it.

 

 

How much can you afford to borrow? How much will the Bank loan you?

In the past lenders allowed customers to borrow three or four times their salary or two and half times joint salary if buying with a partner. However now that the proprty market has slumped in the credit crunch lenders have become far more cautious. To find out how much you can borrow fill out our free quote form.

 

 

Do you have a deposit?

Not everyone has a deposit but if you do the bigger the better. Your mortgage loan amount will be less as will your monthly repayments and you will qualify for a cheaper rate. An ideal deposit nowadays is around ten per cent of the purchase price of your property.

 

If you do not have a deposit you may have to take out a one off insurance premium called a Mortgage Indemnity Guarantee. You could be charged several thousand pounds, which is added to your loan. This protects the lender in case you default on your repayments. It has no benefits for you at all. Not all lenders charge MIG so your broker will need to shop around on your behalf. Click here to read about 100% mortgages.

 

 

Guarantors

If you are a first time buyer on a low income it may be to your advantage when sorting out your mortgage to use a Guarantor. Most lenders would prefer the guarantor to be a parent although some will accept friends.

 

When you apply for your mortgage your guarantor will have to go through an application process. He will be required to give details of his income and outgoings and sign a declaration confirming that he understands what is involved in being a guarantor. He may wish to consult a Solicitor before committing himself. With a guarantor you may be offered a loan to value rate and be able to get a bigger mortgage.

 

 

Mortgage Application

Your lender will need you to provide certain information about yourself in order to process your application for a mortgage.

 

    • Personal details such as name, address, and date of birth.
      Address of the property you wish to buy
      The amount you would like to borrow
      Solicitor’s name, address, and phone number.
      The amount of your deposit and where you got the cash from.
      Each mortgage applicant’s job title,employer’s name and address, salary and the length of time that you have worked for the company.
      Bank account details including the number of years that you have banked with them.
      Whether each applicant has ever been declared bankrupt or has any CCJ’s(County Court Judgments)
      Details of monthly outgoing such as personal loans or outstanding credit card loans
      Whether or not you would like the lenders building insurance(Not recommended - See later)
      Signatures and date.
      You will also need recent payslips, bank statements, P60, and maybe some recent utility bills.
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    Types of Mortgages

    The first thing to consider when choosing your mortgage is do you want a repayment mortgage or an interest only mortgage.

     

    Repayment Mortgage

    A repayment mortgage will cost you more each month. However each month you will repay some of the capital amount borrowed together with accrued interest. Your balance will reduce gradually throughout your mortgage term. At the end of your mortgage term your debt will be cleared and your home will belong to you.

     

    With a repayment mortgage you can make overpayments and make lump sum payments at any time during your mortgage term although there may be a charge for this. It is not always necessary to take out Life Insurance cover with this type of mortgage. Please note that during the early years of this type of mortgage most of the monthly repayment is interest rather than capital being paid off. This is not a problem unless you move house often.

     

    If you borrow £100,000 over 25 years at the end of your term your debt will be completely cleared.

     

    Interest Only Mortgage

    With an interest only mortgage your monthly repayment will only pay off the interest on your loan. However it will cost you less each month. The idea is that you take out an investment plan to run in conjunction with your loan such as an ISA or a Pension Plan. This will cover your loan amount when your mortgage term comes to an end. This type of mortgage is popular with first time buyers as they are able to get onto the property ladder quicker. If you are on a low income this type of loan is an advantage in the early years but it is most important that you begin a savings scheme as soon as possible or switch to a repayment mortgage at a later date.

     

    If you borrow £100.000 over 25 years on an interest only mortgage at the end of your mortgage term you will still owe your lender £100,000.

     

     

    Mortgage Interest Rates

    The mortgage rate is the amount of interest you pay to your lender. This reflects the Bank of England base rate. This base rate is set each month by the Bank of England's Monetary Policy Committee. They decide whether to cut, raise or leave the rate. This depends on several things including inflation, consumer confidence and the housing market. For instance if the MPC decides to increase the base rate by 0.35 % most lenders will increase their (SVR) standard variable rate by 0.35%. This will affect all types of mortgages except fixed rate and maybe capped rates.

     

    These are the different types of interest rate deals available.

     

    Standard Variable Rate - Your payments will increase or decrease depending on your lenders mortgage rate which is set by the Bank of England base rate.

     

    Tracker Rate - This is a variable rate loan. The interest rate will be a set amount above or below the base rate for a set period of time. The interest rate tracks up and down with the base rate. Be prepared to pay more when interest rates go up. If the base rate goes down you will benefit, as the tracker rate will also go down.

     

    Fixed interest rate - Your mortgage repayments will be at a fixed rate for a set period of time. At the end of the agreed period you will usually be switched to a standard variable rate. There may be a fee for this arrangement.

     

    Capped Rate Mortgages - Your payments are linked to the base rate but fixed so that they will not go above an agreed level. This is the cap. You know what your repayments will be for a set period. At the end of the agreed period you will probably be switched to a standard variable rate. There may be a fee for this arrangement.

     

    Collared rate - This is similar to a capped rate but the rate is set not to go below an agreed rate. This rate is often used in conjunction with a capped or tracker rate. However if rates fall you may not benefit.

     

    Discounted Rate - The lender offers a discount on the SVR for an agreed period of time. Your interest rate will increase or decrease along with the base rate but your discount remains the same. Again at the end of the set period you will usually be switched to the SVR.

     

    For more information about mortgage types click here: Mortgage Type Guide

     

     

    Other Costs

    Your mortgage will only cover the cost of your property less your deposit. There are quite a few extra expenses, which you will need to budget for:

     

    • Stamp Duty - This is a tax that is unavoidable. The cost depends upon the price of your property. For properties up to £125.000 no stamp duty is charged. Between £125.001 and £250.000 duty is 1% of the purchase price. Between £250.001 and £500.000 duty is 3% and for properties over £500.001 stamp duty is 4%. See- www.direct.gov.uk
      Legal Fees - You will need a solicitor to handle the transfer of the property. His costs will include Land registry fees, local authority search fees, and water authority search fees. Cost will be greater for a house purchase than for a remortgage. It is always advisable to use a Solicitor who has been recommended to you.
      Lenders Valuation - This is arranged by your lender but you will have to pay for it. This is not a detailed inspection and is for the lenders benefit. The cost depends on the value of the property.
      Arrangement fee - If your lender charges an arrangement fee for setting up your mortgage the lenders valuation fee may be included in this.
      Insurance - Building Insurance is compulsory. You cannot have a mortgage without it. Your lender can arrange this or you can use your own Insurance Company. This insurance will cover fixtures and fittings in the property and the property will be insured against fire damage, storms or flooding. You should also take out a Contents Policy to cover furniture and personal belongings.
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    Mortgage Brokers

    It is most important to ask if your broker is independent mortgage advisor or if they are tied to a particular lender. A tied broker only has access to a limited number of mortgages. An independent broker will search on a database containing an unlimited amount of mortgage types from many different lenders.

     

    Click here to have an independant broker contact you: Independant Mortgage Advice

     

    A good Mortgage Broker will take time to discuss your individual circumstances with you. The broker selects the deals that he considers the most suitable for you. He acts on your behalf and if you chose to proceed with the mortgage he will deal with the lender on your behalf and assist you with any queries and paperwork.

     

    Independant brokers and advisors are paid a referal fee by the mortgage lender that is chosen. The fee does not affect a quote at all and the advisor gets the same fee from all companies, so it does not influence his decision.

     

     

    More Jargon

    More mortgage jargon explained:

     

    • Adverse credit - A borrower with a poor credit history is described as Adverse Credit. This may be because of Mortgage Arrears, County Court Judgements( CCJ ), or Bankruptcy.
      Annual statement - Each year you will receive a statement from your lender. It will show how much you have paid and how much is still outstanding.
      Approval in principle - Some lenders will give you a statement that shows how much they are prepared to lend you. It is not guaranteed but it can be useful to have when viewing properties.
      APR- This is the Annual Percentage Rate. It shows the total cost of a loan taking into account the term of the loan, interest rates and other costs.
      County Court Judgement - This is ruling taken out by a County Court against someone who has failed to pay debts. It is recorded against credit history each time credit is applied for. The ruling will last for 7 years. Therefore anyone with CCJ’s will be unlikely to get a mortgage.
      Capital - this is the amount that you borrow to purchase your home.
      Default - When a person fails to make payments on a mortgage at the correct time
      Early repayment charge - This is a charge that you may have to pay if you pay off your mortgage early or move to another lender.
      FSA - The Financial Services Authority- This is the UK’s financial services regulator.
      Interest Rate - This is the figure that determines how much interest you pay on your mortgage. This figure moves up and down with the Bank of England’s rate.
      Loan to Value - This is the percentage of money that you want to borrow compared to the cost of the property that you wish to purchase.
      Remortgage - This is when you change one mortgage for another one without moving house.
      Secured - A mortgage is a secured loan. If you fail to pay your mortgage your lender will be able to claim your home in order to sell it to get their money back.
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    If you require any more advice Mortgage Fox will happy to assist you. We can put you in touch with an Independant Mortgage Advisor who will answer any questions you may have

     

    Click a link below:



    *There is no obligation with any of these services, and both are offered completely free.

     

     

    Value of Property  
    £
    (eg 135000) 
    Value of Mortgage
    £
    (eg 85000) 
    Type of Mortgage