Mortgages – a guide to all beginners

Updated Oct 23, 2020

One of the largest purchases of an individual is buying a home. Before deciding on your mortgage arrangements, be sure that you can manage to pay what is borrowed. Find out the different types of mortgage, where to get one and how it works.

 

What is a mortgage?

A mortgage is a loan commonly used in purchasing land or property. Terms can run up to 25 years but maybe cut short or extended. This loan is ‘secured’ based on your home value until it’s fully paid off.

The lender has the authority to take back or repossess your home once the repayment is not regular or did not push through as agreed. Lenders may sell it to others so they may get their money back. 

 

How to identify what you can afford

Our Mortgage Affordability calculator might be of great help to know how much you can afford.

Do not stretch yourself if you know you will suffer to keep up with the payments. You also have to be mindful of the running costs of getting homes such as council tax, insurance, household bills and maintenance.

Lenders will ask you to submit proof of income and expenditure, and debts, if you have any.  They might also ask you for information about personal expenses, child maintenance and household bills. Lenders need proof that you are capable of repayments if the rates of the interest rise.

They might refuse to give you a mortgage offer if they do not think you cannot afford it.

 

Where you can get a mortgage

Mortgage can be applied directly from a building society or bank, selecting from their product range.

You can also have an independent financial adviser (IFA) or a mortgage broker who will compare several mortgages offered in the market, even those mortgages that are not directly offered to the customers. 

Some brokers may look at mortgages offered from the ‘whole market’ whereas others look from several lenders. On your first meeting, they will inform you about this all and discuss whether they take any charges.

Seeking advice from the expert is the best unless you are well experienced in financial matters specifically in mortgages.  It is somehow possible to decide on a mortgage without getting any advice – this is commonly called an execution-only mortgage.

These are offered for limited situations.

You would be expected to know:

  • The type of mortgage you want
  • The exact property you want to purchase
  • The rate and type of interest 
  • The terms and how much you will borrow

The lender will issue a written notice to confirm that you have not received advice and that the mortgage has not been assessed to check if it is suitable for you.

For some cases, you will need to waive the consequences of taking a mortgage without seeking advice, and that you are happy to push through with the process. If by chance the mortgage did not suit you, later on, making a complaint won’t be an option.

If you choose the execution-only route, the lender may still carry out comprehensive affordability checks of your funds and evaluate your ability to pay continuously under certain circumstances.

 

Choosing the right Mortgage

Use a Mortgage payments calculator to compute the interest amount and repayment.

Stages in the mortgage application

The mortgage application is usually a two-stage process.

The first stage includes a simple fact to determine the type of mortgage(s) you will be needing and how much you can afford. 

The second stage is the evidence of income if have not requested yet, and where the mortgage lender will have the detailed affordability check. 

Stage 1

Lender or mortgage broker will give you a series of questions to determine the kind of mortgage you intend to get, and for how long. They will also try to check your financial condition without getting too much detail. Generally, this is used as an indication to a lender of how much might be granted to lend you. They must give you fundamental information of the product, any fees or charges if applicable and their service.

Stage 2

This is typically where your application begins. The mortgage broker or lender will start a full ‘fact find’ and a thorough affordability assessment, wherein you will be asked to provide proof of your income and detailed expenditure, and also have a ‘stress tests’ of your funds.

This might include some meticulous questioning of your finances and prospect plans that could give a big impact on your future income.

 

How to apply for a mortgage.

They will also evaluate the impact on your settlements should the rates of interest rise in the future.

The lender will arrange for you a Mortgage illustration document(s) explaining terms of your mortgage and a ‘binding offer’ once the application has been accepted, You will be granted at least 7 days ‘reflection period’, wherein you will be allowed to make some comparisons and review the consequences of accepting the offer.  Some lenders may grant you 7 days or more to do this.

You can also put aside this reflection period if you intend to expedite your home purchase. Throughout this reflection period, lenders cannot usually withdraw or revise their offer except for some limited circumstances.

For instance, if the facts you have provided were discovered wrong or untrue. If you are not confident about the advice you have, you can always give a complaint to the Financial Ombudsman Service.

Your deposit – size to be considered

You will be asked to pay a deposit as soon as you decide to buy a property.  This is a portion of the money that goes to the price of the property you are buying. The bigger portion of the deposit you give, the lower the interest rate would be. When discussing mortgages, you will possibly hear people mention about “Loan to Value” or LTV.

It pertains to the amount of your fully owned home, versus the amount you will secure against a mortgage. For instance, a deposit of £20,000 or 10% of the property price which is £200,000, the LTV is the outstanding 90%.

The mortgage is protected against the 90% portion. When the LTV is low, your interest rate is likely to be low too. Simply because the lender meets a lesser risk with a smaller loan. The lowest rates are typically given to those with 40% deposit.

How does it work?

The money borrowed is called the capital and the lender adds up interest on it till it is fully repaid.

The kind of mortgage you will be granted depends on whether you intend to repay the interest only or both capital and interest in the same time.

 

Repayment mortgages

The borrower pays the part of the capital and interest every month under repayment mortgages.  Usually 25 years, you should be able to have it paid in full and own your home at the end of the term. 

 

Interest-only mortgage

Borrowers do not pay the amount borrowed or so-called capital and only the interest on the loan. This is said to be classified as interest-only mortgages. 

This kind of mortgage is harder to come by because regulators and lenders are worried that the homeowners might be left with a huge amount of debt and no clear way of repaying it. You must have a lender with a concrete plan on how you will pay the capital loan at the end of the term.

 

Combination of interest-only mortgages and repayment 

You can seek advice from your lender if dividing your mortgage loan amongst interest-only mortgages and repayment is possible. 

 

Types of mortgages

Once you have decided on how to settle the interest and capital, it is time to choose the type of mortgage you will be getting.  Mortgages can be of a variable or fixed interest rates. A fixed-rate mortgage is where the repayments will be similar for a definite time – normally two to five years.  Regardless of the interest rates instability. In variable rate mortgage, rates will be in line with the Bank of England rate so it could move up or down. 

Variable-rate mortgages come in various types

Check out more details read our guides:

  • Interest rates explained 
  • Mortgage types
  • Interest rates: How homeowners can beat the rise

Your next step – Enquire

 

Fashion

Get deals, tips and insider secrets on the hottest fashion and beauty trends. Stay ahead of the curve on what’s in style and where to find the best bargains

Discovery

Get deals, tips and insider secrets on the hottest fashion and beauty trends. Stay ahead of the curve on what’s in style and where to find the best bargains

Electronics

Get deals, tips and insider secrets on the hottest fashion and beauty trends. Stay ahead of the curve on what’s in style and where to find the best bargains