Unless you have the luxury of being a cash buyer, getting a mortgage is the most important part of buying a property, as it will be your main source of funding. There are so many banks and building societies offering a range of mortgages with different interest rates, the whole process can be quite daunting. Our guide helps simplify the mortgage process and details what you need to start applying.
A mortgage is a loan secured against a property, how much that loan amounts to depends on how much you want to borrow and the value of the deposit you have in place. The average deposits in the UK are around 25%, meaning the loan would cover the remaining 75% of the property value. The mortgage is then repaid monthly over an agreed period of time.
Before you start looking for mortgages, there are a few factors you should take into consideration. Exactly how much is your deposit? This will help you identify how much you want to borrow, you can then work out what you can realistically afford to pay back on a monthly basis. Online mortgage calculators are a good place to start as they take into account your circumstances and give you results based on the criteria you have entered.
Another route is getting in touch with an independent mortgage broker. You won't have any initial upfront costs to pay and there will only be a fee if a mortgage is taken out through a bank or building society the broker has recommended. Brokers tend to have the latest information on mortgages and are in a good position to get you the best deal for your needs, but most do charge a fee for this service.
Mortgages can include different repayments and interest rates. Below are some of the most common types of mortgages available in the UK:
You agree on a rate of interest and that stays fixed for a set period of time, usually around two to five years. This is a good option if interest rates are unpredictable, but if they fall, then you will still be tied to the agreed rate for the period.
Your rates will go up or down according to the current interest rates set by the lender. Banks follow the base rates set by the Bank of England and apply their rate on top.
These will only change if the Bank of England changes its base rate, which can either go up or down. You don't have the same security as you do with fixed-rate mortgages, and should be financially prepared to cover the cost if they go up. However, if they go down, your monthly repayments will also decrease.
This allows you to cut down on the interest rate you pay on your mortgage by sacrificing interest earned on your savings.
The amount you pay per month is deducted from your outstanding mortgage balance. If you borrow a set amount over 25 years, after that period, you will have paid your mortgage off in full. This is the most common type of mortgage repayment.
You will only pay the interest of the mortgage. If you borrow £100,000 at an interest rate of 3.5 per cent, you will pay monthly repayments of around £500. Your monthly payment will be lower, but you will be obliged to pay back the full £100,000 to the bank once the mortgage length has finished.
There are fees that need to be paid in order to take out a mortgage. These vary depending on the type of mortgage you are applying for. Some of the fees payable are:
The booking fee is upfront and pays for the booking of the loan while the application is processed. If you are refused the loan you will not get your booking fee back.
This is usually what you will pay the lender to set up your mortgage. You will be able to choose between paying the fee upfront or you can add it to the overall cost of the loan. If you chose the latter, you need to be aware you will also pay extra monthly interest.
You will be required to pay a valuation fee so that the lender can carry out a valuation on the property. Some mortgages come with free valuation fees, so it's always worth looking out for.
When applying for a standard homeowner mortgage, you will probably be asked to provide three months' worth of bank statements and three months of payslips. Check with your advisor exactly what information you need to provide to apply for a mortgage, as it can depend on the type of mortgage you have and whether you already have an outstanding mortgage on another property.
As with any financial outlay, you always need to be sure you can pay your mortgage and take out appropriate insurances to protect yourself. Most mortgage providers will insist on you having some kind of payment protection or life assurance in place.