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A guide to getting a mortgage.

December 10, 2019

Few of us can afford to lay down hundreds of thousands of pounds to buy a house outright, which means we need to get a mortgage. It can seem a little daunting, but in reality there’s not much to fear if you want to know how to get a mortgage, as long as you know what they are and what they entail. If you’re asking yourself what a mortgage is and how you can get one, you’ve come to the right place.

What is a mortgage?

Quite simply, mortgages are loans provided by a financial institution  that pay for the property or land you want to buy. The loan is secured against the value of your home, and you pay it back through monthly mortgage payments. These can be structured over as many as 35 years, although 25-30 is more common, and the shorter term you can manage the better in the long run. If you default on your repayments then your home will be at risk, as your lender can repossess the property in order to get their money back.

What is a mortgage in principle?

Also known as an agreement/decision in principle, many estate agents and sellers will ask for you to secure a mortgage in principle prior to submitting an offer on a property. This is to show the seller you are serious about the purchase, while providing an indication you are creditworthy and likely to secure the full finance you need. As a buyer, it’s a good idea to get a mortgage in principle when you are house-hunting. They can give you a clear indication of what you can afford, while they only usually involve a soft credit check and last for 90 days.

How to apply for a mortgage

Once you’ve had an offer accepted on a property, you need to convert your agreement in principle into a full mortgage offer. You must submit all relevant documentation to the lender, including things like bank statements and proof of identity and earnings. If you’re self-employed you’ll need to provide tax calculations, while you must submit business accounts if you own your own company, or a P60 and your last three months’ payslips if you’re employed. The timeframe for a decision varies depending on the underwriter and your personal circumstances, but could take as little as 48 hours or a number of weeks if you need to supply further information.

How does a mortgage work?

A mortgage works in a very similar way to any other loan you may take out, although for most of us, our mortgage is the biggest financial commitment we’ll ever make. This is why it can be a bit daunting, and it’s also why lenders carry out thorough checks on our financial record. This is to protect both parties, as it wouldn’t be fair for you to become burdened with a huge debt that you couldn’t cope with. Your mortgage will make up the rest of the finance for your house purchase, after you deduct your deposit from the price you agree with the seller.

How much money do you need for a deposit?

Deposits are usually at least 5% of the purchase price, while they often amount to around 10%. There’s no set figure for what a deposit should be, but it’s a good idea to put what you can into your property at the start, as you’ll pay interest on anything that goes into the mortgage. Putting a bigger deposit in will also mean you get access to better interest rates from lenders. This is down to your loan to value (LTV) ratio being lower, with the best interest rates usually available to people with a 60% LTV.

How much interest will I pay on my mortgage?

Again, there’s no fixed figure for this, with lenders offering different rates to tempt people into their mortgage deals. Usually the interest rate will be set at a low figure for two, three or five years, with something less than 2% generally considered a good rate. However, if you don’t have a very big deposit or a strong financial record, you may be looking at 3% and above. This is because you’ll either own less equity in your property, or you’re seen as a bigger risk to a lender if your credit score isn’t the greatest.

What are the different types of mortgage?

Before you start wondering what a lifetime mortgage is or how a tracker mortgage works, the first thing to find out is whether you’re looking at a repayment or interest-only mortgage. As the name suggests, you only pay off interest on your loan with interest-only mortgages. This means you aren’t paying off any of the capital, so you won’t own any more equity in your home than the value of your deposit and any increases in the overall value of your property. You’ll also need a separate plan in place for what happens at the end of your mortgage term in order to pay off the amount of the initial loan. With a repayment mortgage, on the other hand, a portion of your monthly payments will be towards paying off the capital on your home, and you will own 100% of the property at the end of your term.

There are also two main types of mortgages when it comes to interest rates. With a fixed rate mortgage, your monthly repayment will typically be set for an initial period of two to five years. The amount of interest you pay can change with a variable rate mortgage meanwhile. Variable rate mortgages come in a number of forms, including standard variable rate (SVR) and tracker mortgages. A tracker mortgage will see your interest rate move directly in line with the Bank of England base rate.

How do I know if I qualify for a mortgage?

Different lenders have different sets of criteria they look for in mortgage applications, but having a strong credit score is naturally a good place to start. You can get a free credit report from plenty of places, while lots of mortgage providers offer calculator tools to help you determine your affordability. This will of course be linked to your income and expenditure, and you’ll need to have proof of your earnings when you apply for a mortgage. You must be at least 18 years of age to apply, and no older than 75 when your mortgage term comes to an end.

What mortgage can I afford?

When you’re asking yourself how much mortgage you can afford, you need to think about a number of things beyond your current income. As well as calculating your outgoings on essential and non-essential things, you need to consider whether your earnings are likely to change to any great degree in the future, or whether your personal circumstances could affect your ability to make repayments. You must also take into account all of the other fees associated with the mortgage process and buying a house, including any arrangement fees charged by the lender, stamp duty, legal fees, and whether you’re paying a mortgage broker.

What is a mortgage broker?

When considering whether to apply for your finance through a mortgage broker or bank, you may want to think about what a broker can offer you. Acting as an intermediary between yourself and the lender, a broker could save you a lot of time and effort when applying for a mortgage. They should be able to pinpoint the best of the latest deals for you to choose between, while also liaising with the lender and potentially other parties such as lawyers and estate agents. A broker can also point you in the direction of a lender you’re most likely to be accepted with, which may protect your credit rating, and they’ll also help you with the application process to make things run as smoothly as possible.

As a first time buyer or if your mortgage application isn’t going to be completely straightforward due to something like self-employment, business ownership or a chequered credit history, this can all be very useful indeed. However, if you’re confident in your own abilities to shop around for the best deals and submit all your necessary information and documentation without any help, you may decide to go it alone without a broker. Whatever path you decide to go down, don’t miss our downloadable conveyancing guide, which explains the legal side of your house purchase that runs alongside your mortgage application.

Disclaimer: This article is for informal and general advice regarding information on getting a mortgage.

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