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Mortgage Guide

This guide introduces you to how mortgages work and how to source the best product for you.

Mortgage Guide

1. How mortgages work

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A mortgage is a loan from a bank or building society for the purpose of purchasing a property. You are required to pay back the loan with interest over an agreed period of time (the mortgage term). The loan is secured against the property so if you are unable to repay it your lender can sell the property in order to recoup its money.

2. Mortgage advice

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Unless you know exactly what mortgage product you want, you should seek professional mortgage advice. You can get advice from mortgage lenders, brokers or IFAs. Mortgage lenders only offer information on their own products.

Mortgage brokers can offer advice on a range of products from a variety of lenders, however it should be noted that some brokers will cover the whole of the market, others will only advise on products from a limited number of lenders.

Many mortgage brokers have relationships with lenders and are able to access competitive exclusive products that aren't available directly from the lender.

When looking for mortgage advice you should consider whether you are willing to pay an advice fee. Some brokers are paid commission by a lender for selling their products, others may charge an advice fee, or a combination of the two. Your Mortgage Adviser should explain to you what their fees are before giving advice.

The mortgage options available to you will depend upon your circumstances.

3. How much to borrow

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Most buyers purchase a property using a combination of their own money (the deposit) and borrowed funds (the mortgage).

To calculate how much money you can comfortably borrow a professional mortgage adviser will assess your individual circumstances, provide guidance on how much you can borrow, and the products available.

The amount your mortgage provider will lend depends on:

  • You and/or your partner's salary/income.
  • The equity in your existing property (if you have one).
  • The size of your deposit.
  • Any outstanding debts or committed outgoings, including non-essentials.
  • A Detailed Income and Expenditure Form.

If your intention is to add lender fees to the loan, your mortgage adviser should explain to you in more detail the impact of positively electing to add fees to the loan. Calculating the approximate sum total of these extra costs and subtracting it from your combined mortgage and deposit will provide you with your final estimated property budget. There are several other costs that need to be accounted for, read our property buying guide for further information.

4. Capital and Interest Repayment methods

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Repayment in this instance you actively pay back the loan over the mortgage term. Your monthly repayments consist of repaying the capital along with the interest accrued.

The interest only mortgage*
This mortgage is more suitable for Buy to Let mortgages and is not typically available for residential mortgages.

  • Each monthly repayment to your lender consists of interest only.
  • As no capital repayments are made during the term of this mortgage, monthly costs are lower; however you will not increase the equity in your home.
  • It is your responsibility to ensure an adequate repayment strategy is in place to repay the mortgage at the end of the mortgage term.
  • This type of mortgage is not available from all lenders and a repayment strategy will also need to be selected.

*This type of mortgage (Interest Only) is not available from all lenders and some lenders will assess the affordability on a Capital & Interest Repayment basis.

Mortgage categories

Mainstream owner-occupier mortgages are for those who are buying property to live in and have a good credit rating and no specialist requirements.

Sub-prime mortgages are for individuals who have a poor credit rating. If you have defaulted on loan, credit card or utility bill payments then you may be classified as "sub-prime".

Buy-to-let mortgages are for those who are purchasing a property to let. The lender will often base a lending decision on the estimated rental income rather than the borrower's occupational income.

Flexible mortgages may let you make overpayments or take payment holidays or port your mortgage. Borrowers will normally have to build up a reserve before being allowed to underpay. Flexible mortgages can allow you to reduce your mortgage term by years.

5. Types of mortgage

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Fixed

A fixed mortgage will give you the security of knowing how much money is coming out of your account each month, with equal mortgage payments split over the term of your mortgage product.

Variable

A variable mortgage follows the lenders current variable rate. Whilst you may benefit from rate reductions, you are also taking the risk that they may rise.

Tracker

A tracker mortgage is set above or below the Bank of England Base Rate, with payments reflecting the rise and fall of these rates.

Capped

A mortgage where there is an upper limit on the interest rate payable to the lender, but no lower limit.

Discount

A type of ‘special offer’ where the payments are variable and set at a specific level below the lenders Standard Variable Rate for a set period of time.

Offset

A type of mortgage whereby the borrowers savings or current accounts are set against the mortgage balance, with interest only being charged on the outstanding amount. This means interest payments are reduced.

Not all products are available through all lenders - speak to your mortgage adviser about the availability of schemes.

6. Mortgage features

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Cashback is an incentive that offers a cash sum once the mortgage has been taken out.

Free legal costs or contribution towards conveyancing costs are product enhancements that usually require the borrower to use a firm of conveyancers nominated by the lender.

Free valuation or refund of valuation either requires no up-front fee from the borrower or provides a refund of the valuation fee when the mortgage application completes.

No early repayment charge means that the mortgage scheme will allow you to repay the loan in full, at any time, without having to pay a penalty.

No overhang means that the mortgage scheme will allow you to repay the loan without penalty once the benefit period has ended.

7. Fees and charges

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When organising a mortgage you must also bear in mind the additional fees and charges that will also be associated with arranging the loan:

Valuation fee is the amount charged to carry out a valuation of the property on behalf of the lender. Valuations should not be confused with homebuyer's reports or surveys as these are much more detailed and are carried out on behalf of the borrower rather than the lender.

Booking fee and arrangement fee charged by the lender these are up-front fees charged at the outset of the mortgage. The booking fee is paid to reserve funds on a mortgage product and is often non-refundable. The arrangement fee is typically charged on completion and can often be added to the overall mortgage sum. Your Mortgage Consultant will explain to you in more detail the impact of positively electing to add fees to the loan.

Legal fees are payable to the solicitor acting on behalf of the borrower and the lender. The cost is greater for purchase than remortgage.

Early repayment charges only become payable if an applicant makes an overpayment or pays off the mortgage early.

8. The mortgage process

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  1. Fact-find
    • After choosing a mortgage adviser they will ask you questions about your employment, and payment structure to evaluate whether or not you will be granted a mortgage, how much you can borrow and the most suitable type of product.
  2. Research
    • At this stage your adviser will approach various lenders on your behalf. You will then be provided with a cost analysis and proposal suggesting products that might suit your needs.
  3. Agreement in principle
    • Once you have chosen a product and lender, you will require an agreement in principle. This will involve the lender running a check on you to ensure they are, in principle, prepared to lend you the money.
    • Armed with this information, you will be able to make an offer on a property. Once your offer has been accepted, your professional adviser will continue with your mortgage application.
  4. KFI
    • The results of the professional's research will be presented to you in the form of a Keyfacts Illustration (KFI). By comparing KFIs for different mortgages you can make a decision on which product is best for you.
  5. The offer
    • A mortgage offer will be issued on the provision that all the detailed checks do not highlight any issues for concern. Checks may include credit checks, employee references and proof of income. The lender will also carry out a valuation on the property. Provided the lender is happy they will provide you with a mortgage offer.
  6. Completion
    • The solicitor then takes the transaction through to exchange and completion. The legal documentation is finalised and the mortgage funds are sent to your conveyancing solicitors, the property is then yours.

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