Mortgages
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Buying a property simply with your own capital is something that very few of us can do. The cost of a property is just too high for buyers to have access to that sort of money without bankrupting themselves.
This is where mortgages help home buyers complete that hefty, life-changing purchase.
Today we’re going to take a look at the different kinds of mortgages that are available in this extensive market to see which one is best for you, the costs involved in acquiring one, the pros and cons, and we’ll answer some important burning questions.
What is a mortgage?
A mortgage is a loan that is taken out to buy a property allowing you to put down a manageable deposit and have the rest of the property price covered by the mortgage amount.
How do mortgage deposits work?
A mortgage deposit is an upfront sum of money paid towards the value of your home. This is usually 5%, though a number closer to 20% would be recommended.
So if you choose to pay 5% out of your funds, this leaves 95% to be covered by an LTV (loan-to-value) mortgage.
So if you’re looking to buy a property for £200,000, with a 10% deposit, you would pay £20,000 upfront. The LTV mortgage loan would cover the remaining £180,000 of the property value.
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What type of mortgage do I need?
There are several types of mortgage loans available so you can select one that best suits your requirements.
First-time buyer mortgage
You qualify for being a first-time buyer if you have never owned a residential property domestically or abroad or have only owned commercial property with no living space.
As part of the application process, the lender will undertake a credit check, review your salary and other overheads like credit card debts.
The deposit of a first-time buyer loan is usually at least 10%; the higher the deposit, the less risk is caught up in owing more money in mortgage payments.
Buy-To-Let
Buy-to-let mortgages are recommended for landlords who buy a property with the intent of renting it out.
These differ from residential mortgages in that they can run on an interest-only monthly payment option. This means the borrower would still need to repay the full capital debt once the interest has been repaid. This means low payments, but you will need to be willing to take out a new mortgage or repay it with savings at the end of the interest period.
Remortgage
This is when you switch your interest rate with your current lender or switch to a new lender altogether, usually to find lower interest rates or better terms.
As your current mortgage rate comes to an end, your interest rate will probably be put on your lender’s standard variable rate, which will be higher than your current rate. Remortgaging allows you to seek lower interest rates and protect yourself against rising interest rates.
Commercial mortgage
Also known as a business mortgage, these are made with business owners in mind who want to buy land or real estate for commercial purposes.
Due to the higher variation in property and land size in comparison to a simple residential mortgage, a commercial mortgage is not usually a pre-set product but will adapt to the size of the collateral.
The terms can be as little as three years, and some can stretch up to twenty-five years with an average of fifteen years. The deposits are usually 30% of the property value but can vary depending on the risk of the business.
Are there any government-backed mortgage schemes?
As an incentive to get people onto the property ladder, the government offers a range of schemes to make getting on the property ladder more feasible.
95% Mortgage scheme
This scheme aims to make homeownership more accessible by allowing buyers to purchase a home with a deposit of just 5%. This scheme extends up to properties costing £600,000, and participating lenders need to offer it as a fixed-rate mortgage with a 5-year term.
This scheme is especially helpful in the wake of Covid-19, when buyers may be experiencing lower income. It also offers a higher rate of approval as government assures lenders they will recoup some of the costs if payments are not made.
First Homes scheme
This policy provides the opportunity to buy a discounted home to first-time buyers in England. The 30% discount offered by this scheme on the average price of a new build can equate to a saving of £100,000.
New properties are built specifically to be sold at a discounted rate of at least 30%, though at the discretion of local councils, the cost can be reduced by 50% in expensive areas.
Help to Buy scheme
If you have 5% of the deposit needed for a home, the government will lend you an equity loan of up to 20% of the property value (40% in London). You will then need to get a mortgage to cover the remaining 75%.
Once you pay off your mortgage, sell your home or reach the end of the equity loan term (generally 25 years), you will need to repay the equity loan. This scheme is exclusively available for new builds and is only for first-time buyers.
Shared Ownership
With shared ownership, you will start out owning only a share of your property. You will pay rent on the share that you don’t own as well as cover mortgage repayments, the rent on the share you don’t own and monthly property service charges.
With this scheme, a buyer can make a purchase they wouldn’t be able to make in full by only purchasing as small a share as 10% of the property, plus the deposit you pay will reflect the share that you purchase, however, a larger share means a smaller mortgage overall.
There is a swathe of new properties being built up and down the country specifically catered for this modern, affordable way of getting on the property ladder.
What are the pros and cons of a mortgage?
Provides an opportunity to own a home
Mortgages in all their many shapes and sizes all function to be able to get people on the property ladder who otherwise could not get there for many years, or maybe ever, on their funds.
Choice and flexibility
Everyone’s financial situation is different, and the mortgage market has adapted over the years to acknowledge this. The sheer range of mortgage deals ensures that there is flexibility and freedom to suit your restrictions and requirements.
Several Government schemes
Mortgages can allow access to the property ladder, but they come with financial constraints that can restrict potential buyers from taking them out. But with a range of government schemes designed to incentivise first-time buyers and previous buyers alike, the cost of getting a mortgage is made much more agreeable.
Repay more money than you borrowed
The upshot of being able to get on the property ladder ahead of your time is that you will end up paying mortgage lenders considerably more than you initially staked. When the term of your initial loan is complete, you will be placed on a standard variable interest rate which will incur dramatically more in interest than your initial agreement.
Fees and additional costs
Mortgage lenders can tie their loan terms up in a host of extra fees to make parting with the initial loan more financially beneficial to them. These include an arrangement or product fee, a mortgage booking fee, and a valuation fee.
Once you’ve acquired a loan, some agreements will also incur early repayment fees if you want to settle up your agreement ahead of schedule.
Your home may be repossessed if repayments aren’t met
The big one is that if you fall far behind in your payments, the mortgage lender can claim your home as collateral. This is only a last resort, and your lender is required to refer you to seek independent debt advice if you are struggling with your payments. Once your home is acquired, they are obliged to sell it on.
This is, of course, the biggest, most devastating fear of someone seeking a mortgage, so it’s paramount that you are in a comfortable enough position to ensure you can keep up with your payments throughout your agreed term.
What is a mortgage in principle?
A mortgage in principle is essentially a theoretical mortgage your lender estimates to show how much they think you can borrow. It costs nothing to receive one, and you are not tied to it.
The amount you receive on your actual mortgage may differ from the estimate depending on your financial situation, your deposit, and the lender’s criteria. They tend to last between 60-90 days and can be required by some show estate agents you are capable of purchasing.
What do I need to qualify for a mortgage?
Initially, you will need to make sure you have the finances to cover a mortgage. This includes deciding how much of a deposit you can afford to put down. Remember to keep in mind the various schemes that might help you during this phase.
Then you’ll have to figure out how much you can afford to borrow and pay back each month; mortgage calculators are designed to help with this.
How do I get a mortgage?
Your lender will need three months of bank statements, proof of income, and your passport as a minimum. They may also carry out a soft credit check. If your loan is approved, they will give you a mortgage in principle to show to sellers and agents that your ability to purchase is reliable.
How much does a mortgage cost?
A mortgage is tied up in a list of various administrative costs that are important to be aware of when appraising your ability to afford one.
Interest
Your interest rate is affected by the BoE’s base rate, currently at an all-time low of 0.1%, where it’s expected to stay until 2024, as well as the length of time you agree to borrow for. The shorter the period, the lower the rate; a two-year fixed plan averages at 2.4%, while five years is closer to 4%.
Mortgage fees
A mortgage generally incurs one and sometimes two fees.
The largest of the two is the arrangement fee; this can be paid upfront or added to the overall cost of the mortgage and covers administration costs. You can expect to pay between £1000-£2000 for this fee.
Next, the mortgage booking fee is used to reserve your loan and costs between £100-£200.
You can also be charged for a valuation survey, which costs an average of £300.
Early repayment charges
If you pay off your mortgage before your deal ends to move to another lender or to transfer to a new plan with your current lender, you may be charged an early repayment fee, which will be a percentage of the total amount you are borrowing on your plan.
Exit fees
Once you complete your mortgage and clear the balance completely, your lender may charge an exit fee administrative cost to cover the closing of the account; this can cost between £50-£300. Some lenders do not charge an exit fee at all.
Can I get a mortgage if I have a bad credit score?
Yes, though a poor credit rating will limit your options. Some high street banks will deny your mortgage application, while building societies can be more lenient if you have poor credit.
You may have to pay above-average interest rates and a larger deposit, and while a bad credit rating will not prohibit you from getting a mortgage completely, it may be worth improving your score to better your options.
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As soon as you miss a monthly payment, you are technically in default, though most lenders wait up to 30 days to officially pursue.
In this situation, it’s important to open a dialogue with your lender and not ignore their solicitations. Chances are you will be able to work something out, plus it will keep you in good standing with your lender.
After you have defaulted for 120 days, your default can become a foreclosure, in which case your lender can claim your home and sell it to recoup the money lost from your mortgage debt.
Stamp duty land tax is a tax levied on residential property transactions. If you are a first-time buyer, you won’t pay stamp duty on properties up to £300,000, and you will receive a discounted rate on properties costing up to £500,000.
Stamp duty is 2% on properties costing £125,001-£250,000, and 5% on properties between £250,001-£350,000. That’s £2500 and £5000 respectively.
At the top end, a lender will usually offer you between 3 and 4.5 times more than your annual income.
Yes, being a foreigner does not prohibit you from getting a mortgage, though the process can be more time-consuming. The exact terms set will vary depending on the lender you choose.
