Residential
The first step in the home buying process is to approach a lender or mortgage broker to find out how much you can borrow. They will be able to give you an estimate based on your income and, if relevant, that of your partner.
An increasing number of lenders are looking at affordability, rather than applying a one-size-fits-all multiple to your income. However, income multiples are still popular and by looking at what lenders typically offer you can get an idea of how much you can borrow.
Someone buying alone will usually be offered a mortgage of around three to three-and-a-half times their gross annual earnings. Where there are two or more borrowers, the lender may be prepared to offer three times the annual income of the highest earner, plus the other income(s), or two-and-a-half times the joint income. It may be possible, though, to borrow as much as five times your salary.
Other earnings, such as commission or overtime, may be taken into consideration by the lender, but it depends how regular these earnings are.
When processing your application the lender may get in touch with your employer to confirm your salary. If you are self-employed, you will be asked to supply two or three years' audited accounts or an accountant’s letter, unless you go for a self-certification deal. The lender will also check you have kept up repayments on an existing mortgage or made regular rent payments.
Most lenders offer mortgages of up to 90 or 95 per cent of the value of the property or the price you are paying for it - whichever figure is lower - but some will offer 100 per cent mortgages.
Loans with a very small or no deposit often incur a charge to cover the lender for taking the extra risk. This is called mortgage indemnity guarantee premium (MIG) and is one of a number of costs that can be attached to getting a mortgage.
Regulation
The Financial Services Authority (FSA) now regulates mortgages. This means that you will receive clear information about mortgages and mortgage services in a standard format before you apply for a mortgage. An Initial Disclosure Document (IDD) tells you about the adviser, their company, the service they provide and the commission they are paid. A Key Facts Illustration (KFI) gives clear information about the product and its costs. The documents are designed to make it easier for you to shop around by using them to compare products and services from a number of companies.
Do not be afraid to ask as many questions as you need to about the arrangements for your mortgage. Remember, you are about to borrow thousands of pounds so you need to understand what is going on.
Mortgage Options
A mortgage has two main ingredients: the capital, which is the amount of money you borrow, and the interest, which is charged on the capital until you have paid it back. Mortgages tend to be sold according to how interest is charged, so you will probably choose between a fixed-rate and a variable rate mortgage.
The lender may also refer to the loan by one of its features so, for example, you may hear of a new flexible mortgage or a 100 per cent loan.
To give you an idea of your choice, here is a round up of the most common types of mortgage:
Fixed rate - the rate of interest you pay is the same throughout the period of the fix - for example, 5.50 per cent for three years - so you know exactly how much your mortgage will cost for a given period.
The risk is that rates on variable-rate mortgages may fall below your fixed rate, and you will find yourself paying more than other borrowers will. However, a fixed rate allows you to budget confidently.
Capped rates - like a fixed-rate mortgage, a capped-rate deal has an upper limit but below that, the rate you pay fluctuates in line with the lender's standard variable rate or the Bank of England's base rate (BBR). Therefore, you get the best of both worlds - a maximum rate but the potential for a reduction in your rate.
However, the cap is often much higher than the prevailing mortgage rate and in return for the security this type of mortgage offers, the rate you pay may be higher than those available on discount mortgages.
Discount mortgages - the lender's standard variable rate (SVR) is reduced by a set percentage. For example, a 2.00 per cent discount on a variable rate of 6.50 per cent means you pay 4.50 per cent for the offer period.
If the SVR changes, so does the rate you pay, although you will always be paying 2.00 per cent less during the discount period.
Lenders are increasingly offering stepped discounts where the margin between the SVR and the pay rate decreases after a set period.
Base-rate trackers - the rate you pay are at a set margin above the BBR and moves up and down as the base rate changes. This can be appealing because you know that when the rate is reduced, your monthly payments will go down. On the flipside, when interest rates are rising you can be sure the monthly cost of your mortgage will also go up.
Some tracker mortgages have caps, so you know the cost will not rise above a certain level (see capped rates)
Making Repayments
There are two ways to pay off your mortgage: you can either make monthly repayments towards the capital and interest or opt to pay off just the interest each month.
Interest-only mortgage - this is a mortgage where only the interest is repaid each month. At the end of the term, you have to find cash to repay the capital you borrowed. You could do this by selling your property, with an inheritance or with the proceeds of an investment vehicle. The choice is yours but you must make sure that you have something in place to clear your debt.
If you opt for an interest-only mortgage, you will probably choose one of the following investment vehicles:
ISAs - individual savings accounts (ISAs) offer you the chance to earn money on your investment without paying income tax or facing a capital gains tax bill when you withdraw your cash. There are three different types of ISA: cash, equity and insurance. To earn enough to repay your mortgage you will probably need to invest in some sort of equity ISA, which means having some exposure to the stock market. There are no guarantees that your investment will grow enough to cover the capital you need to repay.
There are many different equity ISAs to choose from offering different levels of risk and access to different investment styles. A small number of lenders offer ISA mortgages where the loan is packaged with a choice of ISAs however, most borrowers will probably prefer to choose their own ISA from the whole of the market.
Pensions - you can back an interest-only loan with a personal pension. At the end of your mortgage term, you withdraw a tax-free lump sum from your pension pot to pay off your mortgage debt. You must be aged 50, 55 from April 2006, or over at this time and you can only take out up to a quarter of the fund.
Like other investments, the pension may not grow enough to enable you to pay off the capital you owe. In addition, you must bear in mind that taking money out of your fund will reduce the amount you have to spend on an annuity and therefore the annual income you receive from your pension.
Endowment - these have fallen out of favour in recent years as the returns have failed to live up to expectations and many borrowers have discovered a gap between how much their endowment stands to be worth and the sum they owe their lender. As a result, you are unlikely to be recommended an endowment mortgage.
If you already have one and you are concerned your policy will not make enough to pay off your mortgage, you can increase your payments, pay off some of your mortgage as a lump sum or through regular payments, start up another investment such as an ISA, or do a combination of these.
Repayment mortgages - each month you pay back some of the capital you borrowed to buy your home and some of the interest. In the early years, the majority of your monthly repayments go towards paying off the interest but in later years, they reduce the capital you owe. By the end of your chosen mortgage term, you will have cleared the loan.
Repayment term - when you arrange your mortgage you will agree a repayment term with the lender. This is usually 25 years but can be more or less. Your monthly repayments will be worked out based on your chosen repayment term – the longer the term the lower the repayments. If you decide, you can afford to repay more each month you may be able to repay your loan early.
Flexible mortgages allow you to adapt your monthly payments to suit your lifestyle. Depending on the scheme, you may be able to make regular or lump sum overpayments whenever you like, without incurring any early redemption penalty. Some deals also let you make underpayments or take payment holidays, although usually only once you have built up a reserve of overpayments
Conveyancing
If you are buying a property, you and your lender will need a solicitor to undertake the legal work on the purchase. Choose a solicitor which is acceptable to your lender and you will only have to pay one set of legal fees.
Your solicitor's main job will be Conveyancing - the legal transfer of the ownership of your new home. Together with the seller's solicitor, he or she will prepare a written contract between you and the seller, setting the price, terms and date for the property to change hands.
Your solicitor will help negotiate if you wish the seller to do any repairs before completion or if, after your survey results, you want to lower your offer. He or she will also undertake searches, including a local authority search and, mining or environmental searches if necessary.
When contracts have been drawn up and agreed and your solicitor has received your mortgage offer, contracts can be exchanged. At this time, the price is fixed and the purchase is secure. A 10 per cent deposit is normally required at this point, but this is negotiable.
Completion - when you finally own the property - is usually two weeks to a month from the date of exchange.
If you do not have a solicitor or conveyancer lined up, we can help as we can offer you a list of names to choose from of conveyancers or solicitors operating in your local area. Remember that when you choose a solicitor it is as important that you have a good relationship with your lawyer, as it is to find the cheapest deal.
Note: this information applies to purchases in England and Wales. If you are buying in Scotland, the process is different and it is best to seek independent legal advice first.
The Costs
As well as the interest charged on the money you borrow, there are other costs associated with getting a mortgage. Make sure you factor these in when working out what budget you will need.
Your lender may charge the following fees:
Mortgage indemnity guarantee (MIG)
When a mortgage exceeds a certain percentage of the value of the property - usually 90 per cent although it could be higher - you may be required to pay a one-off fee. This is the MIG and it covers the lender if you default on your mortgage.
The fee varies from lender to lender but can add up to many thousands of pounds. The fee is normally paid on completion, although in some cases it can be added to your mortgage.
Valuation fee
The lender will instruct a surveyor to ensure your property represents adequate security for the mortgage you want - and in most cases, it will send you the bill. The cost will depend on the value of your property, and is likely to be upwards of £200.
A Homebuyer’s Report, which will give you a guide to any problems there might be with your chosen property, usually costs upwards of £400. You may be able to cut costs by having your valuation and Homebuyer’s Report done at the same time or by choosing a mortgage that comes with a free valuation.
Administration/booking/
arrangement/completion fees
Your chosen lender may charge any combination of these fees .Administration and booking fees tend to be charged upfront, when you first apply for the mortgage. They are usually somewhere between £100 and £400 each, but can be higher.
Some lenders only charge a booking fee on fixed-rate deals, others will charge one whatever deal you take. Administration charges can be attached to any type of loan.
Other fees are usually payable on completion and there is often the option to add them to the loan. These can also be several hundred pounds each.
First-time buyers
Lenders are keen to attract first-time buyers and many offer them special deals. As a first-timer you may be offered a larger income multiple than is normally available from your chosen lender, or a higher loan to value (LTV).
Other lenders will pay your valuation fee or your legal costs, or waive the mortgage indemnity guarantee premium (MIG). Make sure you understand the terms and conditions of these offers, and any additional costs you might incur for taking a mortgage with these features. Sometimes these incentives go hand in hand with a higher interest rate.
If you want to check your eligibility for a mortgage before you start home buying you can ask for an agreement in principle. This is based on details you provide about your income and a credit check. You are under no obligation to take a mortgage from the same lender, but you should bear in mind that every credit check will leave a footprint on your credit file and too many footprints may put a lender off agreeing a loan.
Some people believe having an agreement in principle makes you look more serious about buying a home and in fast-moving markets; a seller may favour an offer from a buyer who has one. Usually, though, the fact you do not have to sell a home and are not in a chain is more important to a seller.
Your home is at risk if you do not keep up repayments on your mortgage.
Why would you want to Re-mortgage?
Moving your mortgage from one lender to another is known as remortgaging. It is a good way to escape high variable or fixed interest rates and take advantage of some of the current fixed-rate or discount mortgages, which have much lower rates. It is also a way to raise funds for an expensive purchase. If you have owned your property for a few years, it could be worth much more than your outstanding debt. By taking out a new, larger mortgage you, can release money to spend as you choose?
Applying for a new mortgage on your existing property is much the same as applying for a loan to fund a house purchase. You need to supply information about your income and outgoings, and the property on which the mortgage will be secured. The lender will want to undertake a valuation – although, in some cases, it will do this from outside the property.
On the legal side, the lender will want a conveyancer to undertake a local authority search and a search to prove you own the title to the property. As there is no sale involved, there are no contracts to prepare, so the process should cost less than that surrounding a house purchase.
To attract customers, many lenders offer a remortgage package. This usually offers free legal work or a contribution towards legal fees, a free valuation and a reduced administration fee. Where no remortgage package is available, you need to bear in mind that the costs associated will make a dent in your potential savings.