For most, the process of actually finding and buying a house can’t begin until a mortgage offer is secured. Even ‘putting your feelers out there’ requires an offer on the table, since this is what will give you (and the estate agents) a realistic picture of what you can afford.
A mortgage offer sets the scene, but it is so important that you secure yourself the right kind of offer. No two lenders are the same, which means that no two mortgages (or mortgage offers) are the same, either.
From the ‘just thinking’ phase to completion, here is everything you need to know about securing a mortgage.
The Basics
What is a mortgage?
A mortgage is, put simply, a type of loan. More specifically, it is a loan used for the purchase of property or land, and characterised by the fact that it is secured against the property or land in question.
Some loans can be secured against different types of collateral. These are, of course, known as secured loans, and it’s down to the lender what assets they will accept as collateral. In the case of a mortgage, however, the ‘collateral’ is the home (or other type of property) itself.
Your mortgage will fund the agreed cost of your new home, minus any deposit money you put down at the beginning of the agreement. They are paid off over an agreed period of time – this is known as the mortgage term – which often falls somewhere in the region of 25 to 35 years.
As with any loan, you will be charged interest. This can be fixed or variable. Shorter mortgage terms tend to entail a higher interest rate, while longer mortgage terms tend to be more affordable on a month-to-month basis (although you pay more in the long-term).
There are a few different types of mortgages out there – and, no matter what product you choose, the specifics will come down to you, and the picture you paint as a borrower.
What is the difference between a repayment mortgage and an interest-only mortgage?
The difference comes down to your monthly payments – or, more specifically, what those monthly payments are paying for.
Under a repayment mortgage, your monthly payments will be made directly toward repaying the loan itself, with your fixed or variable interest rate applied to that repayment. This means that, over the course of your mortgage term (say, 25 years), you’re gradually paying off that loan with interest.
Under an interest-only mortgage, your monthly payments are only paying off the interest on the original loan, and not the loan itself. This means that your monthly payments are a fair bit lower but that, by the end of the mortgage term, you’ve still got the original loan to pay-off in a lump sum.
What types of mortgages are there?
There are a lot of different types of mortgages. Some are relatively similar, some are better for first-time buyers, and some are a little less common than others.
For first-time buyers, a fixed-rate mortgage tends to represent the best option, primarily because it offers a guarantee on the rate of interest they can expect to pay for the first few years of repayment. The interest will change eventually, but most buyers can expect it to remain fixed for the first 2-10 years after the mortgage is finalised. This fixed term will be stipulated in the paperwork.
Once that initial period comes to an end, your mortgage will become a variable rate mortgage. This means your interest rate will depend on your lender’s standard variable rate and, potentially, the economic situation the country finds itself in.
Other mortgage types include…
- Capped rate
This means that the mortgage rate will never rise above a certain amount, but can dip lower at times of low interest. Capped-rate mortgages are a lot less common than other types of mortgages, since they are a riskier choice for lenders. - Discounted
As the name suggests, your lender offers a discount from their standard variable rate (SVR). This means that your mortgage rate will still fluctuate with the lender’s SVR, but that it will always remain a certain amount (say, 1%) below that SVR.
The discount may be temporary, and last the first few years of your loan, or it may apply throughout your entire mortgage term. - 95% (or 100%)
Most mortgages pay for the value of the property, minus the buyer’s deposit. A lot of lenders will stipulate a minimum amount needed for a deposit, or offer much more attractive options to those with bigger deposit. 95% mortgages are designed to cater to those who have a very limited amount of money to put forward, while 100% mortgages require no deposit at all.
They’re less common, and the terms are generally a lot less attractive to buyers – but, for some, they help to accelerate the process of getting on that bottom rung of the property ladder. - Offset
If you’re someone with a very healthy savings account, then you can ‘offset’ your interest rate against your savings. The amount borrowed, minus the amount in your account, will be used to determine how much interest you pay each month.
To get an offset mortgage offer, you’ll need to have around 20-25% of the mortgage value in your account. - Tracker
Instead of adhering to your lender’s own Standard Variable Rate, tracker mortgages follow (or ‘track’) the market. This generally refers to the Bank of England’s interest rate (base rate). This means your rate can go up or down, and may go higher or lower than your lender’s SVR. - Buy-to-let
If the buyer is not planning on living in the property in question, but on renting it out to a third-party instead, then the terms of the mortgage will be determined based, in part, on the monthly rent payments the property is expected to bring in.
They are not commonly offered to first-time buyers, although it’s not impossible to get one if you haven’t owned property before.
What factors do mortgage lenders consider?
A mortgage is a substantial loan – the biggest loan many people will ever take on. Mortgage lenders have to be sure that prospective borrowers are likely to keep on top of payments, and see the mortgage term through, which means looking at a wide range of factors that, together, create a ‘portrait’ of you as a borrower.
Income
The most obvious considerations are, of course, your household income. First-time buyers who have a stable income – say, a monthly salary – are already at an advantage; if your income is less predictable – say, if you’re self-employed and don’t draw a consistent salary – then you’ll want to ensure that your finances (in particular, your tax calculation and year overview) are shipshape and close to hand.
If you’re employed, lenders will ask to see a few recent payslips. If you receive regular bonuses, they will also want to review your most recent P60 form, which gives insight to the amount of tax you paid over the last financial year.
Debt-to-Income Ratio
Whether you’re self-employed or not, however, all lenders will be interested in your debt-to-income (DTI) ratio. This is the ratio of your earnings that goes toward paying off debts. The higher the number, the less confident lenders will be that you’re going to manage your mortgage payments.
If you’re planning on buying a house, it’s well worth making the effort to pay off any significant debts – and, of course, to do so on time.
Credit score, credit utilisation, and pending disputes
Your credit score offers lenders (not just mortgage lenders) a quick and easy glimpse into your ability to manage and repay debt. Most debt is reflected in your credit score, along with any late or missed repayments. This is, of course, why it’s important to work to keep your score as high as possible. It may not tell a complex financial history, but it’s a little like a film trailer – just enough to tell lenders whether or not they should be interested.
But, beyond the score itself, lenders are also interested in your credit utilisation. If you’re at the very limit of the credit available to you on a credit card, for instance, then you may be deemed ‘over-leveraged’.
Pending disputes are also cause for concern for lenders. For that reason, it’s better to wait for the dispute to reach a conclusion before you file an application.
The size of your deposit
This is incredibly important. Unless you’re going for a 100% mortgage – which are few and far between – you’ll need to be able to invest a portion of the house’s value into the purchase yourself.
Different lenders will offer different products depending on the size of your deposit, and the offers get more and more attractive as the amount increases. A 5% deposit is the most easily attainable for first-time buyers, but you’ll get a far better rate if you can put down a 10% or 15% deposit (or more).
Other factors lenders may consider include…
- Whether or not you’ve strayed into your overdraft in recent years
- Who you’re financially linked with. This may be your current partner – the person you’re buying a house with – or an ex-partner you didn’t even realise you were still connected to.
- Whether or not you’re keeping on top of bills
- How long you’ve been employed for. If you’ve just had a significant career change, for instance, it’s often best to wait a few months before trying to apply for a mortgage.
- Any other income you take generate – say, through an investment portfolio.
- Your spending patterns.
The Application Process
How do you start the process of getting a mortgage?
The best advice we can give you is to talk to an independent financial advisor first.
Why? Well, for starters, because ensuring that your finances are in the strongest possible position to get you a good and attractive offer from a prospective lender is vital. Mortgage ‘How Tos’ and guides – yes, even this one – can only take you so far. They can help you to prepare, and to get the ‘lay of the land’ – but they can’t address all the specifics of your case.
Add to that the fact that, for various reasons, mortgage applications can be rejected. This is not the end of the world, and you can always apply again, but each application will result in a hard inquiry into your credit score – and a knock to your confidence. Minimising the risk of any ‘pushback’ from potential lenders is key.
Also, there are countless different products out there for borrowers from an incredibly wide range of lenders. We’ve talked before about the importance of seeking independent financial advice, and this is where it really starts to matter. Picking a restricted advisor means significantly limiting your options before you’ve even got started.
What is a mortgage in principle?
Think of it like a preliminary offer – an offer subject to further checks into your financial background, and status as a potential borrower. It will detail a specific amount that the seller is willing to lend – which is determined based on the factors detailed above.
Having a mortgage in principle is not a guarantee. You won’t have signed onto any binding agreement, and you (or the lender) could still back out.
But having a mortgage in principle is what enables you to start seriously looking for a property. One of the first questions many estate agents ask is, ‘Have you got your mortgage in principle?’ Without one, no one can be sure what you can afford – whether or not you can actually fulfil any offers you put on the table – or that you won’t cause a significant hold up further down the line, as you search for a mortgage.
This offer may also be referred to as an AiP – an Agreement in Principle – or a DiP – a Decision in Principle.
What is the next step after a mortgage in principle?
You can make an offer on a house. Mortgages in principle don’t last forever, and will generally expire somewhere in the region of 3-6 months after the offer is initially extended.
If your offer is accepted, your lender will need to see a few more documents from you, and conduct a deeper search into your finances. They will also need to find out more about the property – specifically, its value and the level of risk it poses to them. If they ever need to repossess the house, they want to be sure that it’s truly worth the amount of money they are lending to you now.
This is also where the survey will be necessary. This can cause a bit of a delay in the process, particularly if urgent repairs are required. Some homeowners use these repairs as an opportunity to negotiate a lower price.
Once all your ducks are in a row, you will be sent your official mortgage offer. Your job at this point is to sign on the dotted line, and grant your conveyancer permission to exchange the contracts on your behalf.
How often do you need to pay mortgage?
The most common repayment structure will see homeowners making monthly payments via direct debit. This is just like paying rent, and tends to represent the most manageable option. Unlike the majority of rental payments, however, these payments are made in arrears, which simply means each payment you make will be for the month just gone, rather than the new month coming.
Protection
Is life insurance needed for a mortgage?
No, it’s not a pre-requisite. Since your mortgage is secured against the house itself, lenders don’t need to put any other safeguards in place to protect their money.
As a homeowner, however, you’ll want to think about the responsibilities that come with it. Your lender may not need protection, but your loved ones do need to be protected against those worst-case scenarios.
Life insurance can represent a financial safety net, should you pass away unexpectedly.
Is income protection required for a mortgage?
No – and for the same reasons why life insurance doesn’t offer any benefit to lenders.
Income protection offers you the peace of mind that can only come from knowing you’re a sudden illness or disability that prevents you from working won’t leave you without any income at all. Your policy probably won’t provide you with your full salary, but it will offer a strong safeguard against falling behind on your bills or mortgage payments.
Like any other financial commitment, turning to an independent, unbiased financial advisor is vital. You can find out more about the protection advice we offer by clicking here.
Get in Touch
It’s no secret that the prospect of buying your first home is daunting. Exciting, yes, but also ‘unchartered territory’. Without the right pillar of support, it’s easy to feel as though you’re being passed from one agent, one representative, and one advisor to the next – being dragged, rather than guided, through the process.
Only by working with an independent financial advisor can you be sure you’re working toward the best option for you, rather than one of a limited number of products a representative is paid to sell.
If you’re considering getting on the property ladder, then get in touch with us today, and we can make certain you’re prepared for what lies ahead.
