Buying a property is likely to be one of the largest purchases you will make in your lifetime.
Most people buy a property using a mortgage which is a loan of money from a bank or building society.
There are many different types of mortgages and interest rates on the market and it is important to understand which will suit your personal and financial situation.
Propertynews.com have created a guide to understanding mortgages which will explain what a mortgage is, what a mortgage application involves and the different types of mortgages available in Northern Ireland.
In this guide to understanding mortgages, you will find:
What is a mortgage?
A mortgage is a loan from a bank or building society that you use to purchase a property.
When you buy a home, you will typically have to pay a deposit (this is usually a minimum of 5% – 10% of the property price) and take out a mortgage to pay for the remainder of the price.
You will then pay back what you owe, along with interest, over a period of many years. The average period for mortgage repayment is 25 years. However, some lenders may allow for longer or shorter terms.
The mortgage is secured against your property until you have paid it off in full. Therefore, if you fail to keep up with your monthly mortgage repayments, your lender could repossess your home.
How does a mortgage work?
When taking out a mortgage, you will initially have to pay for part of the property yourself. This is called the deposit.
Deposits are typically shown as a percentage of the property’s value. Therefore, if you purchased a property for £150,000, a 10% deposit would equal £15,000.
Your mortgage provider will loan you the rest. This is referred to as the loan to value (LTV).
In the example above, a 90% LTV would cover the remaining £135,000. This is how much you would have to repay to the lender.
The money that you have borrowed from your lender is referred to as the capital.
On top of the capital, you will also have to pay interest on what you owe.
The interest that you pay will depend on the type of mortgage rate that you have chosen.
We will go into more detail on the different mortgages and rates later in the guide.
What are the different types of mortgage fees?
There are a number of mortgage fees that need to be paid at different stages of the buying process. These payments range from smaller admin fees to the larger costs which cover essential services.
The different types of mortgage fees include:
- Arrangement fee
An arrangement fee is what you will pay your lender to set up your mortgage. This fee can be paid upfront or added to your mortgage. However, if this charge is added to your mortgage, you will pay interest on it.
- Booking fee
A booking fee is also known as an ‘application’ or ‘reservation’ fee and is charged upfront to your lender. Some lenders will charge this fee to reserve your loan and is often non-refundable.
- Valuation fee
A valuation fee is charged by the lender who will value your property to ensure that it is worth the amount that you wish to borrow. This valuation will also highlight any defects which may affect the value of the property.
- Telegraphic transfer fee
The telegraphic transfer fee allows your mortgage provider to transfer the money to your solicitor. This fee is often non-refundable.
- Mortgage account fee
The mortgage account fee will cover the costs in setting up, maintaining and closing your mortgage.
- Early repayment fee
You may be required to make an early repayment fee to your lender if you pay off your mortgage before the agreed term. This fee does not always apply so be sure to check with your lender before agreeing to the mortgage.
How to apply for a mortgage?
There are a number of mortgages available on the market. It is important to understand the differences of each loan to discover the best one for you.
A mortgage adviser will be able to search and review the best deals for you based on your personal and financial situation.
Before deciding on a mortgage adviser, check to see if they are tied to a certain lender. If so, these advisers will only be able to advise on mortgage deals from a certain bank or lender. Therefore, these advisers may be unable to recommend some mortgage deals, even if they are the best option for you.
Whole-of-market advisers are not tied to a certain lender and so can recommend mortgage deals from a range of banks and lenders. However, whole-of-market advisers will be unable to comment on ‘direct only’ deals. These are deals that banks and building societies offer directly to their customers.
Before deciding on a mortgage, speak directly with different banks and lenders about the types of mortgages that they can offer you. By speaking directly with these lenders, they may be able to offer you deals that a mortgage adviser can not.
You need to be sure that the mortgage you apply for is right for you and that you can commit to the monthly repayments. A mortgage in principle will help you discover how much of a mortgage you can afford. Knowing how much of a mortgage you can get in advance will help in your search for your dream home.
What is a mortgage in principle?
Also known as a Decision in Principle (DIP) or Agreement in Principle (AIP), a Mortgage in Principle (MIP) is a statement from a lender that highlights how much they are willing to lend you before you have finalised your property purchase.
A mortgage in principle is based on an initial assessment of your circumstances which includes your salary, outgoings and credit score.
It is important to remember it is offered in principle.
When you make a formal mortgage application, the lender has the right to change the details of the deal and in certain circumstances, they may not offer you a deal. If a substantial amount of time has passed between receiving your mortgage in principle and applying for your mortgage, you may find that the interest rates have changed or that you can find a better deal elsewhere.
What does a mortgage application involve?
A mortgage application is an extensive document that includes information about the property being considered for purchase, the borrower’s financial situation and their employment history. Banks and lenders will use the information in this document to determine whether to approve the loan.
In order to apply for a mortgage, you will need to provide the following:
- Proof of ID – Passport or driving licence
- Details of your employment
- P60 form
- Your last three to six pay slips from employer
- Bank statements of your current account for the last three to six months
- Proof of current address – These can be utility bills, credit card statements or a bank statement. Typically, these documents need to be dated within the last three months.
- Proof of any benefits received
- Details of your outgoings
- Details of any loans you have taken out
- Details of the property that you wish to purchase
- Details of estate agent selling the property
- Details of your solicitor
If you are self-employed, you may also need to provide the following:
- Details of your tax assessments and your account from the last three years
- Details from accountant
- Tax return form SA302
- Supporting information such as bank statements and receipts
- A tax calculation
- Your HMRC tax year overview
Ensuring that these documents are up-to-date will help to speed up the mortgage application process. It is important that your name is spelt correctly, and if you are applying for a mortgage under your married name, check that this name is printed on these documents. Some mortgage lenders may ask you to provide different documentation to those listed above. It is advised to speak with your mortgage provider to determine which documents you will need to produce.
How long does a mortgage application take?
On average, it takes between 18 – 40 days for your mortgage application to be processed.
However, there are several factors that determine how long a mortgage application will take. These factors include:
- The complexity of your application
- The information on your application documents are up-to-date
- The applications of other people in the property chain
- How quickly your solicitor acts
- How quickly you respond to your solicitor and lender’s requests
What are the different types of mortgages?
- Repayment mortgages
A repayment mortgage consists of repaying the capital amount (the amount borrowed from the lender) as well as the interest. The amount borrowed decreases throughout the term until the full loan has been paid.
- Interest only mortgages
The monthly repayments consist only of the interest charges on your loan, not the capital that was borrowed at the beginning of the loan. This means that the monthly payments will be less than a repayment mortgage. However, at the end of the term, you will still owe the original amount borrowed from the lender.
- Cashback mortgages
With these types of mortgages, the lender will offer you a cash gift for taking out a mortgage with them (usually a percentage of your loan.) This cash gift is usually payable to you one month after taking out the loan or on completion of the loan.
- Flexible mortgages
Flexible mortgages usually have terms that lets you overpay, underpay or take a payment holiday (miss a few monthly payments) if needed. Flexible mortgages tend to have variable rates of interest.
- Right to buy mortgages
If you have been a tenant of a Housing Executive property for five years, you may be able to purchase the property.
- Buy to let (investment) mortgages
A buy to let mortgage is sold specifically to people who want to buy a property as an investment. This is available for individual and professional landlords. Interest rates on buy to let mortgages are usually higher and the maximum loan to value is usually around 75/85%.
- Let to buy mortgages
Let to buy involves having two mortgages as it helps you to simultaneously purchase your next home and let out your former house. Let to buy mortgages may be useful when you are unable to sell or perhaps the climate is not right to sell.
- Adverse credit mortgages
An adverse credit mortgage is a term used to describe a loan for applicants with a history of poor credit. Interest rates on these mortgages are usually higher, and a larger deposit may be required to secure the loan.
What are the different interest rates of a mortgage?
Different types of interest can be applied to different mortgage products.
The interest rate options are:
- Variable rate
The interest rate you pay can fluctuate at any point throughout the term of your mortgage.
- Standard variable rate (SVR)
The standard variable rate is the normal rate of interest offered on a mortgage by the lender. Each lender is free to set their own standard variable rate and adjust it how and when they like.
- Fixed rate
The interest rate that you pay will remain the same for a set amount of time. This option allows you to budget for the first couple of years.
- Discounted rate
There is a reduction in the lender’s standard variable rate over a set period of time. As this is a type of variable rate, the amount that you pay each month can vary due to the lender changing their standard variable rate.
- Capped rate
Capped rate mortgages are variable rate mortgages but with a cap on how high the interest rate can rise. You will also benefit if the standard variable rate decreases.
- Tracker rates
Tracker rates are a type of variable rate, meaning you could pay a different amount to your lender each month. These rates work by following a particular interest rate (such as the Bank of England base rate), then adding a fixed rate on top. If the base rate increases or decreases, so does your interest rate.
What is remortgaging?
Remortgaging is the term given to switching to a new mortgage deal, either with the same or a different lender.
There are a number of reasons why an individual may want to remortgage their home.
- Your current mortgage deal is ending
- You want to secure a better rate
- Your home’s value has increased
- Your financial situation has changed
- To gain funds to carry out home improvements
- You are concerned that interest rates will rise considerably
Before deciding to remortgage, it is advised to speak with an independent mortgage adviser who will consider all options and highlight whether remortgaging will save you money.