Most buyers buy property by borrowing money. A mortgage is a loan of money from a bank or building society. The mortgage is secured against the deeds (ownership documents) of the property. If the mortgage repayments are not made on time the lender can evict you (repossess the property) and sell the property to repay the mortgage loan.
How much should you borrow?
How much you can borrow depends on your income and on the value of the property you are buying. Mostly you can borrow between 70% or 95% of the value of the property. An average loan for those selling and moving up the market might be a loan of 60%-80% of the property value.
Individuals can usually borrow up to three times their gross annual salary. Couples can borrow either three times the higher salary plus one time the lower or two and a half times the total of their joint gross annual income. Pay slips, or in the case of self-employed applicants an accountant’s letter, will be required as proof of income. These are very rough figures as loans of up to 3.5 times income for individuals may be available depending on prevailing market conditions.
Term of Mortgage
Lenders have different lending policies and you should shop around to find out what is available. The length or term of your mortgage will normally be between 10 and 25 years and you will have to pay it each month. Think about your other current and possible future expenses and income. It is important not to overstretch your finances as property markets are cyclical and a downturn in property values or an upturn in interest rates is never far away.
There are lots of mortgage providers with hundreds of products on the market and you should shop around, or have a financial advisor shop around for you, to find the scheme that suits you best.
Arranging a Mortgage
The mortgage process should be started as soon as possible:
- before agreeing a deal the seller and estate agent will want reassurance that the buyer knows what he can borrow and has made provisional arrangements
- the legal contract will not be signed until mortgage arrangements have been completed and up to this point a buyer can be gazumped
- it will take longer than you think
How to do arrange a mortgage?
There are two ways to progress
One is to approach the lenders directly and research what they have to offer the other route is to select a broker who will take responsibility for researching the market for you.
Choice of mortgages
There are hundreds of mortgage products to choose from and the market can get very confusing. Some of the things to think about are:
- is the interest rate variable or fixed?
- if variable will I be able to afford the payments if interest rates go up?
- can I take payment holidays if my financial circumstances change?
- is it flexible so I can pay off earlier if I am able and save on interest charges?
- is a cash back available to help me cover valuation or legal expenses, my deposit, carpets or home improvements?
What Does a Mortgage Application Involve?
A potential lender is being asked to assume the financial risk that you will not service or repay the loan. The decision making process concerning this is called underwriting. The process is detailed and lenders require a great deal of information before making their decisions:
- Evidence of income and current commitments such as wage slips, a P60 and bank statements
- credit references from agencies, previous lenders and landlords
- income verification from employers
- reports from surveyors that the property’s condition and value are suitable for mortgage purposes.
- Lenders will reduce their offer amounts after credit scoring processes taking into account your existing commitments.
The mortgage code provides protection for you as a mortgage borrower. It sets out minimum standards that mortgage lenders and intermediaries have to meet. Visit the website of the Council of Mortgage Lenders to find out more at http://www.cml.org.uk.
Types of Mortgages available in NI
You should try to choose the type of mortgage that suits your lifestyle. This may depend on whether you are employed or self-employed; buying your first home, moving on, or simply want to re-mortgage your current home.
Some of the options are: –
Capital and Interest Mortgages (Repayment Mortgages)
Your monthly payments go towards paying off both the interest and the original amount you borrowed (the capital). You make payments to the mortgage lender on a monthly basis, the payment consists of interest (which might vary) plus a portion of the money borrowed, as such the amount of the mortgage reduces every time.
If you keep up all your payments you are certain to clear your mortgage at the end of its term which is usually between 10 and 25 years.
Repayment mortgages provide a flexible repayment method as they may allow you to vary your repayments to suit your circumstances. Additional monthly repayments will reduce the overall term of the loan and you may be permitted to reduce your payments in times of hardship.
Investment Backed Mortgages
With this method of repayment the payments you make to your lender represent interest only; the consequence of this unlike the repayment method is that none of the initial capital is repaid with the monthly repayments.
You make a regular investment that will pay out at the same time as your mortgage ends e.g. an endowment or pension.
You make monthly contributions to the issuer of the policy i.e. an assurance company which invests your premiums along with those of other investors in securities and hopefully the policy grows in value. As further premiums are invested the assets in which they are invested hopefully increase in value, with the objective that the policy has accrued a sufficiently large enough value by the time it matures thereby releasing capital to you in order to repay the mortgage.
It is also generally possible to make lump sum payments to reduce the capital throughout the mortgage term but you should ask your lender when is the best time to do this. Remember your monthly payment is only interest, no capital is repaid in this manner so the endowment or pension policy is the means by which your mortgage will eventually be repaid.
It is your responsibility to make sure adequate arrangements are made to repay your mortgage when the time comes. If your investment arrangements do not cover the capital borrowed you will have to make up the difference yourself. If you do not have the means to do so you could ultimately have to sell your home to repay the capital. On the other hand if there is a surplus you get to keep it. You should take financial advice before choosing this type of mortgage. Recently financial performance of endowments has been insufficient to pay off mortgages to the extent few if any are now bought.
If you don’t have a deposit there were a limited number of mortgage lenders who would lend the full purchase price of the property were in the early 2000s. 100% loans are now rarely available.
Right to Buy Mortgages
Tenants of Housing Executive properties can borrow to purchase at the discounted purchase price (up to 100%). If you want to borrow more to improve the property this is generally also possible.
Buy to Let (Investment) Mortgages
It is possible to purchase one or more properties with a view to letting them out.
This is available for individual or professional landlords. The maximum loan to value is usually around 75/85%.
Let to Buy Mortgages
You may be able to let out your present property perhaps where circumstances dictate a bigger house or a move away for job relocation. This can be either with a view to a later sale or retention as an investment. It may also be useful when you may be unable to sell or perhaps the climate is not right to sell.
This is simply a method whereby you declare your income without any checks by the lender. It is most popularly used for the self employed where historical accounts do not reflect the current income or trading position of the individual. It is also available if you are employed and part of your income is commission based. Interest rates are normally marginally higher than the standard rates available on conventional mortgages. The maximum loan to value is usually around 70%.
These schemes apply if you are a British national working abroad and wish to buy a home in the UK. The maximum loan to value is usually 75%.
Adverse Credit (or Bankruptcy) Mortgages
This is for those that fall outside the criteria of the mainstream lenders due to past credit problems but now have no difficulty in managing their finances. If you have suffered previous arrears or have any County Court Judgments there are mortgage and loans available. The maximum loan to value is normally 75%.
A flexible mortgage lets you overpay if you want to top up your monthly repayments or pay off your mortgage more quickly. You can also request a break from your normal monthly payments. This type of scheme is ideal if you are not on a fixed income or if you want more versatility in your mortgage arrangements. Flexible mortgages tend to have variable rates of interest. Recently some lenders have also introduced all-in-one accounts where savings and borrowing are put into one account so as to reduce the level of borrowing.
With these types of mortgages the lender offers you a cash gift for taking out a mortgage with them. The cash gift is normally payable to you one month after taking out the new loan or on completion of the loan.
Different types of interest, or methods of calculating interest, can apply to different mortgage products. Some of the variations are: –
The interest rate you pay goes up or down according to how your lender reacts to interest rate moves on the money markets.
Standard Variable Rate
The normal rate of interest offered on a mortgage by the lender is called the Standard Variable Rate. Mortgage schemes, such as discounted mortgages, are often linked to this rate.
The interest rate you pay stays the same for a set period, even if general interest rates go up or down. You can plan your budget with confidence.
There is a guaranteed reduction in the Standard Variable Rate giving you the benefit of lower monthly payments for a period of time.
The interest you pay is “capped” at a top level. You pay no more than the capped rate.
You can also still benefit if the Standard Variable Rate goes down.
An interest rate directly linked to another rate usually the Bank of England Base Rate.
Most mortgages have traditionally charged interest annually in advance which means if you make a substantial capital repayment to reduce your mortgage you need to time the date of your payment, or make a special arrangement with your lender, to make sure you are not giving your lender an interest free loan until the next interest calculation date!
When you pay off your entire mortgage however interest is almost always then recalculated daily until your payment date although some products recalculate monthly.
Some products now calculate all interest charges daily.
Remortgaging your property has become very popular for a variety of possible reasons:
- because the mortgage payments you are currently making are at too high a rate and no longer competitive because you wish to reschedule existing loans under one long term lower monthly cost commitment
- because you want to extend or renovate your property
- because you want to raise money out of your house for other purposes, e.g. business, boat, holiday home, etc.
- because you want to switch to a different product such as a flexible mortgage which allows you to offset savings against borrowings
- because the expenses of remortgaging are now often nil as new lenders will pay the valuation and legal fees of switching to them
Changing your mortgage lender used to be like changing your house; something you only did once or twice in a lifetime. Now it is like changing your car. If you think you are being charged too much ask for a few quotes through your financial advisor or selected major lender. Check the interest rate and monthly cost. Make sure your switch will be a no cost opportunity with your new lender picking up all the expenses.