How it works
A mortgage is the process of borrowing money from a bank or loan provider such as The Loans Department in order to buy a property or land. You will need to provide a deposit that can be from 5% upwards of the property value and you will pay your lender interest on the remainder of the money you will need to borrow in order to make the purchase.
You will make monthly repayments over a fixed period of time, usually 25 years, but can be longer or shorter. If you fail to make your repayments your lender can repossess the property and sell it in order to recoup losses on the money loaned.
Types of mortgage
Each mortgage repayment scheme will be dependant on a rate of interest charged across the amount of money borrowed.
Your interest rate will change over the period of the loan and is linked to the lenders standard variable rate (SVR); a rate they decide and is often, but not always, linked to the Bank of England’s base rate.
A fixed rate mortgage will tie in a specific interest rate for a given period of time. This makes budgeting a simpler process, as you will know exactly what you will be paying. At the end of the fixed rate period you can choose to move to the lenders SVR or choose another fixed rate for a similar suitable term.
A tracker mortgage is linked to the Bank of England’s base rate and will increase or decrease in line with any changes in the base rate. A tracker mortgage will generally offer a lower interest rate than fixed rate mortgages but you need to be aware that they are likely to change and your repayment amounts with them.
An offset mortgage is an option linked to your savings.
With a repayment mortgage you pay off the interest and part of the capital amount each month. Your interest amounts should slowly reduce as you pay off part of the capital every month.
With an interest-only mortgage you only pay off the interest on the loan and nothing towards the capital amount.
So when you reach the full term of your mortgage you will own your home outright with a repayment mortgage but with an interest-only mortgage the lender will still own your home. You will need to prove to your lender that you have a saving plan to be able to pay for the property at the end of the term in order to be offered an interest-only option.
Rates and fees
The interest rates you will be offered are dependant on the value of the property, the term of the loan and your deposit amount.
The loan-to-value (LTV) amount is the amount of the property you own relative to that of how much capital you need to borrow from the lender. This translates into the larger the deposit you can pay the lower your interest rate could be as you will be considered a lower risk to the lender.
Lenders can also charge a set up fee that should be added to the total amount when making comparisons to other offers. You should factor in all costs associated with each loan. Not only with the loan itself and the cost of the property but also the costs associated with the process; you will incur additional fees for property checks and valuations and there will also be legal fees to pay too.
You should also consider any early repayment or exit fees with the mortgage you choose. If you decide to change mortgages or find yourself in a position to be able to repay the full amount before completion of your term your lender may include a charge for doing so.
How much can you borrow?
Your loan amount is dependant on your age, your financial position and your credit score.
A lender will consider your loan term against your age to make sure you will still be under retirement age and have access to a suitable income. They will also consider a host of personal financial details in both your income and monthly outgoings to make an in-depth estimation of what you can comfortably afford to repay each month.
Any loan you apply for will be based on your current credit score so make sure you check your credit report to be assured of the best health possible and the best option of receiving favourable offers from lenders.
How your lender will vet you
Modern mortgages have to be assessed by a mortgage advisor regulated by the Financial Conduct Authority. This could be a bank or building society’s own advisor or an independent broker or financial advisor. Either way they will assess you in order to be sure you are in a position to be able to afford your repayments.
Your advisor will put together a detailed forecast from your personal cash-flow situation. They will look at income streams for you and your partner (if you’re applying for a joint mortgage) and of all your outgoings too. You will have to provide information into how much you spend on utilities, loans, groceries, child-care, phone contracts, gym memberships, travel expenses and more. Everything that can be considered a regular monthly outgoing will be taken into consideration to arise at a suitable figure you can safely afford to pay each month without causing financial difficulties.
You can create your own plan by checking your bank statements and your monthly lifestyle. There are affordability and mortgage calculators online that can help you determine your outgoing costs and obtain an estimate of what you are likely to be offered from lenders on your figures. The more research you do the better prepared for your application you will be.
Finding your best mortgage
To give yourself the best mortgage options you should do your homework across all lenders and products.
A bank or independent mortgage advisor is often tied into their own products. The same applies to comparison sites; you should check them as many as possible as they will each likely be linked to varying suppliers and lenders throughout their product ranges.
Some banks will not be associated with comparison or money websites so you should always make additional independent searches to be sure you’ve covered all of your options.
A mortgage broker can prove to be a valuable option, as industry specialists they will often have a wealth of knowledge that can save you time and money.
A broker may also have exclusive access to deals unavailable anywhere else. They could provide options for those with a poor credit history or a difficulty in attaining a mortgage due to an irregular income or self-employment.
A broker should outline their fees at your initial interview. They may charge separately for individual services or as a complete commission on a mortgage that they supply or arrange. You should make sure you add this onto your total list of costs.