How does a mortgage work?
A mortgage is a loan to help buy residential or investment property. The mortgage lender will only provide some of the money for the property purchase, which is known as the Loan to Value Ratio (LVR). Most lenders will offer an LVR of up to 80% for residential properties, meaning the buyer will need to put down the other 20% of the purchase price as a deposit. Lenders may offer higher LVR so buyers require less than a 20% deposit, which is also possible through some government initiatives to help first-time buyers. However, lenders offering mortgages to help purchase an investment property (Buy-to-Let mortgage) may only provide a loan that is less than 80% LVR, meaning the buyer needs to have a bigger deposit.
There is a good reason why lenders need the buyer to put down a deposit and will not offer 100% of the property price as a loan. This is to mitigate the risk for all parties in case the mortgage repayments are not met and the property must be sold to repay the loan. By requiring the buyer to put down a sizeable deposit, the bank should still be able to get all of the money back even if the property value has decreased somewhat. Therefore, the deposit is a way of reducing the risk of failure to repay (and negative equity) from causing serious mortgage debts.
Mortgages are usually repaid over 25 or 30 years. Some homeowners manage to repay their loan much quicker by making extra repayments or by using an offset account which reduces the amount of interest added to the loan during the loan’s term. The mortgage lender calculates monthly repayments based on the size of the loan, the loan term and the interest rate applied. Depending on what type of mortgage you have, mortgage repayments can change over time to ensure the loan is repaid in full within the agreed loan repayment term. Interest on the mortgage is accumulated daily but is usually only added to the loan balance at the end of each month.
What are the different types of mortgages?
Understanding how mortgages work can be complicated enough, but the complexity is increased when you realise just how many types of mortgages there are to choose from. The two overarching mortgage types are fixed-rate mortgages and variable-rate mortgages, although there can be different mortgage types within both categories.
A fixed-rate mortgage is a mortgage that applies a fixed rate of interest to the loan balance each month for a fixed period. Some fixed-rate deals will last as short as six months to a year, whereas other fixed-rate mortgages can be locked in for five or more years. The benefit of a fixed-rate mortgage is that homeowners know exactly how much their mortgage repayment will be each month during the fixed term. However, fixed-rate deals typically offer a higher interest rate than variable-rate mortgages. Once the fixed-rate mortgage term comes to an end, the mortgage will usually switch to the same lender’s standard variable rate mortgage rate, which could mean homeowners are moved to a lower or higher interest rate, albeit one that could change and fluctuate monthly repayments.
A variable rate mortgage is a type of mortgage where the interest rate can change and therefore mortgage repayments will change to ensure the loan is repaid within the agreed timeframe of 25 or 30 years. The interest rate may increase or decrease, which doesn’t provide homeowners with assurances on how much they will have to repay over long periods. However, SVR mortgages usually have lower interest rates than fixed-rate mortgages – but not exclusively. There are different types of variable rate mortgages, such as:
- Standard-Variable-Rate (SVR) mortgage
- Base Rate mortgage
- Tracker mortgage
- Offset mortgage
SVR mortgages will offer an interest rate decided entirely by the lender, which will be influenced by external factors and possibly the loan’s LVR i.e. the size of your deposit. Base rate and tracker mortgages offer an interest rate that is significantly influenced by the Bank of England’s base rate of interest. The rate offered is the BoE’s base rate plus a fixed percentage, usually between 1% and 2% extra. Offset mortgages are when the borrower has a savings account with the same lender and any money in the account is reduced from the loan balance even though this money has not been paid into the mortgage which is a way to reduce the interest applied and the length of time it takes to fully repay. You can sometimes find offset mortgages on fixed-rate deals but they are more commonly found as part of variable-rate mortgages.
How to get a mortgage
A property purchase is likely to be the most expensive purchase in your lifetime which makes getting a mortgage daunting and stressful to some buyers, especially when purchasing your first home. Yet, it is important to remember that scores of people get a mortgage to buy property every month without any issues at all. With careful research and planning, you can get a mortgage without major issues and headaches.
The first task is to work out what type of mortgage you need which requires careful analysis of personal circumstances and preferences. This can be achieved independently, but using professional mortgage advice services may make the process quicker, clearer and even achieve a better outcome due to industry knowledge and connections.
It is recommended to first get a mortgage in principle at the beginning of your property search. A mortgage in principle is when you provide the chosen lender with your financial information, including income, expenses and existing debts. It may involve a soft or hard credit check as well. The lender will then tell you how much it is likely to approve you to borrow within a mortgage so you know your maximum budget from the outset of your property search. It also ensures that you are likely to be approved for a mortgage at crunch time.
A mortgage in principle sets realistic expectations with a preferred lender and allows you to complete much of the bureaucracy earlier. However, there is no obligation to make a real mortgage application (after an offer has been accepted) with a lender that gave you a mortgage in principle. At the time of the property purchase, you may wish to take advantage of a better deal with a different lender.
There can be complexities within the mortgage application process if:
- The applicants have unstable income
- The applicants have multiple income streams
- The applicants do not have a permanent contract of employment
- The applicants have a poor credit history
- Other unique situations apply
Mortgage advisers can also assist in these situations. For example, some of the above scenarios are common when the applicant works in certain professions and industries. The mortgage adviser will have encountered these hurdles before and already know what options and solutions are available. People in some professions may even be eligible for exclusive mortgage deals or discounts.
Having unsatisfactory credit history can put some aspiring homeowners off from seeking a mortgage. This doesn’t have to be the case. Many lenders are willing to provide a mortgage to people with below-average credit ratings. There is no one-size-fits-all approach and each mortgage lender will need to consider individual circumstances. Moreover, your credit score is just one aspect of the whole application. Speak to Taylor James mortgage advisers if you are worried about your credit history when getting a mortgage. We might even be able to help improve your credit score.
What happens if you cannot repay a mortgage?
If you are struggling to keep up with mortgage repayments, there are things you should do as early as possible. Make a budget to see if there are areas where you can cut spending and maintain essential living costs. If you simply cannot keep up with your mortgage, it is best to speak with your lender as soon as possible. A new mortgage charter has been introduced which enables all mortgage holders to take a repayment holiday for up to six months, meaning borrowers will not have to make any repayments but interest will still be added to the loan balance and they will therefore have the repayment period extended.
Mortgage lenders will often try to find ways to help homeowners repay their mortgage with new viable agreements when possible but if repayment issues are not communicated then the lender can repossess the property and sell it to clear the debt. A mortgage is a type of secured loan where the property is used as the security within the credit agreement. This is what allows the lender to take possession of the property if the loan is not repaid as stated within the loan agreement.
However, the new mortgage charter prevents lenders from repossessing homes for one year from the mortgage default. Only after 12 months can the lender repossess a property to then sell it. The money raised from the property sale will be used to repay the lender and any penalties. If there is still a debt the lender may need to take court action to recover this money. Alternatively, if there is money left over from the sale proceeds this will be the borrower’s money to keep.
If you experience mortgage difficulty in the future, it is important to speak with the lender. You can also get advice from Citizens Advice, debt charities like StepChange or a qualified financial adviser.
FAQs
There is no fixed minimum amount of income required to get a mortgage. Lenders complete affordability checks to ensure you can repay the loan amount that is needed to complete the property purchase. Therefore, the amount of income required is dependent on other details, such as loan amount, which will be determined by the sale price and available deposit.
Fixed-rate and variable-rate mortgages are both commonly used in the UK by first-time buyers and home movers. The decision to use one or the other will depend on personal circumstances and preferences. The right one for you is best understood with research or by speaking to a reputable mortgage adviser.
Mortgage advice is provided by qualified professionals to help property buyers identify the most suitable mortgage type for their needs and preferences. The adviser will answer questions and equip clients with the correct knowledge to make informed decisions. Mortgage advice usually extends to brokering services and assistance in applying for the mortgage. Therefore, mortgage advice and brokering assists applicants through all stages of the property purchase.
A mortgage adviser could make your property purchase easier and less stressful or daunting. Due to their connections and knowledge, they may even help secure a more advantageous mortgage deal which can save considerable money over the long term. Furthermore, they can prevent borrowers from selecting a mortgage that isn’t right for their needs and preferences.
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FAQs
There is no fixed minimum amount of income required to get a mortgage. Lenders complete affordability checks to ensure you can repay the loan amount that is needed to complete the property purchase. Therefore, the amount of income required is dependent on other details, such as loan amount, which will be determined by the sale price and available deposit.
Fixed-rate and variable-rate mortgages are both commonly used in the UK by first-time buyers and home movers. The decision to use one or the other will depend on personal circumstances and preferences. The right one for you is best understood with research or by speaking to a reputable mortgage adviser.
Mortgage advice is provided by qualified professionals to help property buyers identify the most suitable mortgage type for their needs and preferences. The adviser will answer questions and equip clients with the correct knowledge to make informed decisions. Mortgage advice usually extends to brokering services and assistance in applying for the mortgage. Therefore, mortgage advice and brokering assists applicants through all stages of the property purchase.
A mortgage adviser could make your property purchase easier and less stressful or daunting. Due to their connections and knowledge, they may even help secure a more advantageous mortgage deal which can save considerable money over the long term. Furthermore, they can prevent borrowers from selecting a mortgage that isn’t right for their needs and preferences.
