Mortgages

Whilst 19,000 first-time buyers bought their home without a mortgage in 2015, they are in the minority. Unless you are an extremely high earner, or have generous and wealthy relatives, you are going to need a mortgage to buy your
first home.

Mortgages are quite simple in theory.

You borrow a sum of money from a bank or building society, and repay it over an agreed period, at an agreed interest rate.

How much can you borrow?

You will only know exactly how much you can borrow when you speak to a mortgage broker.

Hint: here’s our telephone number: 0207 808 4120 and our email address: enquire@london-money.co.uk – jot those down for when you finish this guide!

As a rule of thumb, the amount you can borrow will depend on several factors, including, your:

  • Income
  • Credit history
  • Existing loan commitments
  • Outgoings
  • Deposit
  • Personal circumstances

The type of mortgage you are applying for, and the lender’s own criteria, will also affect the amount you can borrow.

Although each lender is different and the exact amount you can borrow will depend on your specific circumstances, the government’s mortgage affordability calculator will give you an indication of the amount you might be able to borrow.

Which comes first, a mortgage application or house hunting?

Are you thinking of house hunting this weekend? If you haven’t found a mortgage yet, you could be wasting your time.

Technically, you don’t need a mortgage until you have found the property you want to buy. But, you can’t buy a property without a mortgage. It sounds a little Catch 22, but look at it this way: until you know how much you can afford to borrow, and repay each month, how do you know which properties to look at?

That means getting a mortgage agreed ‘in principle’ before you go house hunting. This simply means a bank or building society has accepted you for a mortgage, but hasn’t yet looked at the property.

This agreement in principle will show you:

  • How much you can borrow
  • What kind of mortgage rate you’ll be offered
  • What your repayments might be

Once you have a mortgage agreement in principle, you’ll be able to make a firm offer on a property. It may also convince the seller that you are serious and can proceed if you decide to make an offer.

Getting your mortgage approved before you start house hunting keeps everyone happy. It also means you will avoid the inevitable disappointment of finding you dream home, but not being able to borrow enough to buy it. It also gives you time to get your head around the subject of mortgages, so that you’re not rushing to play catch up once you’ve found the right property.

DIY or use a mortgage broker?

There are two ways to get a mortgage:

  1. Use a broker
  2. Do the research yourself and go direct to a bank or building society

We firmly believe there are several reasons why, as a first-time buyer, you should use a mortgage broker.

Remember, if you decide to use a broker you don’t have to use one working with your estate agent, regardless of what they may lead you to believe.

There are several key reasons to use a mortgage broker include:

Experience

Whilst this is your first time, it isn’t theirs.

A mortgage broker is qualified

There’s an awful lot to think about when choosing the right mortgage. It’s not as simple as just opting for the cheapest fixed or tracker rate mortgage you can find.

Mortgage brokers have to be qualified to give you mortgage advice, whereas you may not get that kind of guarantee if you ring up a lender’s call centre. That said, new regulations mean that all call centre staff need to be advisers or must refer you to someone who is. After all, if you went in-branch, you’d be able to arrange an appointment with one of their mortgage advisers.

A broker is on your side

An independent mortgage broker will look for the best mortgage for you. They aren’t on the lender’s side, they’re on yours. Using a broker will give you access to far more products and lenders than if you go direct.

You’ll get unbiased advice and enjoy more choice from a range of lenders and subsequent products, rather than being restricted to the single range of the lender you go to.

It is worth remembering that if you call your mortgage broker at 7pm they will likely pick up the call. Try doing that with your bank!

They know the market

Mortgage criteria has tightened massively over the last few years, with the Mortgage Market Review being the latest, and arguably widest-ranging development. It’s been designed to ensure borrowers can prove affordability, even in the event of a rate rise, and those extra checks have understandably increased application times.

That’s why it’s so important to stay in the loop and have a mortgage broker on your side who understands it all. A broker deals with lenders on a day-to-day basis, so they’ll know the application process and can tell you which lender can process your application with minimal delays.

They also know the background criteria that a lender has and can bring this experience to bear when advising you and processing your application.

It’s not just about the mortgage

A mortgage broker won’t just advise you about your mortgage. They will also look at any related insurances you need.

They will recommend insurance based on your new mortgage arrangements to make sure you are fully protected in the event of:

  • Death
  • Critical illness (such as cancer, heart attack or stroke)
  • Long-term illness

Don’t be put off by a fee

Mortgage advice tailored to your needs is a service. In order for the mortgage broker to offer this service, they need to be able to make money.

They do this by one or both of the following:

  • Charging a fee. This could be a one-off fee for advice, or a fee that pays for advice throughout the term of your mortgage (if you need to remortgage, move home, etc.)
  • Commission. Your mortgage lender may decide to pay the mortgage broker a fee for putting your business their way. The banks are no longer geared up to provide branch based advice so it is often more efficient and cost effective to ask an intermediary to do a lot of their work for them. It is estimated that mortgage brokers now account for 75% of gross lending in the market. Does this affect the advice you will receive? No, as we said earlier your adviser will work for you to ensure the mortgage you get will be the right one for your circumstances and the remuneration from the lender should be the last thing on their mind

How can I find out how much my mortgage broker makes?

Mortgage brokers are required to provide you with a Key Facts document about their services that details any fees or commission they charge or earn.

You will also be provided with a Key Facts Illustration (KFI) about the specific mortgage being recommended. These follow the same format, with each section giving you a specific piece of information.

Details of your broker’s fees can be generally found in section 8 of the KFI.

Details of any fee earned by your broker for introducing your business to the mortgage lender can be found in section 13 of the KFI.

The value of advice

As you are probably gathering, mortgages are a lot more complex than they first appear. Finding the right lender, deciding on the product and understanding what insurances you need is a time-consuming and complicated process. Navigating them on your own is possible, but an expert will be able to keep you on the straight and narrow. If you have had credit problems in the past, or there are other difficulties with your application, they might even be able to find you a lender willing to accept your application where you have previously failed.

Comparing mortgages on a site like Moneyfacts.co.uk is a good place to start – it’s great to get an idea of what’s out there. But choosing a mortgage is a process far more complicated than simply opting for the lowest rate or the best incentives.

A mortgage broker takes your whole circumstances into account, to recommend a suitable product, and it’s that thorough, professional look at your finances, that makes advice well worth paying for.

Types of Mortgages

Whether you team up with a broker or go it alone it may be useful to know a little about the different types of mortgages out there.

Mortgages come in a variety of shapes, sizes, rates and terms, so this section looks at the different types, giving you the basics of how they all work. Some may apply to you and others won’t, but ruling some options out can be as useful as shortlisting them.

What is a repayment mortgage?

With a repayment mortgage, you gradually repay the money you borrowed over your mortgage term, usually 25 years, but often longer.

In the first few years of your mortgage, most of your mortgage payments go towards paying the interest, with a small part repaying the capital. Over time, the balance switches, so you’re paying off more of the capital each month.

With a repayment mortgage, you are guaranteed to repay the full loan by the end of your mortgage term, provided you make your repayments in full each month.

What is an interest only mortgage?

With an interest only mortgage, you only pay the interest on the amount you originally borrowed each month. Your payments are smaller, but you don’t pay off any of the capital that you’ve borrowed until the end of the mortgage term. You need to make other arrangements for paying back the capital. This usually means paying into an investment, such as a Stocks and Shares ISA.

Taking out an interest only mortgage is risky. There is no guarantee that the investment will be worth enough to pay off the mortgage in full at the end of the term.

You also pay more interest overall on an interest only mortgage as you are paying interest on the entire sum borrowed for the whole term.

What type of mortgage product should you choose?

Whether you choose a repayment or an interest only mortgage, there are variations of each, which have different effects on your monthly payments.

Fixed rate mortgages

With a fixed rate mortgage, the interest rate will stay the same throughout the length of the deal. They can be fixed for one, two, five or even 10-years. You should look for a new mortgage deal two to three months before the fixed period ends or you’ll be moved onto your lender’s Standard Variable Rate (SVR) which is usually higher The SVR is the normal interest rate your mortgage lender charges homebuyers.

Advantages

  • Your monthly payments will stay the same, helping you to budget
  • If interest rates rise, your repayments don’t

Disadvantages

  • Fixed rate deals are usually slightly higher than discount or tracker rate mortgages
  • If interest rates fall, your repayments don’t
  • You will usually face penalties if you want to leave the deal early. You are tied in for the length of the fixed rate deal

Variable rate mortgages

There are several kinds of variable rate mortgages. But with all, the interest rate can change at any time. It’s therefore good to have some cash in reserve in case interest rates go up.

Advantages

  • You can overpay or leave at any time without penalty

Disadvantages

  • Changes in the interest rate occur after a rise or fall in the Bank of England base rate
  • Other mortgage types will result in a lower monthly payment

Discount mortgages

This is a discount off the lender’s Standard Variable Rate (SVR) and only applies for a certain length of time, typically two or three years. There may be charges if you want to leave before the end of the discount period.

Advantages

  • Usually lower monthly repayments compared to a fixed rate
  • If the lender cuts its SVR, you’ll pay less each month

Disadvantages

  • The lender can raise its SVR at any time
  • Early repayment charges if you pull out of a discount mortgage deal before the end of the term
  • A large rise in interest rates may make your monthly repayments unaffordable

Tracker mortgages

Tracker mortgages are usually linked to the Bank of England’s base rate plus a few percent.

So, if the base rate goes up by 0.5%, the rate you pay will go up by the same amount. While your tracker mortgage rate is low, you could overpay, shortening the total length of time it takes you to pay the mortgage off.

Advantages

  • If the rate it is tracking falls, so will your mortgage payments

Disadvantages

  • If the rate it is tracking increases, so will your mortgage payments. If the interest rate rises significantly, this may make your mortgage payments unaffordable
  • You might have to pay an early repayment charge if you want to switch before the deal ends
  • Usually have a short life, typically two to five years, though some lenders offer trackers which last for the life of your mortgage