Mortgage Guide:

What is a Mortgage?

A mortgage is a sum of money borrowed from a bank or building society in order to purchase a property. The money is paid back to the Lender over a fixed period of time together with accrued interest.

What types of Mortgage are there?

You will find two main types of mortgage, these are:

1. Repayment (Capital and Interest mortgage)
2. Interest only (ISA, Pension, Endowment mortgage)

What is a Repayment Mortgage?

With a repayment mortgage your monthly payments consist of both the capital amount borrowed together with accrued interest. Your lender will keep you advised about how much you have repaid.

What is an Interest Only Mortgage?

With this type of mortgage you only pay the interest accrued on the mortgage each month. It is usual for the borrower to take out a savings or investment plan at the same time as applying for the mortgage; this could be an ISA, Pension or Endowment plan. The main fact about this method is that the capital balance of the mortgage stays the same during the mortgage term; only the interest is paid to the Lender each month.

What is a Fixed Rate Mortgage?

With a Fixed Rate Mortgage the amount you repay to the Lender each month stays the same for an agreed period. When applying for the mortgage you may be offered a Fixed Rate from 1-25 years.

What is a Capped Rate Mortgage?

A Capped Rate Mortgage is similar to a fixed rate except when the variable rate drops below the capped rate, should this happen the borrower would make payments based on the lower variable rate.

What is a Discounted Mortgage?

This option is linked to the lenders Variable Rate. The Lender may offer you a discount to their Variable Rate for a specified period of time. With this option there is no certainty what your future payments could be.

What are Cashbacks?

The Lender may offer you a cash incentive once the mortgage has been taken out. Although Cashbacks can be offered on all mortgage types, they are most common when you apply for a Variable Rate Mortgage.

What are Redemption Penalties?

Some Lenders expect you to stay with them for a minimum period of time. If your Lender has offered you a special scheme (Fixed Rate, Discounted, Cashback mortgage) they may charge you an Early Redemption Charge if you decide to repay the loan prior to the scheme ending. It is possible to find Lenders and schemes with No Early Redemption Charges.

What is an Overhang?

Some Lenders may continue to Charge an Early Redemption Penalty after your Fixed, Discounted or Cashback scheme has ended. It is possible to find Lenders and Schemes that do not have Overhanging Penalties.

How much Deposit do I need to get a Mortgage?

Having a deposit toward the purchase of your home is preferable but it is possible to borrow 100% of the purchase price. In some situations lenders will consider a mortgage in excess of the purchase price.

I have a deposit how does this help?

Having a deposit helps in several ways. One of the main advantages is an increased choice of the lenders wishing to assist and an increased number of mortgage schemes to choose from.

What fees should I expect to set up a Mortgage?

Lenders will want a valuation to be carried out on the property you wish to purchase, the cost of this report is usually charged to you. In addition you may be asked to pay either a Booking or Arrangement fee, these fees are specific to a scheme being offered by the lender. Finally, you may be required to pay a Higher Lending Charge, this is an Indemnity Insurance taken out by the lender.

What other fees should I expect?

When buying a home you would usually use a Solicitor to carry out the legal work, the Solicitor will work on your behalf and for the Lender; you are expected to pay for this work. If you are buying a property with a value in excess of £120,000 you will be charged a tax called Stamp Duty. Stamp Duty is charged at different rates depending on the purchase price:

1. Property Value£125,000 - £250,000 = 1% of Purchase Price
2. Property Value £250,001- £500,000 = 3% of Purchase Price
3. Property Value over £500,000 = 4% of Purchase Price

Other costs may include a more detailed survey of the property you are buying and of course your moving costs.

How much can I borrow?

The amount you can borrow will depend on several factors. The lender will decide how much they can lend you based on factors such as: your income, existing credit commitments and your deposit. If you are looking to buy jointly this can increase the amount you are able to borrow. Each lender will have different criteria for the maximum they will lend but as a guide you could borrow 4 x the highest income + 1 x the second income or 3.5 x the joint income.

I'm unable to prove my income?

Lenders understand that in some situations it can be difficult to prove your total income. For this reason some Lenders offer mortgage finance based on your confirmation of income (Self Certification). Although this is a flexible way of borrowing money, you may be expected to find a larger deposit than usual.

What is Right To Buy?

If you are offered the opportunity to buy either your Council home or Housing Association property you could be eligible for mortgage finance. In most cases you would be offered a discount against the open market value of your home, this results in the Right to Buy value. Lenders will often agree to lend you 100% of the Right-to-Buy value. In most cases you would still have to pay the usual fee's associated in buying a home, including Stamp Duty.

What is Shared Ownership?

Shared ownership schemes vary depending on where you live. In most cases you buy a share of the property with the help of a mortgage; the Housing Association will buy the other share and will charge you rent on a monthly basis.

I have a poor credit history, can I get a Mortgage?

This will depend on the extent of your credit problems, if you are still declared bankrupt the answer would be no. If you have less serious credit problems such as Defaults or County Court Judgements you may still be able to get mortgage finance. To be sure about your credit history you should order a copy of your credit report (Click Here to Order).

How should I choose a Mortgage?

It is important to take advice and from an Adviser who is regulated by the Financial Services Authority (FSA).