Beginner's guide to mortgages
What is a mortgage?
A mortgage is simply a loan that allows you to buy a home or other property by securing the loan against the property you buy.
- Where can I get a mortgage from?
- What is a repayment mortgage?
- What is an interest-only mortgage?
- What types of mortgage are available?
- How much can I borrow?
- How much can I raise on a mortgage?
- What information or documents will I need to provide when I apply?
- How long do I have to be in my job for?
- I'm self employed – does this mean I won't be able to get a mortgage?
- My bank has turned me down for a mortgage – will everywhere do the same?
- What is a credit score?
- I have had problems with credit in the past, can I get a mortgage?
- Can I still get a mortgage if my credit rating is bad?
- How can I improve my credit score?
- How do I see what is on my credit report?
- What is a Decision in Principle?
- If I do get an Agreement in Principle (AIP) with a lender what will I do if a better product comes up before my application?
- What fees might I incur when taking out a mortgage?
- When are fees payable and are they refundable?
- Do I have to have a survey?
- How long do I take my mortgage out for?
- What is the LTV ratio?
- Can I make overpayments on my mortgage to pay it off sooner?
- What if I want to move house before I've paid off my mortgage?
- What is an Early Repayment Charge?
- What should I be avoiding doing in the run up to getting our mortgage completed?
- What happens at the end of my fixed rate period?
- What if I lose my job or I am having difficulty paying my mortgage?
First time buyer mortgage guides
First time buyers
Depending on circumstances we can look at mortgages from 5% deposit. Generally the larger the deposit you can afford the cheaper the mortgage repayments.
- Do I need to have saved the deposit myself?
- What is a family assisted mortgage?
- Are there any circumstances where I wouldn't actually need to have a deposit?
- My bank won't lend me enough - we need more than they are offering. Can we still buy the house we like?
- Can I use a guarantor for my mortgage?
- Can I take out a joint mortgage with a partner or friend?
- Is buying together the right choice? What if we split up?
- Can you help with the Help to Buy Scheme?
Buy to let mortgage guides
Buy to let
A buy to let mortgage is where you a buy another property specifically as an investment for the purpose of letting it out.
Where can I get a mortgage from?
You can apply for a mortgage from a bank or other financial institution, building society or specialist mortgage lender. Although you can apply directly, using an independent mortgage broker or advisor might help you find the right deal.
What is a repayment mortgage?
This is the most popular type of mortgage where the borrower repays the loan each month over a set term - until the capital and the interest are repaid.
What is an interest-only mortgage?
With an interest-only product, the borrower repays the interest charged against the loan for the term, but doesn't repay the capital itself. At the end of the fixed term the capital remains to be paid and it's expected that methods such as savings or investment plans will have been put in place by the homeowner to cover the debt.
Interest-only mortgages are now far less common than they used to be for residential home purchases, although they're still commonplace for buy-to-let mortgages.
What types of mortgage are available?
There are many different sorts of mortgage to choose from with varying features and benefits. Some of the more common types include:
- Standard variable rate (SVR) mortgages
- Fixed interest rate mortgages
- Tracker rate mortgages
- Offset mortgages
How much deposit do I need?
Depending on circumstances we can look at mortgages from 5% deposit. Generally the larger the deposit you can afford the cheaper the mortgage repayments. In some circumstances, a 100% mortgage could be available but this would need your parents to allow a charge on their property too.
Do I need to have saved the deposit myself?
Whilst ideal, sometimes it can be difficult to save the amount you will need. Many people now get help from their parents or other relatives in the form of a gift (a gifted deposit). The person providing the gift will likely have to provide a letter confirming that it is a gift and they do not expect it to be repaid.
What is a family assisted mortgage?
Not everyone is prepared to actually gift the deposit amount to someone. They want to know that at a later date they will be able to get it back. Some lenders have a scheme where money is placed in a deposit account as security which can then be released at a later date. Terms and conditions would apply.
Are there any circumstances where I wouldn't actually need to have a deposit?
If you are buying as a sitting tenant at a discount (below market value) or from a family member, or if you qualify for a discount under the Right to Buy scheme then normally you don't need to put any of your own money down as a deposit. In addition there are some schemes where it possible to borrow the whole purchase price – but these are likely to involve the involvement of family or parents.
How much can I borrow?
Most lenders these days use an affordability calculator which takes into consideration your personal circumstances, income and any financial commitments that you have. All lenders look at things in different ways. Some will reduce the amount they will lend if you are paying into a pension or if you have loan or credit card repayments. Most, but not all, will take childcare costs into consideration.
If you have additional income from others sources such as benefits and maintenance then these may increase the amount you could borrow. The amounts you can borrow can vary considerably from lender to lender – you might be best to speak to a mortgage advisor like ourselves who will quickly work out how much you should be expecting to borrow. Please remember though, that the more you borrow the higher your repayments will be – so please do not over commit yourself.
How much can I raise on a mortgage?
This would be based on income and expenditure which would need to be assessed with you based on payslips and bank statements. Lenders all have their own individual affordability calculators which can vary significantly. A good mortgage broker can help you to quickly find out which might be the most suitable lender for you.
What information or documents will I need to provide when I apply?
- Typically you will need to provide details of your income – by payslips and P60 if you are employed or by accounts/SA302s if you are self employed
- You will be asked for details of any existing commitments you may have and for your last 3 months bank statements to confirm your bank account runs satisfactorily
- You will need to provide proof of identity typically driving licence/passport plus proof of address by a utility bill or bank statement
- You will also be required to provide evidence of your deposit.
My bank won't lend me enough - we need more than they are offering. Can we still buy the house we like?
Premier Mortgage Services have access to some mortgage deals that are not available direct from lenders on the High Street. Lending policies differ from lender to lender, and some may lend more than others; we need to sit down and discuss affordability to see which lenders criteria you meet and how much you can borrow.
How long do I have to be in my job for?
This varies from lender to lender. Some will need to have been there for 6 months where others are happy with just one day provided your job is permanent.
I'm self employed – does this mean I won't be able to get a mortgage?
No. If you are able to prove your income you will this be able to get a mortgage – but you will need to provide typically your net profit figures for the past three years. This is normally through a form that you can get from HMRC confirming your taxable annual earning. Some lenders consider people who have only been trading for a minimum of one year.
My bank has turned me down for a mortgage – will everywhere do the same?
Not necessarily so. All lenders look at things differently and because one lender has refused you it doesn't mean that another will do the same.
It is important though to know why you have been turned down. Is it your income or affordability? Have you had credit problems? Once you know what the problem is you can then start to tackle it. This is where a broker can help you.
I have had problems with credit in the past, can I get a mortgage?
It all depends what the problems were. Different lenders have different criteria and a good broker will quickly tell you if there is a way forward. You should get a copy of your credit report to find out just what the issues are.
What is a credit score?
This is a score that is used by financial services companies to assess your credit worthiness. It is based on the way we have conducted our finances over the preceding six years.
Can I still get a mortgage if my credit rating is bad?
There are mortgage plans out there to suit people in a whole range of financial situations and so if your credit score is less than perfect the chances are that there is a product out there for you.
If you do have a bad credit score, while you will likely still be able to get some kind of mortgage, you might not be able to benefit from the very best deals. You might be offered slightly higher than average interest rates, or maybe a lower LTV ratio. to reflect the higher risk that the lender is taking by allowing you to borrow money with a less than perfect track record of repaying in the past.
How can I improve my credit score?
You can improve your credit score by proving that you can cope with all your various credit commitments such as loans and credit card payments and by paying things like mobile phone bills and utility bills on time. Being on the electoral role also helps.
How do I see what is on my credit report?
You can get to see your credit report by contacting one of the credit reference agencies.
What is a Decision in Principle?
It is sometimes a good idea to approach a lender for a Decision in Principle before you start looking for properties. This involves you providing a lender with your details – usually via a broker – and based on this information and them checking your credit report they will tell you if they would be able to give you a mortgage subject to valuation and confirmation of your details.
This involves a credit check which might be registered on your credit file so you shouldn’t approach too many lenders as this in itself could reduce your score.
If I do get an Agreement in Principle (AIP) with a lender what will I do if a better product comes up before my application?
An AIP will tell you whether your credit score is good enough for your mortgage application to be accepted by them, and the level of borrowing they may be willing to consider. It does not oblige you to go to a particular lender or indeed oblige them to lend to you.
Can I use a guarantor for my mortgage?
Yes if your income is not enough to get the mortgage amount required then a close family member (usually parents) can act as a guarantor however the guarantor will need to prove that they can afford all of the mortgage in addition to any mortgage they may have of their own. Not all lenders allow these schemes.
Can I take out a joint mortgage with a partner or friend?
Yes, you will be allowed to take out a mortgage with a partner or friend if you are planning to live together. You should make sure, if you do so, that you draw up some kind of trust deed giving both of you power of sale so that you are covered in the event of a dispute.
Your solicitor will help you also decide, and put in writing, whether you’ll be joint tenants (sharing the property on a 50/50 basis) or whether you’ll be tenants in common, with each owning a different share dependant on your respective incomes.
Is buying together the right choice? What if we split up?
You need to be completely sure that buying together is the absolute best choice for you. Obviously, if you buy together, you can take both of your salaries into consideration, meaning that you can borrow more.
What if we can't afford to put in 50% each?
This is where tenants in common can help – this is an agreement which lays down what proportion of the property each of you own and can help to decide how things would be split of you did separate.
Can you help with the Help to Buy scheme?
We can advise you on mortgages for the Help to Buy scheme.
What fees might I incur when taking out a mortgage?
Typically the list of fees could include:
Charged by the lender to value the property and generally paid up front with your application.
charged by the solicitor to complete the conveyancing transactions on the property. Part of this is might need to be paid up front when the solicitors are instructed but the remainder is paid upon completion.
Stamp duty land tax
A tax levied by the government on any property purchase above £125,000. Special rates are available for first time buyers. If you already own a property and plan to buy another then a higher rate of SDLT might be payable. More details are available on HMRC website.
Lender arrangement fees
Charged by the lender for arranging the loan. This can be added to the loan in most circumstances but will therefore increase the size of the loan and mean you would pay more interest.
Charged by some lenders for booking the funds for your mortgage and typically charged up front with your application.
May be charged if you are using a broker for the work they do on your behalf and payable either up front or on completion.
When are fees payable and are they refundable?
Some fees may be payable on application and some when you complete on the property, and some may be refundable. At your appointment your advisor will go over all fees that could be payable and explain when they would be due and if they are refundable or not.
Your advisor will always provide you with an illustration for any mortgage they talk to you about and this will show you the breakdown of any fees and when they are due.
Do I have to have a survey?
You have to have a valuation if you are buying with a mortgage but do not need to have a survey. However, in most situations it is advisable. Your advisor can explain about the different types of survey available.
How long do I take my mortgage out for?
The answer to this is simply down to what you can afford. We would always advise speaking to a mortgage advisor to ascertain what term is suitable to your circumstances.
What is the LTV ratio?
LTV stands Loan to Value and the ratio is the amount of the mortgage expressed as a percentage of the property's value. The lower the LTV, the greater the equity in the property. Generally the lower the LTV is the lower the interest rate you will be charged.
What is a buy to let mortgage
A buy to let mortgage is where you a buy another property specifically as an investment for the purpose of letting it out. As long as the rent covers the mortgage payments due by a certain amount the mortgage is agreed based on the rent and not your own income. You are likely to have to prove that you do have some earned income though the amount can vary from lender to lender.
How much deposit do I need for a buy to let mortgage?
Typically a minimum of 25% deposit is needed for a buy to let mortgage.
Is there any tax to pay when I sell my property?
No, not for your main residence but investment properties bought on a buy to let basis will be subject to Capital Gains Tax. You should always seek advice from a suitable accountant or tax advisor.
Can I make overpayments on my mortgage to pay it off sooner?
Yes, normally you are allowed to pay off up to ten percent of the balance in any one year without incurring any repayment penalties. If you pay more than this amount during your fixed rate period, you may be liable for Early Redemption fees but these will be explained on your Mortgage Offer.
What if I want to move house before I've paid off my mortgage?
If you want to move house, you may be able to simply port your existing mortgage and interest rate over to your new property and continue paying it off as usual.
You may have to undergo new affordability and credit checks if you do so and if your new property’s value is significantly different from your old one then the situation may get a little more complicated. If you do want to move house, get in touch with your mortgage broker or existing mortgage provider first and they'll let you know what options you have available.
What is an Early Repayment Charge?
When you take out a mortgage with an initial deal for a set period on an e.g. fixed, tracker or discounted rate basis, if you were to repay the mortgage in full or part before the deal ends, you usually will have to pay an Early Repayment Charge which, in most cases, is charged as a percentage of the loan. You may be able to pay off some of the mortgage – typically up to 10% of the balance per year with no penalty. Some mortgages will offer a ‘portability’ option which means that if you move house when you are still tied into your deal, you can ‘port’ the mortgage to the new property and avoid the Early Repayment Charge.
What should I be avoiding doing in the run up to getting our mortgage completed?
Once your mortgage application has been agreed it is important not to apply for lots of other credit around the same time – even though you know there could be a lot of things to pay for when you move, This is because most lender will check your credit file before completion to ensure you haven’t taken more finance that could put your mortgage at risk.
What happens at the end of my fixed rate period?
If you do nothing then you will revert to the Lender’s Standard Variable Rate which means your repayments might increase considerably. Before this happens you should talk to your advisor who will look at what options are available to you and whether it might be better to move your mortgage to a different lender. This is called a remortgage. You should be aware that there may be an Early Repayment Charge payable if you remortgage before the end of your current deal.
What if I lose my job or I am having difficulty paying my mortgage?
The first and most important thing to do is contact your lender as soon as possible. Lenders are required to treat borrowers in this position "sympathetically and positively". Some lenders also have telephone helplines and debt counselling facilities which may be able to help you. Remember, there are insurance policies that could protect you in this event.