Introduction to Mortgages
As a former mortgage broker, I’ve had the pleasure of helping a wide array of clients through one of the most significant financial decisions they’ll ever make: choosing the right mortgage. It’s not just about signing papers; it’s about finding the very best deal for you as it’s a commitment that can shape your financial future for years to come.
Mortgages might be daunting as they come with their fair share of fine print and getting something wrong could be costly, but they’re also a powerful tool in building your personal wealth. Every payment is more than a due date; it’s a step towards owning a valuable asset. And while market conditions may shift, the equity you build in your home is a slice of stability you can count on.
Homeownership often reaps long-term benefits as property values have a historical tendency to climb, meaning that you could be increasing your net wealth, simply by enjoying the comforts of your own home. Securing a mortgage, therefore, is an investment in your future, not merely a transaction for a home.
In this guide, you’ll find answers to the most frequently asked questions I encountered as a mortgage adviser. My goal is to provide you with the same support and insights that my clients have valued over the years – clear and comprehensive information that will enable you to make the right choices.
Table of Contents
What Is A Mortgage?
A mortgage is a loan that is used to buy a house, property or even a piece of land in the UK. The loan is secured against the property, meaning the lender has the right to repossess it if the borrower fails to keep up with the repayments. But as the lender has this extra security, a mortgage is usually the cheapest form of borrowing available to most people.
When you take out a mortgage, a bank or building society lends you the money needed to make the purchase. In return, you agree to pay back this amount over a set period or term, like 15 or 30 years and sometimes even longer, with added interest. A long term and relatively low interest rates make it affordable to borrow a significant sum of money which is lucky as UK property prices would be totally out of reach of the majority of the population if they could not take out a mortgage to help with the purchase.
The property you’re buying serves as security for the loan. This means that you will own the property and can do anything you like with it but if you can’t keep up with the repayments, the lender has the right to repossess your home to recover their funds. It’s a significant commitment, but for many, it’s the first step towards owning their own home outright and securing their financial future.
The first recorded use of a mortgage in a form similar to today’s understanding occurred in England in the late 12th century. However, the concept of secured loans, where assets are used as collateral, dates back thousands of years to ancient civilizations.
Originating from Old French, the word ‘mortgage’ combines ‘mort’ (death) and ‘gage’ (pledge), implying that the pledge dies either when the obligation is fulfilled or the property is seized upon default.
Can Anyone Get A Mortgage?
No, although it is possible for the vast majority of people to get a mortgage (whether it’s the right mortgage is another question), there are people who may not be able to get a mortgage at all.
If you’ve got a large deposit, a great job and a perfect credit history, you will be able to pick from the very best mortgages on the market. The further you stray from being the ideal borrower the harder you might find it to secure a mortgage and the more expensive that mortgage is likely to be.
Some of the reasons someone may struggle to get a mortgage are:
- Bad credit
- Too many credit applications in a short time
- Too much unsecured borrowing
- Having payday loans on your credit report
- Unable to prove income
- No cash for a deposit
- Newly self-employed
- Non-UK national without indefinite leave to remain
But there are hundreds of lenders offering 1,000’s of mortgages at any one time so there is a deal out there for most people. I’ve helped people with County Court Judgments against them find a mortgage as well as people who have just started a new job, literally day 1 of their new employment. So, no matter your circumstances there’s a good chance you could take out a mortgage to buy a property and you should speak to a mortgage broker who will be able to tell you what your options are.
How Much Can You Borrow With A Mortgage?
As a quick rule of thumb, typically lenders will lend 4.5 times your gross salary although some banks will lend more and it might be possible to borrow up to 5.5 times your income. That means, if you earn £100,000 you might be able to borrow £450,000 to £550,000.
But there are a number of factors that could mean your actual maximum loan is lower than this, such as:
- Financial commitments – unsecured loans or credit cards, hire purchase agreements, council tax, and any other regular financial commitments will have a negative effect on the amount you are able to borrow.
- Irregular income – If your income is made up of commission or bonuses, some banks may only accept a percentage of this income, say 50%, which will in turn affect how much you can borrow.
- Property value – It used to be possible to borrow 100% of a property’s value and even more (my first mortgage was with Northern Rock and I borrowed 130% of the property’s value! No wonder they went under) but today you will only be able to borrow up to 95% of the value at best.
- Debt to income ratio – Having too much borrowing compared to your income could suggest to a lender you may struggle in future. If interest rates rise, for instance, your monthly payments could also rise leaving you with less disposable income to pay your mortgage. This could mean you are able to borrow less than your affordability calculations might suggest.
Head over to MoneyHelper.org’s mortgage calculator to get an idea of what you might be able to borrow.
How To Increase Your Maximum Home Loan
Many of my mortgage clients have come to me for help after discovering that their initial mortgage applications did not allow them to borrow the amount needed to purchase their new home. Leveraging my extensive experience and knowledge of the mortgage market, I have been able to offer them customized advice and effective strategies to enhance their borrowing capacity.
Below are several methods to optimize your financial profile and potentially increase your loan eligibility:
Incorporate All Allowable Income: This can include commissions, monthly or annual bonuses, car allowances, and certain benefits. However, it’s crucial to verify with each lender how they count these income types, as some may only accept 50% of commission income while others might consider the full 100%.
Seek Lenders with Higher Income Multiples: While most lenders typically offer loans up to 4.5 times your gross annual salary, some may offer up to 5.5 times depending on their criteria.
Opt for a Longer Repayment Term: Extending the duration of your mortgage can reduce monthly payments, potentially enabling lenders to offer a higher loan amount. However, be aware that this will result in significantly more interest paid over the life of the mortgage.
Improve Your Debt-to-Income Ratio: By reducing your existing financial commitments, you can increase your disposable income, which in turn may enhance your borrowing power.
Consider Joint Borrowing: Contrary to common belief, joint borrowers do not need to be married or partners. Teaming up with a family member or friend can allow you to combine incomes for the mortgage affordability calculation, potentially increasing the amount you can borrow.
- Speak to a mortgage broker: A good mortgage broker will take the time to understand your circumstances and what you want to achieve. They will then be able to tell you what is possible and what you might be able to do to increase your maximum loan size. With specialist software and an extensive knowledge of the current mortgage market, your mortgage adviser is more than likely going to be able to recommend a mortgage that fits the bill.
The Mortgage Application Process
Navigating the mortgage application process can feel daunting, especially for first-time homebuyers. From understanding your financial health to navigating lender requirements, each step is crucial for securing not only approval but favourable mortgage terms as well.
This guide aims to simplify the complexities of applying for a mortgage by walking you through each phase, from the initial Decision in Principle to the final completion. I’ll provide insights into what documents you need, how long each stage should take and some of the pitfalls to watch out for.
Step 1 - Decision in Principle
- Assess Finances: Review your financial situation to understand how much you can afford. This includes checking your credit score, income, debts, and available savings for a deposit.
- Decision in Principle (DIP) Application: Submit an application to potential lenders to receive a DIP (also known as an Agreement in Principle or AIP). This gives you an estimate of the mortgage amount you might qualify for based on your financial data.
- If you tick all the boxes you could have a DIP within a couple of hours as most lenders have automated systems that give an answer as soon as the application has been submitted. But if the application is referred, it means an underwriter must assess your case which can take up to 3 days.
Step 2 - Find a Property to Buy
- Search for a Property: With your Decision in Principle in hand, start looking for properties within your budget. Consider factors like location, size, and the condition of the property.
- Make an Offer: Once you find a suitable property, make a formal offer through your estate agent.
Step 3 - Submit a Full Mortgage Application
- Gather Documentation: Collect all necessary documents such as proof of income, employment verification, financial statements, and details of the property.
- Submit Application: Fill out the mortgage application form provided by your chosen lender and attach all required documentation.
- Triple check the application before submitting to the lender for assessment. If you don’t know something, don’t guess, take the time to find out the facts as you could regret it later.
- A full mortgage application will probably take an hour or two.
Step 4 - Underwriting and Valuation
- Property Valuation: The lender will arrange for a property valuation to ensure the offered price is reasonable and to determine the loan amount.
- Underwriting Process: The lender reviews the application and all documents to assess the risk of lending to you. This may involve additional queries about your financial status or the property.
- I’ve had the pleasure of working with lenders who can get this done within a couple of weeks but I’ve also endured the misery of other lenders that took many months but on average the underwriting process should take 3 or 4 weeks.
Step 5 - The Mortgage Offer
- Receiving the Offer: If the underwriting process is successful, you will receive a formal mortgage offer from the lender. The offer is binding on the lender unless there is a material change to your circumstances or the property.
- Review Terms: Carefully review the mortgage terms, interest rate, and monthly payment obligations to make sure they are what you signed up for.
Step 6 - Conveyancing
- Conveyancing: A solicitor or licensed conveyancer will handle the legal aspects of purchasing the property. This includes checking the property title and conducting local searches.
- Legal Approval: Once all legal aspects are cleared, your solicitor will give the green light to proceed.
- Get a good solicitor not a cheap one! If they’re cheap they need to deal with a lot of cases to make a living and may not have the time to dedicate to you. With a good conveyancer you can expect 4 to 6 weeks to pass between making an offer and exchanging contracts.
Step 7 - Exchange of Contracts
- Final Agreement: Sign the mortgage and property purchase agreements.
- Exchange Contracts: Exchange contracts with the seller which legally commits you to the purchase.
- Exchanging of contracts will take a day or two.
Step 8 - Completion
- Well done, you’ve bought a home! Get the keys and get ready for the joys of homeownership.
- Set up Payments: Arrange for the mortgage payments to be made automatically from your bank account.
- Move In: Start moving into your new home and take care of any immediate home improvements or requirements.
What Are The Costs Associated with a Mortgage
When planning to purchase a home with a mortgage, it’s crucial to understand the various costs involved beyond the listing price of the property. These expenses can significantly affect your overall budget and financial planning. Here’s a breakdown of the common costs associated with securing a mortgage:
1. Deposit
- The deposit is typically the largest upfront cost when buying a home. In the UK, deposits usually range from 5% to 30% of the property’s purchase price, depending on the mortgage type and the buyer’s financial circumstances. Although it is not uncommon to have a larger deposit.
2. Arrangement Fee
- Many lenders charge an arrangement fee (sometimes called a product fee) for setting up the mortgage. This fee can vary widely, generally between £0 and £2,000. Some lenders offer the option to add this fee to the mortgage balance, but this means you’ll pay interest on it over the term of the loan.
3. Valuation Fee
- The lender will assess the value of the property to ensure it is worth the loan amount. This valuation fee depends on the property’s value and can range from £0 to over £1,500.
- Typically, if there is a valuation fee, you must pay this fee in advance and will likely not get a refund should the mortgage not go through to completion.
4. Survey Costs
- While not mandatory, having a survey conducted can identify any potential issues with the property. Costs vary by the type of survey: a basic home condition survey can cost a few hundred pounds, while a more detailed structural survey may cost over a thousand.
5. Legal Fees
- You will need a solicitor or licensed conveyancer to handle the legal aspects of buying a home. Fees for these services usually range from £500 to £1,500, depending on the complexity of the transaction.
- Beware, the location of the solicitor could dramatically increase the fees charged. A Central London firm, for instance may charge many thousands of pounds for the same service you might get from a firm based in Birmingham.
6. Stamp Duty Land Tax (SDLT)
- In England and Northern Ireland, buyers must pay Stamp Duty Land Tax when purchasing a home over a certain price. Rates can vary based on whether you’re a first-time buyer and the property’s price.
- Head over to stampdutycalculator.org.uk to see what stamp duty you might have to pay for your new home.
7. Mortgage Broker Fees
- If you use a mortgage broker to find the best mortgage deal, you may need to pay broker fees. These fees can be a flat rate or a percentage of the mortgage amount, typically around £500.
- There are also online brokers that do not charge a broker fee but in my experience these guys need to work on a lot of cases at the same time and so you may not get the attention you might expect.
8. Electronic Transfer Fee
- This fee covers the lender’s cost of transferring the mortgage money to the solicitor. It’s usually around £40-£50.
9. Higher Lending Charge
- If you borrow a large percentage of the property’s value, the lender might charge a higher lending charge, which insures the lender against you defaulting on the loan. Not all lenders charge this, and it can often be avoided by having a larger deposit.
10. Insurance
- Mortgage lenders require you to take out buildings insurance to protect the property. Many buyers also consider life insurance and critical illness cover to ensure the mortgage is paid in case of death or serious illness.
11. Ongoing Costs
- Beyond the mortgage payment, homeowners should budget for ongoing costs such as property maintenance, repairs, council tax, and utilities.
Understanding these costs is essential for budgeting accurately and avoiding surprises during the home-buying process. Being well-prepared financially can make the difference between a smooth transaction and a problematic one.
How Much Will My Mortgage Cost Each Month?
Determining the monthly cost of a mortgage is crucial for budgeting and financial planning. Your monthly mortgage payment can be one of your largest regular expenses, and several factors can influence its size, including:
Interest Rate
- The interest rate on your mortgage is perhaps the most significant factor affecting your monthly payment. A lower rate means lower monthly payments, while a higher rate increases the amount you’ll pay each month.
Mortgage Amount
- The total amount you borrow, known as the principal, directly impacts your monthly costs. More borrowed money means higher repayments.
Mortgage Term
- This is the length of time over which you agree to pay back the mortgage. Spreading the repayment over more years can reduce monthly payments but will increase the total amount of interest you pay over the life of the mortgage.
Type of Mortgage
- With a repayment mortgage, you pay back a portion of the principal along with the interest each month. This means that monthly payments will be higher than an interest-only mortgage, but by the end of the term, you will have paid off the mortgage in full.
- An interest-only mortgage requires you to pay only the interest on the loan each month. The monthly payments are lower, but you will need a plan to repay the full loan amount at the end of the mortgage term.
Changes to Interest Rates
- If you have a fixed-rate mortgage, your monthly payment will remain the same for the duration of the fixed-rate period. After that, it could change if you are moved onto your lender’s standard variable rate (SVR).
- For variable-rate mortgages, including trackers and discount mortgages, your monthly payment can change with fluctuations in the interest rate.
Understanding how much your mortgage will cost each month is essential for financial stability. By considering the factors listed above, you can get a good estimate of your monthly mortgage cost and make informed decisions about buying a home. Always consider consulting with a financial advisor or mortgage broker to get a precise calculation based on your specific circumstances.
And feel free to play around with this mortgage calculator to get an idea of what your mortgage might cost each month.
Powered by Mortgage Calculator UK widget
How Do You Choose The Right Mortgage?
It is a legal requirement for lenders to display the Annual Percentage Rate (APR) when advertising mortgages. The APR is intended to provide a comprehensive measure, incorporating both the interest rate and any associated fees, to facilitate comparison between different mortgage products.
And, in an ideal world, the APR would give an accurate comparison of 2 different mortgages. But, if the past few years have taught us anything, we are not living in an ideal world and so the mortgage APR is about as useful as a cupholder on a motorbike.
Limitations of APR in Mortgage Comparisons
- Long-term vs. Short-term Costs: The APR assumes that the mortgage will be held for its entire term, which might be 25 to 30 years. It integrates all costs, including interest and arrangement fees, into an annualized rate. This is practical for short-term loans where the likelihood of retaining the loan for the full term is high. However, mortgages are long-term loans, and it’s relatively uncommon for borrowers to keep the same mortgage for its entire duration without refinancing at the end of the fixed rate period or due to changes in the market or personal circumstances.
- Impact of Fees: The APR includes fees like arrangement and valuation fees, which are spread over the loan term. For mortgages that are frequently changed or refinanced within a few years, these fees should ideally be considered as upfront costs rather than being amortized over 30 years. This can make the APR misleading as it diminishes the impact of initial fees on the total cost of borrowing in the short term.
- Variable Rates and Flexibility: APR calculations are more straightforward for fixed-rate mortgages but can be less reliable for variable-rate mortgages, where the rate changes in response to market conditions. Additionally, the APR does not account for non-monetary factors such as the flexibility to make overpayments or take payment holidays, which can significantly affect the overall cost and convenience of the mortgage.
- Product Features: Many mortgage products come with features that are not reflected in the APR but can influence the overall cost-effectiveness and suitability of the mortgage, such as cashback offers, free legal services, or free home insurance. These benefits can provide substantial savings that the APR does not capture.
Better Ways to Compare Mortgages
Given these limitations, while APR can be a useful starting point, it should not be the sole factor in choosing a mortgage. This is how I would ensure each of my clients got the best mortgage deal:
- Total Cost Analysis: Evaluate the total cost of the mortgage over a realistic period that you plan to hold it, say 5 years, including all fees, interest payments, and penalties for early repayment.
- Features and Flexibility: Assess the value of flexibility in payments, the possibility of refinancing, and any additional features or incentives that may benefit your specific financial situation.
Understanding these aspects will allow you to make a more informed decision, ensuring that the mortgage not only fits your current financial situation but also aligns with your long-term financial goals.
What Are The Different Types Of Mortgage?
When it comes to purchasing a property, choosing the right type of mortgage can be as crucial as selecting the perfect home. Mortgages come in various forms, each tailored to different financial situations, risk tolerances, and long-term goals. This guide will explore the various types of mortgages available, helping you understand which might suit your needs best. Whether you’re a first-time homebuyer or looking to invest in property, knowing your mortgage options is essential for making informed decisions.
1. Fixed Rate Mortgage
- Description: A fixed-rate mortgage offers a constant interest rate for a specific period, typically ranging from 1 to 5 years, although longer terms are available. During this period, your mortgage payments remain the same, regardless of changes in interest rates in the broader market.
Pros:
- Predictability: With a fixed rate, you know exactly what your payments will be each month, making budgeting easier and more predictable.
- Protection Against Rate Increases: If interest rates rise, your rate stays the same, which can potentially save you money compared to variable-rate mortgages.
Cons:
- Higher Initial Rates: Fixed-rate mortgages often start with a higher interest rate than variable types because you pay a premium for the stability and risk protection.
- Less Flexibility: There may be significant penalties for overpaying or exiting the mortgage before the end of the fixed term.
This graph displays the Bank of England (BOE) base rate alongside the percentage of fixed-rate mortgages taken out annually from 2006 to 2021. The blue bars show the BOE base rate, which significantly declines post-2008, while the red line indicates an increasing trend in the choice of fixed-rate mortgages.
Sources – UK Finance and Bank Of England
2. Variable Rate Mortgage
- Description: The interest rate can change at any time, based on the lender’s standard variable rate (SVR).
- Pros: Potential for lower interest rates when market rates drop; usually lower early repayment charges.
- Cons: Payment amounts can vary, making budgeting harder; potential for higher payments if interest rates rise.
3. Tracker Mortgage
- Description: A type of variable mortgage where the interest rate tracks a nominated base rate (usually the Bank of England’s) at a set margin above or below it.
- Pros: Transparent, as changes in your rate are directly linked to the base rate; potential savings when rates are low.
- Cons: Uncertainty in monthly payments; risk of higher payments if the base rate increases.
4. Discount Mortgage
- Description: Offers a discount off the lender’s SVR for a certain period at the beginning of the mortgage.
- Pros: Lower rates initially, making it cheaper in the short term.
- Cons: Rates can fluctuate with the SVR, leading to unpredictable payments.
5. Capped Rate Mortgage
- Description: Similar to a variable-rate mortgage, but with a cap on how high the interest rate can rise.
- Pros: Security of a rate cap, ensuring payments don’t exceed a certain level even if rates spike.
- Cons: Caps are usually set quite high; often comes with a collar rate, meaning it can’t drop below a certain level.
6. Interest-Only Mortgage
- Description: Only the interest on the loan is paid monthly. The original loan amount (the capital) is paid at the end of the mortgage term.
- Pros: Lower monthly payments.
- Cons: Need to have a reliable repayment strategy for the capital at the end of the term; total cost of the loan is higher.
7. Offset Mortgage
- Description: Links your savings and/or current account to your mortgage; your savings are offset against your mortgage balance, reducing the interest you pay.
- Pros: Can reduce the amount of interest paid over the term; flexibility to overpay or underpay.
- Cons: Savings won’t earn interest; often higher interest rates than on other mortgage types.
8. Buy-to-Let Mortgage
- Description: Designed for properties that will be rented out. The lender considers rental income in your loan application.
- Pros: Enables investment in rental property; potential income from rent alongside property value appreciation.
- Cons: Usually requires a higher deposit; higher interest rates and fees.
9. Guarantor Mortgage
- Description: A family member or friend guarantees your mortgage by offering their own property or savings as security.
- Pros: Helps you get a mortgage if you’re unable to meet standard criteria; potentially borrow more.
- Cons: Risky for the guarantor; their assets are at risk if you fail to make payments.
10. Help to Buy and Shared Ownership Mortgages
- Description: Government schemes designed to help first-time buyers and those struggling to purchase a home.
- Pros: Makes purchasing a home more accessible through loans or owning a part of a property.
- Cons: Limited to participating properties; shared ownership can have additional fees like rent on the remaining share.
For a more in-depth look at these and every other type of mortgage, read my article All Types Of Mortgage Explained: From Standard To Niche.
Paying Off Your Mortgage - Understanding Amortization
Amortization is a crucial concept in understanding how mortgage repayments work. It refers to the process of paying off a mortgage over time through regular payments that cover both the principal (the amount borrowed) and the interest accrued on that principal. Here’s how amortization impacts borrowers in the UK:
How Amortization Works
- Monthly Payments: Each payment made by the borrower is divided into two parts: interest and principal. Initially, a larger portion of each payment is directed towards the interest. Over time, as the principal decreases, the interest component reduces, and more of the payment goes towards paying down the principal.
- Amortization Schedule: This is a complete table of periodic loan payments, showing the amount of principal and the amount of interest that make up each payment until the loan is paid off at the end of its term. This schedule is determined at the outset of the mortgage.
Factors Affecting Amortization
- Interest Rate: The rate at which interest accrues on the mortgage affects how quickly the loan is amortized. Fixed-rate mortgages offer a consistent rate, which makes the amortization schedule predictable, whereas variable-rate mortgages can see fluctuating interest amounts based on changes in the market or Bank of England base rates.
- Mortgage Term: The length of the mortgage term also influences amortization. Shorter terms mean higher monthly payments but less interest paid over the life of the mortgage, while longer terms spread out the payments, lowering monthly amounts but increasing total interest paid.
- Overpayments: UK mortgage lenders typically allow you to make overpayments on your mortgage without penalty, up to a certain percentage of the outstanding balance each year. This can accelerate the amortization process, reducing the total interest paid and potentially shortening the mortgage term.
Benefits of Understanding Amortization for UK Borrowers
- Better Financial Planning: Knowing how each payment impacts your loan balance helps in planning your finances and understanding when you might be in a position to refinance or pay off the mortgage early.
- Interest Savings: Understanding the breakdown of interest and principal in each payment can help borrowers strategize overpayments to save on interest costs over the life of the mortgage.
- Managing Debt Efficiently: With a clear amortization schedule, borrowers can see the impact of each payment on their overall debt level, helping them to manage and reduce their debt more effectively.
Practical Example for UK Borrowers
Consider a £300,000 mortgage at a 5.29% annual interest rate with a 25-year term:
- Monthly payment (approx.): £1,624
- Total cost of credit (interest): £217,304 over 25 years
Yearly Capital & Interest Payment Breakdown
Year | Interest Paid | Capital Paid | Mortgage Balance |
|---|---|---|---|
1 | £14,154.83 | £5,337.34 | £264,662.66 |
2 | £13,865.53 | £5,626.63 | £259,036.04 |
3 | £13,560.56 | £5,931.60 | £253,104.43 |
4 | £13,239.06 | £6,253.10 | £246,851.33 |
5 | £12,900.13 | £6,592.03 | £240,259.30 |
6 | £12,542.83 | £6,949.33 | £233,309.97 |
7 | £12,166.17 | £7,326.00 | £225,983.97 |
8 | £11,769.08 | £7,723.08 | £218,260.89 |
9 | £11,350.48 | £8,141.68 | £210,119.21 |
10 | £10,909.19 | £8,582.97 | £201,536.24 |
11 | £10,443.98 | £9,048.18 | £192,488.06 |
12 | £9,953.55 | £9,538.61 | £182,949.44 |
13 | £9,436.54 | £10,055.62 | £172,893.83 |
14 | £8,891.51 | £10,600.65 | £162,293.18 |
15 | £8,316.94 | £11,175.22 | £151,117.95 |
16 | £7,711.22 | £11,780.94 | £139,337.01 |
17 | £7,072.68 | £12,419.48 | £126,917.53 |
18 | £6,399.52 | £13,092.64 | £113,824.89 |
19 | £5,689.88 | £13,802.28 | £100,022.61 |
20 | £4,941.77 | £14,550.39 | £85,472.22 |
21 | £4,153.12 | £15,339.04 | £70,133.17 |
22 | £3,321.72 | £16,170.45 | £53,962.72 |
23 | £2,445.25 | £17,046.91 | £36,915.81 |
24 | £1,521.28 | £17,970.88 | £18,944.93 |
25 | £547.23 | £18,944.93 | £-0.00 |
As can be seen in the table, during the early years of the mortgage a far greater proportion of the mortgage payments goes towards servicing the interest. But as the mortgage balance is reduced, more of the monthly payment is used to further reduce the outstanding mortgage.
For UK homeowners, mastering the concept of amortization is not just about meeting monthly mortgage payments. It’s about strategically managing one’s long-term financial commitments and making informed decisions that could save significant amounts of money over the lifetime of a mortgage. Whether through choosing the right mortgage product or making informed payment decisions, a deep understanding of amortization can lead to substantial financial benefits.
Bad Credit and What It Means for Your Mortgage Application
Bad credit can significantly impact your ability to secure a mortgage, as it affects how lenders perceive your risk as a borrower. Here’s a breakdown of different levels of bad credit and the potential impact on your mortgage application:
1. Missed Payments
- Impact: Missing a few loan or credit card payments can lead to marks on your credit report, which can reduce your credit score. Lenders review payment history to gauge your reliability in making timely payments.
- Consequences for Mortgage: Missed payments might not disqualify you from getting a mortgage, but they can lead to higher interest rates or the need for a larger down payment. You may also be limited to certain lenders specializing in “bad credit” mortgages.
2. Defaults
- Impact: Defaults occur when you fail to repay a debt as required and the lender concludes you will not pay it back, typically after repeated missed payments. A default stays on your credit report for six years.
- Consequences for Mortgage: Having defaults on your credit report makes it more challenging to find a mortgage lender. Those who do accept applicants with defaults generally charge higher interest rates and require a larger down payment to mitigate their risk.
3. County Court Judgments (CCJs)
- Impact: A CCJ is issued when someone takes court action against you for money owed and you fail to respond. CCJs are a serious mark against your credit.
- Consequences for Mortgage: With a CCJ, your mortgage options will be more limited. Some lenders will consider applicants with CCJs if they are settled (paid off), but often at the cost of higher interest rates and the need for a substantial deposit.
4. Individual Voluntary Arrangement (IVA)
- Impact: An IVA is a formal agreement to pay back creditors over a period of time and is a step to avoid bankruptcy. It reflects that you have had significant debt problems.
- Consequences for Mortgage: An active IVA can make it very difficult to get a mortgage. You might have to wait until the IVA is completed and then build back a more positive credit history. Some specialist lenders may consider your application, typically with higher interest rates.
5. Bankruptcy
- Impact: Bankruptcy is the most severe form of financial distress and is publicly recorded. It severely impacts your credit rating.
- Consequences for Mortgage: After being discharged from bankruptcy (usually 12 months later), you’ll need to work on rebuilding your credit. Obtaining a mortgage post-bankruptcy will require patience; it generally takes at least a few years to qualify for a mortgage with favourable terms. Specialist lenders may consider your application, but again, expect higher rates and larger down payments.
Strategies to Improve Mortgage Chances with Bad Credit:
- Rebuild Your Credit: Take steps to improve your credit score, such as obtaining a secured credit card, making timely payments, and reducing your overall debt levels.
- Save for a Larger Down Payment: A larger down payment reduces the lender’s risk, making them more likely to approve your mortgage application.
- Consider a Guarantor: Having a guarantor on your mortgage can help offset the risk posed by your bad credit.
- Consult Specialist Brokers: Mortgage brokers who specialize in bad credit mortgages can help navigate the process and improve your chances of approval.
While bad credit can restrict your mortgage options, it doesn’t necessarily bar you from buying a home. Understanding the implications of various levels of credit issues and taking proactive steps to manage your financial health can open up avenues to secure a mortgage.
What Happens If You Can't Pay Your Mortgage?
Failing to pay your mortgage can have serious consequences, potentially leading to the repossession of your home. It’s essential to understand the process and timescales involved if you find yourself in a situation where you might miss mortgage payments.
Initial Missed Payments
- Day 1-15: Most lenders offer a grace period for payments; however, once you miss a payment, it’s recorded as delinquent.
- Day 16-30: You will likely receive a late charge, and the lender may contact you to discuss why the payment was missed. It’s critical to communicate openly with your lender, as they may be able to offer options to help you get back on track.
Early Intervention
- 1-2 Months Overdue: The lender will increase communication, urging you to catch up on the missed payments. They may offer temporary relief measures, such as payment plans or forbearance, where payment obligations are reduced or suspended for a short period.
- 3 Months Overdue: If payments are still unpaid, the lender typically sends a formal demand letter or a ‘notice of default’, outlining the amount owed and indicating that you have typically 30 days to settle the overdue payments.
Legal Action and Repossession Process
- 4-6 Months Overdue: At this point, if no agreement has been reached and payments have not been made, the lender may begin the process of repossession. This starts with an application to the court for a possession order.
- Court Proceedings: You will be notified of the date of the court hearing and have the opportunity to present your case. It’s possible at this stage to arrange an alternative payment plan with the court’s approval, which can stop the repossession process.
- Issuance of a Possession Order: If the court rules in favor of the lender, they will issue a possession order. The time given before you must vacate the property can vary, but it is often set for 28 days after the order.
Eviction and Sale of Property
- Eviction: If you have not vacated the property by the date specified in the possession order, the lender can use bailiffs to enforce eviction.
- Property Sale: Once the property is repossessed, the lender will sell it. The proceeds from the sale are used to pay off your mortgage debt and any related legal fees. If there is any surplus, it will be returned to you. Conversely, if there is a shortfall, you are still liable for the remaining debt.
Timescales
The entire process, from the first missed payment to potential repossession, can take anywhere from 6 months to over a year, depending on the lender’s actions, legal proceedings, and the homeowner’s responses.
Prevention and Advice
- Communication: Contact your lender as soon as you suspect you might miss a payment. Lenders are generally more willing to work with homeowners who are proactive in addressing payment issues.
- Financial Counselling: Seek advice from financial advisors or non-profit counselling services that can help you understand your options and rights.
- Legal Advice: Consider consulting a solicitor who specializes in property law if you are facing repossession. They can offer guidance specific to your situation and may help you negotiate with the lender or represent you in court.
Understanding the potential consequences and legal proceedings involved with not being able to pay your mortgage is crucial. Taking early action and seeking advice can sometimes prevent the worst outcomes, such as repossession.
What is Negative Equity?
Negative equity occurs when the value of an asset, such as a property, falls below the outstanding balance on the mortgage used to purchase that asset. This situation can arise due to a decline in property value or because the property market experiences a downturn.
What Is Equity?
To better understand negative equity, it’s important to grasp the concept of equity in the context of homeownership.
- Definition: Equity refers to the portion of the property that you truly own, financially speaking. It is the difference between the property’s current market value and the amount you owe on the mortgage.
- Calculating Equity: Equity=Current Property Value−Outstanding Mortgage Balance
- Positive Equity: When the property value exceeds the mortgage balance, the homeowner has positive equity. This is beneficial because it provides financial leverage, enabling the homeowner to obtain further finance, sell the property without incurring losses, or capitalize on the property’s value growth.
- Growing Equity: Homeowners can increase their equity by reducing their mortgage balance through regular repayments, especially if these payments are structured to pay down the principal more quickly. Property value appreciation over time also naturally increases equity.
Understanding Negative Equity
Negative equity is particularly problematic for homeowners who wish to sell their property or refinance their mortgage. If the sale price of the home is less than the amount owed on the mortgage, the homeowner would need to cover the difference to clear the mortgage debt. This can create financial strain, especially if the homeowner does not have sufficient savings or other assets to make up the shortfall.
- Causes: Negative equity can be caused by several factors, including falling housing prices, economic downturns, or buying a property at a market peak with a high loan-to-value ratio.
- Consequences: Homeowners with negative equity are “trapped” in their properties unless they can pay the difference between the sale price and the mortgage balance. It also means losing out on any equity growth from homeownership, which can affect long-term financial planning and stability.
Negative equity can pose significant challenges for homeowners, limiting their ability to move or sell without incurring financial losses. It underscores the importance of considering the timing of property purchases and the potential for changes in the property market. Understanding equity—both its growth and risks—is crucial for managing a property investment wisely and safeguarding against the financial impact of market downturns.
Should You Use A Mortgage Broker?
When it comes to purchasing a home, one of the key decisions you’ll face is whether to use a mortgage broker. A mortgage broker acts as an intermediary between you and potential lenders, offering a range of benefits that can simplify the mortgage process.
However, like any decision, there are pros and cons to consider.
Do You Need A Mortgage Broker?
I would strongly recommend everyone uses a mortgage broker as this is the easiest way to ensure you get the best deal for your circumstances. A good mortgage broker will have specialist software that allows them to compare every mortgage on the market in a matter of minutes and they will often have access to intermediary-only deals that you won’t be able to consider without their help.
They will be able to tell you, in advance, what your likelihood is of getting the mortgage and they will complete the application on your behalf, saving you time and stress. They then act as your only point of contact which should mean you can get in touch with them whenever you want without the need to sit on hold for 10 minutes waiting for a lender to answer your call. (the vast majority of my time as a mortgage broker was spent on hold to banks!)
An Exception To The Rule
But if you are the perfect “vanilla” client – employed, great income, perfect credit, large deposit – and you have some experience of buying a home and applying for a mortgage then you should be able to get a good mortgage without the help of a mortgage broker.
Typically, the major high street lenders (Natwest, Nationwide, HSBC, Barclays, Santander, Lloyds etc) offer the cheapest mortgages. Visit each lender’s website and find the best deal then submit your application. You won’t be guaranteed of having the cheapest mortgage on the market as things change on a daily basis but it should be relatively competitive.
Get A Second Opinion
I would still recommend you speak to a mortgage professional, though. Once you have found the best deal, take 10 minutes to speak to a whole-of-market adviser, tell them what you’ve got and ask them to beat it. If they can save you money then it could be worth switching but if not, you will be able to rest assured that you have the best possible mortgage out there.
Getting the wrong mortgage can be expensive. Pay just £100 more than you need to each month and it will add up to £6,000 over a 5 year fixed rate period!
The graph illustrates the cumulative cost difference between two mortgages over a 5-year fixed rate period, where paying an extra £100 per month leads to an additional £6,000 in total payments by the end of the 60 months.
Which is why it is essential you get the best mortgage possible.
Advantages of Using a Mortgage Broker
Access to Multiple Lenders
Brokers have relationships with numerous lenders and can access a variety of mortgage products. This means they can shop around on your behalf to find the best rates and terms that fit your financial situation and goals.
Saves Time
Researching mortgages can be time-consuming. A broker handles the comparison work, presents you with options, and explains the complex terms and conditions of different mortgage products.
Expertise and Experience
Mortgage brokers are experts in their field. They understand the details of the mortgage process, including the documentation required, eligibility criteria, and application procedures, which can help to streamline your mortgage approval.
Customization
Brokers can tailor mortgage products to suit your specific needs. They take into account your financial situation and future plans to recommend a mortgage that maximizes your financial benefits.
Assistance for Borrowers with Special Circumstances
If you have a non-traditional financial situation—such as being self-employed or having a poor credit history—a broker might improve your chances of getting approved for a mortgage.
Disadvantages of Using a Mortgage Broker
Cost
Brokers typically charge a fee for their services, which can be a percentage of the loan amount or a fixed upfront fee. While some brokers are paid through commission from lenders, it’s important to understand how your broker is compensated to assess potential biases.
Variability in Quality
The quality and thoroughness of service can vary significantly from broker to broker. It’s crucial to do your research and choose a reputable broker with positive reviews and recommendations.
Potential Limitations in Lender Access
Some brokers may not have access to all lenders or specific deals that are available directly from the lender. Additionally, there are some lenders that work exclusively with their in-house brokers or direct applicants.
Ultimately, whether you should use a mortgage broker depends on your personal circumstances, financial knowledge, and the complexity of your mortgage needs. By weighing the pros and cons and considering your own situation, you can make an informed decision that aligns with your homeownership goals but if you really want to make sure you get the best mortgage deal possible, speak to an expert and let them do all the hard work for you. There will likely be a cost but it could save you considerably more in the long run.
Glossary Of Mortgage Terms
Term | Definition |
Agreement in Principle (AIP) / Decision in Principle (DIP) | An initial statement from a lender indicating how much they might be willing to lend based on preliminary information about the borrower’s finances. This is not a guarantee but a useful guide when house hunting. |
Amortization | The process of paying off a debt over time through regular payments. A portion of each payment is for the interest while the remaining amount is applied towards the principal balance. |
Annual Percentage Rate (APR) | The total cost of borrowing over the term of the loan, including interest and other charges, expressed as a yearly rate. |
Arrangement Fee | A fee charged by a lender to set up a mortgage. This can be added to the mortgage amount or paid upfront. |
Capital | The original sum borrowed in a mortgage, excluding any interest. |
Completion | The final stage in the sale of a property, where all funds are transferred and the buyer legally takes ownership. |
Conveyancing | The legal process of transferring property from one owner to another. This includes handling contracts, giving legal advice, carrying out local council searches, and dealing with the Land Registry. |
Deposit | An upfront payment made by the buyer towards the total purchase price of a property, usually expressed as a percentage of the purchase price. |
Equity | The difference between the market value of a property and the amount still owed on the mortgage. This represents the portion of the property that the homeowner truly owns. |
Exchange of Contracts | The point at which agreed-upon contractual terms become legally binding, and both buyer and seller are committed to the transaction. |
Fixed-Rate Mortgage | A mortgage in which the interest rate is set for a specific period of time, providing predictable monthly payments and protection from interest rate increases during that period. |
Higher Lending Charge | A fee charged by lenders when a mortgage is taken out with a high loan-to-value ratio, to insure the lender against the borrower defaulting on the loan. |
Interest-Only Mortgage | A type of mortgage where the borrower pays only the interest on the loan for a set period, after which they begin paying both interest and principal. |
Loan-to-Value Ratio (LTV) | A measure used by lenders to assess the risk of a mortgage loan, calculated as the loan amount divided by the appraised value of the property, expressed as a percentage. |
Mortgage Term | The length of time that the mortgage agreement is in effect, at the end of which the mortgage must be repaid or renegotiated. |
Negative Equity | A situation where the value of a property falls below the remaining amount of the mortgage owed on it. This can occur when property values decrease. |
Overpayment | Paying more than the regular mortgage payment, either regularly or as a lump sum, to reduce the mortgage balance faster and decrease the total interest paid. |
Porting | The process of transferring a mortgage from one property to another, often to avoid early repayment charges and retain favorable mortgage terms when moving homes. |
Repayment Mortgage | A mortgage in which the borrower pays back both the interest and part of the principal in each monthly payment, gradually reducing the balance owed. |
Stamp Duty Land Tax (SDLT) | A tax paid on properties purchased in the UK. The amount of SDLT depends on the price of the property and whether the buyer is a first-time buyer or owns other properties. |
Valuation | The process of estimating the market value of a property, typically conducted by a professional appraiser for the lender to ensure the property is worth the loan amount being provided. |
