Basics of Making Mortgage Application
After estimating the mortgage amount you want to borrow and have identified your preferred lender, there are key steps to follow to get a mortgage. The procedures are the same whether you want to apply for a mortgage for the first time or want to go for a new lender.
An approval or agreement in principle or the lender or mortgage adviser will set out what you will probably get as mortgage amount based on certain terms and conditions. This can be helpful when you have chosen your mortgage and are ready to make an offer on a property. It is important that you do not overstate your income. This may lead you to borrow excess amount beyond your repayment ability.
You may need legal or expert advice to undertake important activities such as local searches, drawing up contracts and other legal paperwork. It is recommended to use a conveyancing solicitor or a licensed conveyancer if you are not comfortable with such procedures. Lenders may be able to identify a preferred solicitor, or you may be able to get a personal recommendation. You can also search online or in the phone book. In most cases the mortgage provider will insist on a professional conveyancer to undertake the valuation of the property you are planning to put up as collateral.
You will have to make a full mortgage application by completing and returning the lender’s form. The lenders will usually also want to see evidence of your income, your identity, your current address and or sometimes a previous lender or landlord’s reference. They may also want a non-refundable fee to cover their costs and perhaps to pay for a valuation. If you can not prove you have got a regular income due to reasons such are you are self-employed and do not have enough proof, you may be able to get a self-certification mortgage. This usually requires a larger deposit and the lender may still want some evidence of your ability to pay.
Your lender may get written references from your employer and bank or accountant if you are self-employed, and your current lender or landlord. They will also run credit checks to make sure you have paid off your debts in the past. Your lender will usually have the property valued to make sure it’s worth the price you’ve agreed to pay. If it is not, it could affect how much they will lend you. It is advisable to get your own survey done too or to upgrade the lender’s valuation survey to a more detailed one.
If the lender is happy with the valuation and references, you will be made a formal offer - usually sent to you and your solicitor. Once you or your solicitor on your behalf have signed and returned the offer documents, your lender is committed to providing the money. The mortgage offer usually requires you to take out buildings insurance, in case something happens to the property before you have paid off the mortgage.
If you are buying, once you’ve got a formal mortgage offer, your solicitor can agree a date for exchanging contracts with the seller’s solicitor. At this time you usually pay a percentage of the purchase price as a non-refundable deposit and commit to paying the rest on the agreed completion date when the property becomes yours. You may be able to apply for your mortgage and track its progress online. In Scotland, you usually have to arrange your mortgage before you make an offer on a property.
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Key Provisions of Mortgage Loans
A mortgage is a loan against collateral you take out to buy a home or other property. Most banks and building societies offer mortgages, as well as specialist mortgage lending companies. The Financial Services Authority (FSA) regulates the way most mortgages are sold, but not interfere with second mortgage and a majority of buy-to-let mortgage options. The FSA regulations means the lenders must follow certain rules and standards when dealing with their mortgage customers.
You can get a mortgage direct from the lenders such as banks, building societies and specialist mortgage lenders, or you can use a mortgage broker. You can buy based on your own expertise or get advice and recommendation on a mortgage that suits your particular needs. You can repay your borrowed amount to the lender via two methods knows as ‘repayment’ and ‘interest only’.
With a repayment mortgage you make monthly repayments for an agreed period or term until you have paid back the loan and the interest. With an interest only mortgage you make monthly repayments for an agreed period but these will only cover the interest on your loan. For example, the endowment mortgages work in this way. Typically, you will be required to pay into another savings or investment plan designed to help you pay off the loan at the end of the term.
Some mortgages offer you options to vary your monthly payments, or to combine your mortgage account with savings and other income. Usually, these options are called flexible, current account and ‘offset’ mortgages. A flexible mortgage gives you some scope to change your monthly payments to suit your ability to pay. It’s also useful if you want to pay off your loan more quickly. Several flexible features are becoming common and they are not limited to mortgages with ‘flexible’ in their name. Here are some flexible features:
Overpayments – you can pay more than your normal monthly mortgage payment or pay off a lump sum, or both. Underpayments and payment holidays – you pay less than the normal monthly payment for a limited period such as six or twelve months. You may even be able to stop making payments altogether by getting a payment holiday. This could be useful in situations such as losing your job or taking time off to care for a child. Borrow extra – you can borrow extra without further approval from your lender, provided the total loan does not go above an overall limit.
You will also find a range of interest rates to choose from. For example, ‘variable’ and ‘tracker’ rates change in line with Bank of England rates, ‘fixed’ rates are fixed for a set number of years, and ‘capped’ rates have a variable interest rate with a ceiling so your payments won’t go above a set amount. A lender may require you to take out life insurance to pay off your mortgage should you die, known as Mortgage Protection Life cover. You can also get insurance to protect your income or just your mortgage payments if you become ill or disabled, or lose your job, known as Mortgage Payment Protection Insurance (MPPI).
Affordability and Availability of Mortgage Amounts
Lenders should lend responsibly. This means that they should consider whether you can keep up the mortgage repayments now and throughout the term of the mortgage; for example after an initial discount period ends. They should base this on things like your income, expenditure and other circumstances. When you take out a mortgage, lenders look at a number of things to work out how much you can borrow. These include your earnings and outgoings, the property value and your credit history. Whatever you borrow, you need to be sure you can afford the repayments.
Lenders have in the past offered to lend an amount based on earnings. Recently it has become more common for lenders to make an affordability assessment when calculating how much they will lend you. How much you can borrow depends on how much you can afford. Lenders will check this but you can too. Mortgage lenders have in the past offered to lend a sum based on a multiple of your salary before tax. Lenders may take into account if you have other money coming in, such as bonuses, overtime or commission. However, since it is not guaranteed income lenders may, for example, only take into account half of this money. If you already have lots of expenses, such as other loan payments, they will offer you less.
Recently it has become more common for lenders to make an affordability assessment when calculating how much they are prepared to lend you. Each lender will have its own method, but generally they will all try to calculate your disposable income, taking account of your total income; any credit commitment such as loans and credit cards; and household bills and living expenses. If you have received advice from a mortgage broker, the firm advising you must recommend a mortgage that you are able to afford. Whether you receive advice or not, the lender must still lend responsibly. However, it’s always worth satisfying yourself that you can afford the monthly payments by using an online budget calculator.
It is important to give your lender as much detail as you can about your earnings and outgoings so that you’re offered a mortgage you can afford. You also need to remember to budget for the one-off costs of buying a property such as administration and solicitor fees and Stamp Duty. Your lender will arrange a valuation to check how much the property’s worth. Some lenders limit the amount they’ll lend on certain types of property, for example timber-framed. It’s worth shopping around to compare deals.
Your lender will check your credit history and ask previous lenders or landlords for references. If your record shows you’ve had difficulty with loans or rent payments in the past, it may affect how much you can borrow. Do not be put off if a lender refuses you a mortgage or offers you an expensive deal - it’s still worth shopping around.
If you can not prove your income (perhaps because you’re self-employed and don’t have accounts going back far enough), you may be able to get a ’self-certification’ mortgage. Although you may not have to offer proof of income to the lender, the lender will still want to be sure that you can afford the repayments so may ask you to provide evidence of your other outgoings.
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A Look into Different Mortgage Rates
As there are different types of mortgages, there are many types of interest rate deals too, each with its merits and demerits. The suitability of each option depend your personal financial situation. Let us examine each interest rate packages in detail here.
Standard variable rate: Under this option, your payments move up or down at the lender’s discretion. The lender may not reduce, or may delay reducing their variable rate even if the Bank of England rate goes down. Generally there are no early repayment charges, but you will have to check this with the lender. Usually you can leave your lender without any penalties or problems. You can usually pay back extra amounts and cut your interest costs without a penalty. It moves with interest rates. So if the lender decides to increase the rate your monthly payments will increase. It may be expensive compared to other deals. The lender may not reduce, or may delay reducing their variable rate even if the Bank of England rate goes down.
Tracker rate: This is a variable rate loan with an interest rate that is equal to or a set amount above or below the Bank of England or some other base rate. It tracks, means moves up or down with, that rate. It is useful to go for a tracker if you can afford to pay more when interest rates go up, in exchange for benefiting when they go down. It is not a good choice if your budget won’t stretch to higher monthly payments. Early repayment charges may have to be paid sometimes during any special deal period and maybe even after that period also.
Discounted interest rate: Under this scheme, your monthly payments can go up or down, but you get a discount on the lender’s standard variable rate for a set period of time. At the end of the deal, you usually change over to the full standard variable rate. It gives you a gentler start to your mortgage, at a time when money may well be tight. But you must be confident you can afford the payments when the discount ends. The discount period is limited, so do not get used to those early low repayments. You may not be able to make overpayments and pay off the loan early without penalties. The lender may not reduce, or may delay reducing their variable rate even if the Bank of England rate goes down. You will have to pay early repayment charges during the special deal in most cases. This may be applicable even after the end of the special deal period as well.
Fixed interest rate: Under this deal, your payments are set at a certain level for an agreed period. At the end of that period, they will usually switch you to the standard variable rate. Your payments will stay the same in that period, even if interest rates go up. This gives you the security of knowing that you can afford your payments and will make it easier for you to budget. If rates go down, you won’t benefit. Your payments will stay at the higher rate. You may not be able to make overpayments and pay off the loan early without penalties.
Capped rate: Under this option, your payments are variable and often linked to a base rate, but fixed not to go above a set level known as the cap during the period of the deal. At the end of the period, you are usually charged the lender’s standard variable rate. You know the maximum you will pay for a set period of time. Useful if you want the security of knowing that your payments can’t rise above the set level, but still benefit if rates fall.
Collared rate: This scheme may be used in conjunction with a capped rate or a tracker or both. Your payments are variable but will not fall below a set level, also known as the ‘collar.’ It may be part of another interest-rate deal which otherwise appears attractive. But note that if the rate payable is only just above the ‘collar’ and you think rates will fall; you may not get the full benefit of a reduced payment
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