You may not be surprised to hear that the word mortgage comes from the old French for ‘death pledge’. It’s hardly everyone’s favourite dinner table topic, but it’s worth knowing the fundamentals as, barring a yacht, it’s by far the biggest cost you’re ever likely to have. Here’s an attempt at describing the key things to consider when it comes to getting a mortgage without putting you to sleep (no guarantees).
I should add a cheeky disclaimer to say that I’m not qualified to advise on mortgages and am simply aiming to help answer some common questions about mortgages. When it comes to making mortgage-related decisions, speak to a qualified mortgage adviser or broker.
What is a mortgage…?
In case you have no idea what a mortgage is, it’s essentially a humongous loan which banks and building societies* will give you towards buying a property. Very few people are in a position to buy their first place in cash given that the average house price in UK is over £200,000, so a mortgage makes up the balance after you’ve paid a deposit.
Because mortgages are such large loans, they’re typically paid back over many years but a fairly standard mortgage term for a first time buyer would be between 25 and 35 years. In addition to repaying the money you’ve borrowed, there’ll be an interest rate charged on top. The lower the interest rate, the lower your monthly repayments.
There’s a lot of mortgage jargon but one term you definitely need to be aware of is ‘loan-to-value’ or ‘LTV’. All this means is the percentage of the property that you’re borrowing money for. So, if you were buying a £100,000 home with a 5% deposit of £5,000, your LTV would be 95% and your mortgage would be £95,000.
*From a mortgage point-of-view, it really doesn’t make a difference whether you borrow from a bank or building society. The key difference is that banks have external shareholders whereas building societies do not – whether this affects your decision is up to you.
How can I prepare for getting a mortgage?
Banks won’t just lob mortgages out willy nilly. Lenders have a responsibility to minimise the chance of you struggling to repay your mortgage (and of them not getting their money back) and so your ‘financial wellbeing’ will undergo a pretty thorough examination. As such, the best thing you can do to prepare for a mortgage application is minimise other borrowing (it’s sensible to maintain a small amount of credit to prove you can reliably repay it) and to make sure that you repay any loans on time and in full. This is important not only for your credit score (which needs to be as high as possible to boost you chances of getting a mortgage), but also because both your income and outgoings are taken into account when calculating how much you can borrow.
Your bank statements from the last 3 months are likely to be looked at so cut out standing orders to bookies and politely ask your friends to refrain from using hilarious references to pay you back for takeaways.
What’s the difference between going directly through a bank/building society vs a mortgage broker?
Your circumstances will determine which is best for you. As a general rule, if your personal finances are relatively standard (eg: employed, reliable income) and you feel comfortable comparing different lenders’ mortgage products online, going direct to a bank/building society is an option to consider. Bear in mind that if you go down this route you’ll be speaking to mortgage advisers** within specific banks/building societies who obviously won’t be comparing their products vs other lenders’ so the responsibility of checking this would be on yours.
If your finances are a bit more complex (eg: self-employed, poor credit history) or you’re buying a property with a non-standard construction then a mortgage broker may be your best bet as they’ll be able to search the whole market for a product to suit your specific needs. That’s not to say brokers should only be considered if you’re circumstances are a bit niche – brokers are ideal if you don’t feel comfortable comparing mortgage products between lenders as they’ll do this for you.
In terms of the rates you can get, you may think that brokers will always win as they have a wide view of the market. However, that’s not always the case once you’ve factored in the broker’s fee which you may have to pay. If the broker doesn’t charge you a fee, they’ll be getting commission from the mortgage lender which can mean the rate isn’t as attractive as if you went direct to a bank or building society. So the short answer is that neither route is guaranteed to get you the best deal. If you want to be really thorough, make an appointment with a broker AND a couple of mortgage advisers.
It’s sensible to arrange a meeting with a mortgage adviser from your chosen bank/building society or your mortgage broker before you’ve found a house that you want to make an offer on. This will allow you to learn more about how much you could borrow and which mortgage products might be best-suited to you. At this stage you will be able to get an approval in principle (AIP) which is an informal agreement of how much you can borrow. A meeting early on like this would also mean that when you do find the house of your dreams, it’s a much quicker process to get the mortgage application sorted as most of the paperwork is already done.
If this all sounds complicated and very adult-like, remember that you won’t be the first first time buyer that mortgage advisers/brokers have dealt with and it’s their job to advise you properly.
**’Mortgage adviser’ is usually used to refer to a person who works for a bank/building society who can discuss their own mortgage products with you whereas a ‘mortgage broker’ has a broad view of the market and has visibility over various lenders’ products. Both will aim to recommend the most appropriate mortgage product given your needs and will help you through the process.
How big a deposit should I put down?
As a minimum you’ll usually need to put a 5% deposit down (the current economic climate means this is likely to be more). How much you put down beyond this should be dictated by how much cash you have spare and whether you have any plans for it or not.
If the absolute max deposit you can afford is 5% then that’s fine. However, interest rates at 95 LTV (ie: with a deposit of just 5%) are a lot higher than for lower LTVs. If you’re able to put a 10% deposit down or more it may be a good idea as the interest rate you’ll pay will be much lower. As you move down the LTV bands the rate will drop down further but the most dramatic drop is from 95 LTV to 90 LTV.
When deciding what deposit to put down, don’t forget that there are several other costs of buying a house to consider and that once you’ve moved in you’ll probably want some cash in the bank otherwise you’ll be sitting on the floor until you can afford a sofa.
What mortgage term should I take?
As house prices and the age at which people buy their first home have increased, the maximum mortgage term has gone up to accommodate this. Most lenders will now offer mortgage terms of 40 years which is great from an affordability point-of-view (lower monthly payments than if you went with a shorter term meaning you can get a larger mortgage), but not ideal when 74 year old you is still working 9-5 to pay off the mortgage.
Longer mortgage terms are, overall, a good thing because they provide flexibility. Just because you’ve taken out a longer term mortgage doesn’t mean you’re committed to a mortgage for this whole period – a lot can happen in 40 years! You’ll hopefully be in a position at some point to overpay the mortgage to reduce the term.
If you’re disciplined with your money, taking out a 30+ year mortgage could be a good idea as you’ll have a lower committed monthly payment but will have the option to overpay to reduce your term if you’re in a position to do so. If you take out a 25 year mortgage and you’re stretching yourself to meet the payments there’s no flexibility as you’ve committed to paying this amount monthly as a minimum. As with all these decisions, it’s a matter of personal preference which your mortgage adviser or broker will be able to guide you through.
What does the mortgage process look like?
Whilst the process of getting a mortgage can take anywhere from a few weeks to several months (years in extreme cases), the average time from applying to getting the money and moving in is between 2 and 3 months. This may sound like quite a while and that’s because A) there a lot of steps involved and B) there a lot of humans involved and many humans = many delays. Here are the key steps that take place between applying for a mortgage and moving into your crib and if you want to know about our experience, have a gander here.
#1 | Mortgage application
Once you’ve had an offer accepted, the size of your mortgage is known so you can make a formal mortgage application either through your lender or your broker. This involves providing a load of paperwork and details of the property you’re buying so that your application can be thoroughly assessed.
#2 | Mortgage offer
You’ll receive a mortgage offer once your lender is happy that A) you’ll be able to afford your mortgage repayments and B) the property you’re buying is worth the amount you’re paying for it. To check the latter, your lender will likely require a surveyor to value the place you’re buying which is something that may be included for free with your mortgage, or may be an additional cost. Getting your mortgage offer is a big moment as theoretically it means that there’s nothing from your side that’s stopping you from making the property yours. However, there are often multiple buyers/sellers involved in a ‘property chain’ and so unfortunately you’re likely to be heavily reliant on other property sales.
#3 | Exchange
After you receive your mortgage offer there’ll typically be a period of several weeks’ paperwork and toing/froing between solicitors. Towards the end of this period, your solicitor will confirm an ‘exchange’ date with you which is ultimately the date from which you’re legally-bound to buy the property. There’ll be BIG financial penalties if you or the seller pull out at this stage. You can confidently pop open a bottle of bubbly on exchange day because you’ve effectively bought your first house 🙂
#4 | Completion
Completion day is keys day! This is a very surreal day as it involves waiting around for a call from the estate agent to say that you can pick up the keys to your new home. It’s the day that the humongous loan you’ve taken is actually released by your mortgage lender but you don’t need to worry about this – your solicitor will make sure it gets to the owner. For us, there were only 2 days between our exchange and completion dates but this period is typically longer to help people get organised eg: booking a removal firm.
What features of a mortgage are there?
There are various features to mortgages that are designed to cater to your needs and circumstances – these different features combine to create individual mortgage products. Your mortgage adviser or broker will be great at explaining these details but if you want to go in clued up, here are the key features that distinguish mortgage products.
Interest rate – this defines what your monthly mortgage payment will be. The higher the % interest rate, the higher your monthly payment.
Product fee/completion fee – some mortgages have a fee included (typically between £200 and £1,500) which you can choose to either pay up front or roll into you mortgage. We opted to roll our £495 fee into the mortgage as we could do without this cost at the time but this will end up costing more in the long run as interest will be charged on top.
Incentives – there are loads of ways that lenders try to attract your business with stuff like cashback or a free valuation.
Product type ie: fix vs tracker – the majority of people choose mortgage products which fix their mortgage payments for a period of time, but this hasn’t always been the case.
The less popular ‘tracker’ products have variable interest rates which move with the base rate that is set by the Bank of England or the lender’s standard variable rate (SVR) which is decided by mortgage lenders and typically moves up and down alongside the Bank of England base rate.
If you want to comfort of a constant payment for a certain period of time, a fixed product is likely to be right for you. If you’re happy to take the risk of interest rates rising with the hope that they’ll decrease, a variable product may be worth considering.
Product term – not to be confused with your mortgage term, product term is the period over which you’re committing to a certain mortgage product. Most people opt for a period of 2 or 5 years but longer mortgage terms are increasingly popular. After this, you can decide to take out another product with the same lender or remortgage elsewhere if you find a better deal.
Mortgage term – simply the total period of your mortgage. You can take anything up to a 40 year term.
Early repayment charges (ERCs) – if for some reason you need to back out of your mortgage before the end of the product term that you’ve committed to, you’ll likely have to pay early repayment charges as a penalty unless there are exceptional circumstances. ERCs are charged as a percentage of your outstanding loan and typically decrease for each year of the mortgage product term that you’ve committed to. For example, if you owe £100,000 on your mortgage and have to pay the 3% ERC charge for coming out of your mortgage early, you’ll be penalised £3,000.
Loan-to-value (LTV) – as mentioned above, this is the percentage of the property you’ll be borrowing. The higher your LTV, the higher the interest rate you’ll pay because you’ll be deemed a greater risk to the lender.
Overpayment allowance – most mortgage products will allow you to make overpayments on your mortgage to allow you to either reduce the mortgage term or decrease your future repayments. This allowance is typically 10% per year, meaning that on top of your monthly payments you could contribute up to 10% of the outstanding mortgage balance.
Offset mortgages – offset mortgages are useful for people who have a decent chunk of savings that they don’t want to be tied up in their home. These savings can be put into an offset savings account which reduces the interest to be paid on the mortgage.
For example, if you were in the very fortunate position of having £50K sat in the bank that you didn’t want to put into your deposit, this could be put into an offset savings account linked to your mortgage which would effectively reduce the mortgage balance that you pay interest on by £50K. The downsides are that you typically wouldn’t earn interest in the savings account and the interest rate of the offset mortgage product is likely to be higher than a standard non-offset account.
If you’ve arrived here then fair play – there are many more exciting things that you could have been doing with your time! Hopefully this has helped answer a lot of questions about mortgages and has demonstrated that they’re really not that complicated. There’s no need to worry if it doesn’t all make sense as that’s what mortgage advisers and brokers are for.