123 Mortgages Mortgage Guide
Mortgage Basics
With an endless amount of mortgages to choose from in the UK, it's important to know what to look out for and what to avoid. There are two main factors to consider when choosing a mortgage;
1. What is the interest rate of the mortgage?
This is one of the most important features of a mortgage; lenders offer vastly different interest rates so it's important to shop around. The lower the interest rate, the less money you'll need to pay back over the mortgage term.
2. What are the exit penalties?
When you sign up for a mortgage, you agree to pay back the loan over a fixed period of time within the mortgage term. If you decide to terminate your contract before the mortgage term is complete, the lender could charge you a penalty fee of as much as 5% of the remaining mortgage.
It's essential to find a mortgage that allows you to be flexible, so find out about the exit penalties before you sign up. The lower the interest rate, the higher the exit penalties are likely to be.
How much are you allowed to borrow?
The amount you can borrow varies between lenders, but it's based upon the following factors;
- Your earning
Typically, a mortgage lender will agree to a loan amount that's 3 times your annual earnings. However, if you're buying the property with someone else, typical variations can include:
A) 2.5 times the amount of both annual incomes
B) 3 to 3.5 times the amount of the greater income, plus the equivalent amount of one year's earnings from the second income
An important point to remember is that the amount you can borrow is not necessarily the amount you can afford to pay back. Some mortgage lenders require details of your outgoings as well as your income in order to assess whether you can afford to pay back the loan.
If you're a first-time buyer, it will help your application if you can prove that you've been paying rent for a similar amount to the required mortgage repayments.
- The value of the property you wish to buy
This is known as the loan-to-value ratio; most lenders will loan up to 75% of the property's value. Some lenders will loan 100% of the property's value, but this isn't an advisable option.
With a 100% mortgage, you'll eventually pay back much more than with a lower loan-to-value ratio. You may also have to pay for Mortgage Indemnity Insurance, which can send costs spiralling.
It's often compulsory that you take out Mortgage Indemnity Insurance if the loan-to-value ratio of your mortgage is above 95%.
Mortgage Indemnity Insurance protects the lender and not you. If you can't afford your mortgage repayments and your house is repossessed and sold for less than is still owed on the mortgage, the lender can claim compensation for the loss.
Mortgage lenders can chase you for payment of this debt up to 12 years later.
You can avoid paying for Mortgage Indemnity Insurance by checking which loan-to-value level it becomes compulsory with. Then simply arrange to borrow an amount just below the threshold.
Another point to bear in mind is that mortgage lenders may refuse your application if, for example, they believe the property hasn't been valued appropriately. For example, if they judge the house price too expensive, or cheap, for the area.
How do you prove your income?
Mortgage lenders require proof of your income before agreeing to a loan. The documentation required will vary depending on whether you're employed or self-employed:
Employed
If you're employed, you'll need to provide written evidence, such as payslips and/or your P60 for the past two years. Some mortgage lenders may also contact your employer for further proof of your income. Commission and bonuses aren't usually regarded as income as they aren't guaranteed, regular earnings.
Self-Employed
Some lenders specialise in mortgages for the self-employed. They require 3 years of audited accounts from your business, though if you haven't been in business long enough, they should accept a letter from your accountant instead.
How long are mortgages for?
A typical mortgage term is usually 15 or 20 years, although it's now possible to arrange a mortgage for any period of time, within reason. However, most mortgage lenders won't agree to a mortgage term that extends into your retirement. This is because you may become unable to afford repayments on a basic pension.
Remember, the shorter the mortgage term, the less money you will eventually pay back. Although your monthly repayments will be higher than with a longer mortgage term, the amount of interest on your loan will be less.
You'll find the process of getting a mortgage much easier if you're employed. If you can prove that you're earning a dependable income, a mortgage lender will consider it more likely that you'll make regular mortgage repayments than someone who has bad credit history, for example.
If you have a short-term contract with your employer, it will help your application if you can demonstrate that your employer regularly renews your contract.
Mortgage Basics - basics regarding interest rate, exit penalities, proving income
Property valuation & survey fees - property valuations and expenses incurred buying a home
Getting a Mortgage - different ways you can go about arranging a mortgage
Mortgage Types - explanation of the different types of mortgage available
Mortgages for people with bad credit - info for people who have credit problems
Bad Credit Mortgage - more info on mortgages for bad credit
Remortgaging - information on switching your mortgage to another provider
Mortgage Calculator - basic mortgage repayment calculator
Useful contact information - useful contact information relating to mortgages
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP PAYMENTS ON YOUR MORTGAGE.