For most people, buying a house means getting a mortgage as they are not in a position to buy a property outright using their own finances. A mortgage is a loan granted by a lender – usually a bank or building society – for the purposes of buying property.
Most mortgages operate on a monthly repayment basis, whereby each month you pay back some of the amount you borrowed and the interest accrued over an agreed repayment period. By the end of the term, the amount loaned is fully repaid and you own the property entirely. If you fail to keep up with your repayments, the lender has the legal right to take possession of your home.
Some lenders offer interest-only mortgages. With this type of mortgage, during the repayment term, your payments to the lender cover only the interest accrued, so that the full amount of the loan is still outstanding at the end of the mortgage term. In order to receive an interest-only mortgage, you must be able to show the lender how you’ll repay the mortgage at the end of the term – i.e. you must prove what ‘repayment vehicles’ you will use – and your lender will take a view about whether your chosen repayment vehicles are likely to pay off the capital at the end of the mortgage. Examples of repayment vehicles include savings in a savings account or ISA, stocks and shares, pensions, and investment bonds – you cannot use the promise of a windfall such as an inheritance or bonus as a repayment vehicle. You – not the lender – are responsible for creating and maintaining a credible repayment vehicle, but the lender will check at least once during your mortgage plan that your repayment plan is on track to cover the amount borrowed.
Finding the Best Mortgage Deal
In the UK, there are dozens of mortgage lenders and thousands of different mortgage deals on the market. With so much choice, it can be difficult to find the right mortgage deal for you and most buyers use one of the three following methods in order to do so:
Shop around – This requires a lot of legwork as it involves comparing mortgage deals directly by visiting high-street banks and building societies, phoning around or checking lenders’ websites. Although this approach may help you find the best high-street deal, it also puts you at risk of missing out on potentially better deals being offered by less mainstream lenders.
Use price comparison sites – Although this will provide you with a quick overview of some of the best deals on the entire market – so you’ll see what’s on offer from smaller or more specialist lenders – you must be aware that some comparison websites generate revenue by referring customers to affiliated lenders, so the recommendations you receive may not be as impartial as they appear.
Deal with a mortgage broker – As well as providing impartial advice on which mortgage deal would best suit your needs and dealing with the application on your behalf, mortgage brokers and independent financial advisers often have access to the widest range of deals available from both mainstream and specialist lenders. Another benefit of having a mortgage broker is that many lenders have special broker-only mortgage deals that may be better than equivalent high-street rates.
In choosing the mortgage for you, remember that the lowest interest rate does not necessarily equal the best deal. Other factors to consider include whether the mortgage rate is variable (the interest you pay may go up or down) or fixed (the interest rate will not change), and what mortgage arrangement fees will be incurred. If you are a first-time buyer, keep an eye out for special mortgage deals offered only to first-time buyers which often include incentives such as cashback or a free valuation.
Agreement in Principle (AIP)
Once you’ve found the mortgage lender and deal for you, your next step should be getting an agreement in principle – different lenders may have their own name for this, e.g. a ‘decision in principle’ or a ‘mortgage promise’, but it is still the same thing. An AIP is a written statement confirming how much you can borrow from your lender. It is based on the personal details you provide about how much you want to borrow, how much you earn, your employment status, other factors, and a credit check run against one of the UK’s credit reference agencies. Having an AIP is not the same as having a full mortgage offer, which will involve extra checks such as employers’ references, but it does increase your likelihood of securing your desired house when you have made an offer on it as it shows the seller that you are a serious buyer and have the necessary finances.
Applying for a Mortgage
Processing a mortgage application from beginning to end normally takes several weeks, and you can aid this process by being properly prepared. It’s a good idea to obtain a copy of your credit records before you begin your mortgage application so that you can determine whether there is anything in your credit history which could affect your application; this could be something as small as a missed payment or a dispute with your mobile phone company or utility provider. The UK has three credit reference agencies, and you can get your credit record from any of them:
It is also a good idea for you to prepared with any documentation or information which may be requested by your prospective lender, such as: payslips; bank statements or any other information needed to verify your income; a direct address or named contact for your employer’s Human Resources department – this will allow your lender to follow up on reference requests; (if you are self-employed or a freelance worker) up-to-date copies of your account and answers to any questions concerning the sustainability of your income.
The Mortgage Offer
You will receive a formal mortgage offer and a copy of your lender’s mortgage terms and conditions once your application has been approved. Your conveyancing solicitor (or licensed conveyancer) will also be sent copies of these documents in order to review them and provide you with any advice or guidance required for your understanding of your rights and obligations under the terms and conditions.
Congratulations on securing the funding to buy your new home!