Buying a House > Getting a Mortgage

You’ve been saving diligently for years  or maybe you’ve just come into an unexpected inheritance courtesy of a long-lost uncle. Either way, you want to get onto the property market and you’re weighing up your options. And the overwhelming likelihood, unless that uncle happened to be a millionaire, is that you’re going to need a mortgage to do it.

Buying a property is one of life’s stand-out moments – and, whatever people may tell you, mortgages are there to help you make this a reality. Mortgages come in all shapes and sizes, and can be customised to suit the needs of all kinds of buyers. So the question isn’t whether the right mortgage for you is out there, the question is finding it. And to help you find it, we’ve prepared this brief guide.

How a Mortgage Works

‘Mortgage’ is basically a fancy name for a loan taken out to buy property or land. The way this differs from a conventional loans is that it’s ‘secured’ against the value of your home until it’s paid off completely. Once this happens – congratulations – you are the full owner of your property.

Having your home as a ‘security’ means that, if you can’t keep up with your loan repayments, the lender has the option to get their money back by repossessing and selling it. Repossession is an unfortunate fact of the house-buying process and a risk that every prospective buyer has to run. But we’d add that, as it’s a far from ideal solution for lenders, there are often compromises available.

Before you can make an informed mortgage decision, you first have to understand the different components of a mortgage. The four main things you have to worry about are:

  • the mortgage deposit you need up front
  • your mortgage term
  • the type of interest you’re paying
  • whether you have any flexibility around repayments

1. Mortgage Deposit

As we mentioned, a mortgage is a loan secured on the property you’re buying. But you’ll also need to put down a deposit up front.

A mortgage deposit is usually at least 5% of the overall property value – and then your mortgage lets you borrow the remaining amount from a lender. However, first-time buyers will often have to pay a large deposit. Indeed, a recent study for the first half of 2018 returned an average 1st-time-buyer deposit of 16%.

The larger the deposit you are able to stump up, the better your mortgage deal is likely to be – because lenders will regard you as being less risky.

2. Mortgage Term

Borrowers then pay back the amount loaned in monthly instalments, plus interest (more on this below), across the duration of the mortgage. Mortgages terms vary from as little as 5 years to 40 or even 50 years, with 30 years representing the commonest duration.

Longer-term mortgages can be attractive, because spreading out your repayments means you have less to pay back each month. However, they generally result in you paying more in total. This is because you pay interest each month on your total borrowings – and these remain larger for longer because you’re paying them back more slowly.

Shorter-term mortgages are cheaper in the long run but will leave you with less cash in hand in the meanwhile. So it’s all about striking a balance between what’s good for your short-term and your long-term financial position.

3. Fixed or Variable Rate Interest

Typically, you pay a mortgage back in monthly instalments, with interest paid on top each month. It is this interest that makes it worthwhile for mortgage lenders to lend to you in the first place this is how they make money from lending to you. Interest on your mortgage is either fixed-rate or variable.

With a fixed-rate mortgage, your repayments (including interest) will be locked in for the length of your mortgage term. The major benefit of this is that you know exactly what your mortgage will cost up front and can budget accordingly – save in the knowledge that your payments won’t go up over the life of the term.

On the other hand, you could opt for variable-rate mortgage. This is where your interest rate varies in accordance with market rates. So, if interest rates fall during your mortgage term, you stand to gain. If, however, rates rise, then you will likely pay more than you would for a fixed-rate product.

4. Flexibility in Your Mortgage

We wrote above that, when paying off a mortgage, you pay back the money you borrowed plus the interest. This is known as a repayment mortgage, and is the most widely available mortgage repayment option. However, there is such a thing as an interest-only mortgage, where you pay only the interest you owe each month. Interest-only mortgages are naturally a cheaper option during the term of the mortgage. But you are left at the end of this still needing to pay back what you borrowed in full. And the way most householders do this is by taking out a new (conventional) mortgage.

Some lenders offer mortgages that are a cross between these two payment formats. This way, some but not all the borrowed money will need repaying as a lump sum at the end of the term. And there are other ways to add flexibility to your mortgage, too.

While you will face a penalty if you do not make your mortgage repayments on time or as arranged, you can get a flexible mortgage with scope to take a break from payments – for example, you might have a temporary cash-flow problem due to the nature of your job. Sometimes things may even happen the other way round: you might find yourself with more cash than you expected. There are mortgages for this too, with early-repayment options.

If you find yourself wondering about these things down the line, there may be opportunity to revisit them with your lender. However, as this is not guaranteed, be sure to weight them up before signing on the dotted line.

Getting a Mortgage: Where to Start

Seeking Mortgage Advice

An increasingly popular route for mortgage applicants is via online comparison sites, and you should be able to scout out plenty of potential lenders this way. However, getting a mortgage is not a decision to be taken lightly, so it’s advisable to do as much research as you possible can, before and during the mortgage-application process.

This absolutely includes seeking face-to-face advice. A great place to start is by arranging a consultation with your bank (this is normally free). You can also seek advice from an independent mortgage adviser or broker.

Independent advisers may charge fees, in which case they should disclose how much these will be before you use their services. In other cases, advice will be free because the adviser is on commission – and they must disclose this before they work with you.

Lenders and brokers are also legally obliged to offer advice when selling you one of their mortgage products. If you needed another reason to always take whatever mortgage advice you’re offered, it is this: you can only file a miss-selling case if you’ve taken advice in the first place. Otherwise, any negative consequences must be borne by you alone.

Getting a Mortgage in Principle

The whole point of getting a mortgage is to buy a house. But what happens if you find your dream home and then can’t get a mortgage on it? This is where the idea of the mortgage in principle comes in.

A Mortgage in Principle sometimes called an Agreement in Principle (AIP), a Decision in Principle (DIP) or a Lending Certificate – is basically where a lender indicates their willingness, in principle, to lend you X amount of money (to be paid back over Y year with Z interest). And the good news is that you can often get a DIP over the phone, in as little as 2 hours.

This maximum borrowing figure gives you an upper price bracket for your house search. So now you can confidently make an offer on a property knowing that you’re likely to get the money you’ll need to fund the process.

There are, of course, many reasons why you might prefer not to go right up to this borrowing limit. After all, having smaller monthly mortgage repayments gives you more money for the other things in life that you enjoy. But it’s nice to know that, if your ideal home comes along at that price, you would have a good chance of securing the money to buy.

A mortgage in principle is subject to certain terms and conditions being met, so there is always a risk that your mortgage application will be turned down, even if you have secured an agreement in principle. Lenders will always conduct a mortgage valuation survey to ensure that the property is genuinely worth what, in principle, they’re willing to lend you. See further down for more on why a mortgage application might get rejected.

Note: if you’re looking to buy property in Scotland, you’ll need to get a mortgage in principle before you submit a bid on a property.

Applying for a Mortgage: the Process

You’ve got your Mortgage in Principle, you’ve found the perfect property, you’ve put in your offer and got a provisional yes. This means it’s time to set the wheels in motion and get that mortgage approved.

The lender evaluates two things as part of the mortgage application process: your suitability as a borrower (through your application and supporting documentation) and your property’s suitability as a security (through the mortgage valuation survey). This ensures that the assumptions underlying your Mortgage in Principle are indeed met.

Before you Apply: Assemble your Documentation

Beyond getting a Mortgage in Principle, there’s a limit to what you can do to expedite the application process. That said, getting the documentation you’re going to need in advance is an absolute no-brainer.

First things first, contact the three main credit reference agencies (Equifax, Experian and TransUnion) and order your credit reports. Make sure that there’s no incorrect information about you. Fake credit or finance facilities set up in your name can negatively affect your credit score – you don’t want to find out about these on the brink of your mortgage application as they can take time to investigate and resolve.

On top of clean and up-to-date credit reports, you’re going to need:

  • Proof of identity, such as a passport or driving license
  • Proof of current address, such as a recent utility bill
  • Evidence of earnings – your last three months’ payslips, proof of benefits received, P60 form from your employer
  • Evidence of outgoings – bank statements from your current account for the last three to six months, utility bills, council tax, insurance policies and evidence for other costs (such as travel costs, childcare costs and entertainment costs)
  • Details of your estate agent and solicitor

This documentation is intended as proof of the information you’re supplying in your application. So make sure that the two do indeed marry up! And don’t be surprised if your prospective mortgage lender asks you for further paperwork – the above is just the basics.

Next Steps: Assessing Your Credentials

Once you’ve submitted your application, the mortgage provider will take some time to assess your credentials. There are four principle factors lenders take into account:

  • Household income: lenders will calculate your household income, including your basic salary and any additional income you may receive from a second job, freelancing, benefits, commission or bonuses
  • Outgoings: lenders will calculate your expected expenditures by considering regular household bills and outgoings from your account.
  • Debts: a mortgage represents a huge debt, so lenders will want to understand what (if any) debts, loans or credit cards you have already
  • Credit history: as far as your lender is concerned, you’re only ever as good a mortgage customer as your ability to pay the mortgage back. So lenders will perform credit checks to see how good you’ve been at paying back debts in the past – and evaluate how much of a risk lending to you might be.

Lenders will also carry out what’s known as a ‘stress test’. The purpose of a mortgage stress test is to see how well you would stand up if an existing factor changed or a new factor came into play. For example, would you still be able to afford the projected mortgage repayments if interest rates were to rise, or if you were to retire or go on maternity leave?

The Mortgage Valuation Survey

Mortgage lenders aren’t just assessing your suitability as a borrower, they are assessing the suitability of the property that you’re buying to act as a security for your mortgage. They could be 100% confident in your fundamental ability to pay back the sum they’re lending you. But if they’re not confident that the property you’re buying is worth that sum, then they won’t be keen to lend.

This is because everything could still go wrong. And then they’d be left with a property worth less than the money they’d parted with. Normally the report from the mortgage valuation survey won’t be shared with you, and there’s generally no need for you to be party to it. However, if the mortgage valuation survey becomes a stumbling block for your application, and you want to challenge what your lender has determined, you can request a copy.

If everything runs smoothly, it will usually take around one month from submitting your application to receiving offer. But, even if you already have a Mortgage in Principle, you should still be prepared for the possibility of rejection – this is part and parcel of the house-buying game. It’s better to be rejected with good reason than to proceed without.

Getting Home Insurance

Many mortgage providers will

So there we have it – everything you wanted to know (and a lot you quite probably didn’t) about getting a mortgage. It may seem overwhelming but, as this is probably the biggest chunk of money you’ll ever borrow, it’s definitely worth doing your research. And don’t leave this until you’ve already found your dream house – it pays to get your thinking straight at the earliest opportunity. Wishing you all the very best with your application and move!