Budgeting and getting the right mortgage
Before you start looking at property you need to know how much you can spend on a property. If you are not buying for 100% cash then you will require a mortgage to buy your property. Mortgages are loans offered by banks and building societies, which can take many years to repay. The repayment term is normally determined by the size of the mortgage and what you can afford to repay each month.
In the early stages of your budgeting process, there are a number of online mortgage calculators that can provide initial guidance. On this site, the mortgage calculator will give you an indication of how much you may be able to borrow.
In April 2014 the rules governing mortgages were subjected to significant changes following the Mortgage Market Review (MMR). These changes affected lenders, advisers and most importantly buyers requiring a mortgage.
Contacting a mortgage and protection adviser
At your earliest opportunity you should take time to speak to a professional mortgage and protection adviser who can advise you on the whole mortgage market. They will work out what the maximum is that you can borrow and which lender is likely to agree to it if required. They may suggest getting an Agreement in Principle (AIP) which is where they will approach an appropriate lender with your details to see if they will lend the required money, subject to the usual checks. Credit checks are carried out during this exercise so you must be careful not to negatively affect your credit rating. Your adviser will be able to explain this to you in more detail.
Most importantly, your adviser will assess whether the mortgage you are thinking about is affordable for you using a detailed budget planner. There are many factors that need to be taken into account including your income, any debts you may have (e.g. loans and outstanding credit card balances) and how you manage your finances.
Types of mortgages
Fixed rate mortgages
Many buyers favour fixed rate mortgages because they allow them to budget with certainty. With a fixed rate, you know exactly how much you will have to pay out each month, so you don’t need to worry about fluctuations in interest rates. However, this also means that your monthly payment will stay the same during the fixed period, even if other interest rates decrease.
Often, you can fix your mortgage for two, three or five years and some lenders offer longer term fixed rates of ten years or more. It is important to be certain of how long you want to commit to your mortgage. Many lenders will charge you a penalty – known as an early repayment charge (ERC) – if you repay the mortgage before the end of the fixed rate term.
The interest on fixed rates tends to be slightly higher than variable rate mortgages due to the security of knowing that your repayments won’t change (even if the Bank of England changes interest rates).
Variable rate mortgages
The main types of variable rate mortgage are Standard Variable Rate (SVR), tracker and discount.
Each lender sets a Standard Variable Rate (SVR), which is the normal interest rate it charges homebuyers. SVR interest rates tend to be higher when compared to other types of variable mortgage. However, there isn’t usually an early repayment charge so there can be an advantage if you are looking for flexibility in the short term. When a fixed, tracker or discount deal comes to an end, you are usually transferred to your lenders SVR so this can be a good time to review your options.
Tracker variable rate mortgages are linked to a rate such as the Bank of England base rate and move in line with their changes. So, if the Bank of England puts the base rate up by 0.25%, your mortgage rate will rise by the same amount.
The other type of variable rate mortgage is a discount. Discount mortgages are linked to the lender’s standard variable rate (SVR), not the Bank of England base rate. SVRs are set by each lender and therefore can change even if there has been no change in the Bank of England rate.
Variable rate mortgages can offer the lowest initial interest rates. However, repayments are not fixed so you will need to make an allowance for the possibility of fluctuating payments when planning your monthly budget.
Some lenders combine different types of mortgages. They might combine a fix and a tracker, or offer some sort of guarantee that a variable rate loan will not rise above a certain rate.
Your home may be repossessed if you do not keep up repayments on your mortgage.
We do not charge for our advice. Instead, we simply charge a fee for arranging your mortgage of 0.5% of the mortgage amount. A typical fee is £499.
The funding for a property purchase is made up of the mortgage from the lender plus the deposit from the buyer. The deposit is the amount of money you are putting in from your own sources, whether that is your savings and investments, equity from the sale of a property or from parental assistance in the form of a cash gift. If you are using your savings and investments you must be able to evidence this through statements and plans. If you are fortunate enough to have parental assistance, a letter confirming the monetary gift will be required.
The amount of deposit you put in will determine the amount you require as a mortgage. This is expressed as a percentage called the Loan to Value (LTV) and is the amount of money you are borrowing against the value of the property. The more you have as a deposit, the less you will need to borrow of the property’s value. Typically this is grouped within certain LTV brackets such as 75%, 80%, 85%, 90% and in some instances, 95%. Generally, the lower the LTV the lower the interest rates. However, a low interest rate does not always offer the best deal for you as there may be high fees involved, or you may revert to a higher interest rate during the deal period. You should also be aware that some lenders may ask you to pay a Higher Lending Charge if the LTV is high.
Approval for a mortgage
If you are a first time buyer, or even if you have bought a property before, you need to be aware that getting approved for a mortgage requires considerable preparation and you will need to have your financial affairs in order. Keep up-to-date with loan and credit card repayments, as any missed or late payments can affect getting your mortgage agreed.
Mortgage lenders have introduced stringent checks to ensure that anyone wanting a mortgage can evidence their income in order to get approved. If you are employed, this will normally include several month’s payslips and P60s. If you are self-employed, you will normally need to provide the last few years’ accounts or SA302s.
You must be able to demonstrate if you can afford to pay the monthly instalments now and (more importantly) in the future. This affordability check will take into account a ‘Stress Test’. This means when calculating future affordability, lenders will test that affordability using a notional interest rate, which is currently around 7%. They will scrutinise your everyday living expenses, with particular attention paid to essential outgoings such and food and bills as well as other monthly commitments that can’t be altered. To do this, they will want to see your bank statements and credit card statements showing how you spend and manage your money.
Be prepared to provide at least three years of UK residential address history. If this is not possible, then you must be able to explain why. You should ensure that any documentation provided has your current residential address showing on it so that the lender knows where you live.
When you find your preferred lender, having your paperwork in order will therefore help the process. Here is a selection of items you may need to provide evidence of:
- Your income
- Your pension(s) and any investments
- Your credit rating
- Any child maintenance or other financial support you receive
- Your credit card payments
- Any other loans or overdrafts
- Utility, council tax and insurance bills
- General living costs, which may include holidays, travel, childcare, clothes and leisure activities
- The list of documents varies between lenders
There are also other significant costs that need to be taken into account when buying a property. This includes, but is not limited to: solicitor costs, valuation and survey fees, lender product fees and Stamp Duty Land Tax (SDLT).You can check how much stamp duty you would be likely to pay using our stamp duty calculator.
If you are buying a property with a mortgage secured on it there are other monthly costs that will also need to be taken into account, including insurance. Your lender will require buildings insurance to be in place as a condition of the mortgage offer. However, this is something that most buyers will want to arrange together with contents insurance to protect belongings within the property. If you purchase a leasehold property (such as a flat in a block of flats) the freeholder may have already arranged buildings insurance, in which case you may not need your own buildings policy.
If you are going to live in the property you are buying, you will also need to take into account the ongoing costs of running your home, including utility bills and council tax, which may be higher or lower that what you currently pay. You can research council tax for postcodes or areas you are considering in the London area information section of this site.
Contract and responsibility
Once you have arranged your mortgage and you have moved in, you will have entered into a contract with the lender who will expect you to pay it back in monthly instalments. If you have a repayment mortgage this will be a combination of the money borrowed and the intrest owed. While no longer widely available, some lenders may still consider interest only terms if the applicant presents a credible repayment plan. For these mortgages your monthly payments only covers the interest owed. For either type of mortgage, it will be your responsibility to ensure you honour these repayments. If due to unexpected circumstances this is not possible, then you will be at significant risk of losing your property. To avoid this happening, you should have a discussion with your adviser about what appropriate insurance would suit you. They will explain the differences between the insurances and identify the best option for you within your chosen budget. Your adviser will then tailor a suitable insurance package and this cost should be considered in your overall monthly budget.
Your home may be repossessed if you do not keep up repayments on your mortgage.
We do not charge for our advice. Instead, we simply charge a fee for arranging your mortgage of up to 0.5% of the mortgage amount. A typical fee is £499.
We source from the whole of the market with exception of bridging loans and second charge mortgages.