What is a mortgage?
A Mortgage is a type of loan used to finance a property purchase either as a residential home or an investment property. They are usually available to people with a stable source of income and a reasonable credit score.
For those whose income or credit score do not meet a mortgage lender’s requirements, a mortgage advisor could still find a solution to financing a property purchase.
What responsibilities do I have?
Mortgages are a secured loan which means that the property is the collateral. This means if you stop making the payments the loan provider may take possession of your home.
When you take out a mortgage you agree to take it out over a number of years. Traditionally the mortgage term is 25 years, although you could have a term of up to 40 years, or even a lifetime mortgage. A mortgage broker is best suited to help you determine what term is right for you.
When applying for a mortgage, you agree to repay the loan (including interest) and you don’t fully own your home until it is completely paid off. You can pay on a capital and interest basis, or interest only if you have the mechanism to pay the loan off at the end of the term.
Your lender will assess your ability to repay the loan and the risk to them in lending the associated amount based on your current commitments. The deposit you have to put towards the mortgage will also be taken into consideration at this stage.
What is an interest rate?
All mortgages require you to pay interest to the lender throughout your term, this is sometimes referred to as the lender’s ‘charge’. The interest rate is dependent on the current market conditions and the amount of risk to the lender. If you appear as a smaller risk to a lender (for example, approaching them with a larger deposit) your interest rate will be lower than those who are considered high risk.
There are two main types of interest rate that can be applied to a mortgage:
A fixed rate is usually set over two, three or five years. This means your interest rate will stay the same until the end of your fixed rate period. Once the fixed rate period has ended, you will pay the base rate.
Variable rates go up and down with the rest of the market. Your interest rate may go down over time, but it’s just as likely to go up, meaning you will pay more money or less money depending on the state of the market at the time of your payments.
What is the base rate?
The base rate is the figure which interest rates are based upon. It will go up and down, much like a variable interest rate, and is affected by the wider financial services industry, national events, world events and political actions.
How do I get a mortgage?
Finding and applying for a mortgage which is appropriate to your circumstances can be difficult. This is why most people will choose to use a mortgage broker. The broker could be a representative of your bank, a partner of your estate agent, or independent (like us). We highly recommend speaking with an independent mortgage advisor (click here to read why), so that once you have found a property, your advisor can take you through the process of finding a deal. This process is usually:
- Find a lender
- Get an agreement in principle (which involves a credit score and affordability check)
- Make an offer
- Apply for a mortgage & instruct a Solicitor
- The lender requests a valuation
- Your solicitor completes the legal work
- Exchange and pay a deposit
- Complete the purchase
What does this mean for me?
The important thing to note is that regardless of how you choose to get a mortgage, you must take time to understand the process. If dealing with an estate agent or your bank, please ask them for advice first. If speaking to an advisor (like us), you will be walked through the entire process from start to finish. We even do a lot of the paperwork for you!
Sometimes a lender declines an application, there is still scope to look elsewhere and make alternative arrangements, saving you time by not having to start right back at the beginning. This is an area where an advisor will be able to take away much of the stress of starting by starting the process again on your behalf.
So, what do I do now?
Before you can get a mortgage, you first need to know how much money you can borrow from a lender. Once again, your bank or a mortgage advisor will be able to help with this, although banks do not have access to the whole range of mortgages available to you.
Once you have determined how much you can borrow, it’s time to start the exciting stuff and look for your new home! When you’ve found it, check back in with your advisor and get the mortgage process started.
Good luck in your search, and we can’t wait to speak to you!
About the Author
Expert administrator, the voice on the end of the phone, friendliest of faces in our Wymondham office and writer for our blog. Sharen Watts is one of the newest members of the team, having started at the end of 2020.