Obtaining a Mortgage for a Home
Introduction – in order to obtain a mortgage, it is important that first-time buyers seek out information and professional advice regarding what is a mortgage, how does the application process work, what are the logical steps and what personal and financial information will lenders expect the borrower to provide. This article provides an overview of these issues, but does not provide legal advice and is not complete or comprehensive. It is not designed to promote a company or product, instead merely provide an introduction to the issues and principles involved in obtaining mortgage. Always seek financial advice from a qualified FSA mortgage broker or lender.
Using a Mortgage Broker using a qualified mortgage broker to help you through the application process has some benefits Most will have access to whole of market mortgage products and interest rates. Sometimes, mortgage brokers have access to products which are not always available on the high street. Using a qualified mortgage broker takes the hassle and stress out of shopping around and comparing mortgages. There are many comparison websites available which provide comparisons of the features and functions of huge numbers of mortgage products, from a variety of lenders. Since the credit crunch, lending criteria has massively restricted borrowers choice. Consequently, mortgage brokers are an ideal source of the latest available options (especially for people with poor credit histories), or little time to seek out deals themselves.
A broker can advise you on the size of deposit required, in order to obtain the amount of money required to purchase the property. They will also be able to provide guidance on how much you can afford to borrow, and what size of mortgage could be obtained. In addition, they will be up to advise on which types of lenders will lend, the administration costs and fees, and assist in completing application forms.
Most major mortgage lenders usually have an existing relationship with brokers. This provides added credibility during the mortgage application process. In particular, lenders may have questions or concerns regarding a borrower’s suitability. To ask these types of questions, lenders will likely have dedicated teams set up to deal with the intermediary broker channel. Without the aid of an established mortgager broker, borrowers would usually have two reply to written enquiries from the lender (and would have little or no personal contact by telephone to speed up this part of the process). For first-time buyers, the whole process of buying their new home can seem daunting as it involves a huge number of practical, commercial and legal practices. The mortgage broker is ideally placed to provide advice and education on mortgage basics….
What is a Mortgage? – a mortgage is a form of loan that is secured against the market value of a property. The loan is paid back over a long period of time (usually between 20 and 25 years). It is a form of secured loan, in that if the borrower fails to meet the terms of the mortgage contract, the lender has the right to sell the property in order to recover their money. There are two elements to a mortgage, the capital and the interest element.
Types of Mortgage – a capital repayment mortgage is one in which the repayments are made up of both capital and interest over the term of the loan. When the agreed number of monthly repayments has been paid back by the borrower, the mortgage will be redeemed. Conversely, an interest only mortgage is one in which the capital element is never repaid. Instead, monthly repayments are calculated on the interest element of the loan only. The lender expects the borrower to repay the capital by either selling the property, or financing the loan over the course of the term, with other financial products. These may include a life assurance endowment policy. During the late 1990s, mortgages linked to endowments became controversial. This is because when stock markets fell, the value of unit linked endowments also fell. People who purchased houses using endowment linked mortgages found that the value of their endowment would not be enough to cover the capital repayment element of the mortgage. Other savings vehicles such as individual savings accounts or pension linked products are other mechanisms provided by financial institutions, to repay a mortgage at the end of it’s term.
Mortgage Interest Rates – the interest on the mortgage can be calculated in a number of different ways, depending upon the type of mortgage obtained. Some mortgage lenders calculate interest on a daily basis based on the outstanding value of the loan. This helps borrowers with capital repayment mortgages, by incrementally reducing the capital balance outstanding. Other lenders may choose to calculate interest on a monthly or even annual basis. It is important to understand what basis interest will be charged, particularly if the mortgage lenders rate does not reflect the potentiallyvolatile market rate, set by the Bank of England. The monetary policy committee has responsibility for setting the official interest rate, based on a mandate of controlling inflation at 2%. However, banks and mortgage lenders will use the Inter banking rate, as a measure of the cost of borrowing money. Hence, the rate at which they will charge their borrowers accordingly may differ from the base rate.
Interest Repayment Options – the main mortgage options available are as follows:-
- Fixed-rate mortgage – with this type of mortgage the monthly amount is fixed over a fixed period of time, at a specific interest rate. If the market rate rises over the period, it is possible for borrowers to benefit from a lower average interest rate, than the standard variable rate (SVR). Normally lenders or brokers would charge an arrangement fee and may include early repayment penalties in the contract. This provides the lender with a form of comfort and added security, if future interest rates change adversely in favour of borrowers.
- Capped Rate mortgage – with this type of mortgage, if the base rate increases over the pre-agreed capped rate, the borrower will only be charged up to the capped rate. Conversely, if rates fall, the borrower will make payments based on the lower variable rate. The borrower will pay for this privilege in the form of administration fees and lock in style terms and conditions.
- Discouted Rate Mortgages – with this type of mortgage, the lender provides a pre-agreed discount, relative to the standard variable rate over a fixed period.
- Tracker Rate Mortgages – with this type of mortgage, the borrower receives a variable rate that is linked to the inter-banking interest rate. This type of mortgage can be extremely beneficial if the base rate is very low, (at the beginning of 2009 interest rates fell to 1.5%, the lowest Bank of England rate in history)
- Flexible mortgages – these are sometimes referred to as lifestyle mortgages’. The lender allows you to over pay at any time in order to reduce the outstanding capital balance. Some lenders also provide borrowers with a’payment holidays’, if borrowers are struggling to meet payments, due to changes in their personal circumstances. Some lenders even combine it with a savings bank account, to provide a savings vehicle for borrowers to use it as a single account for debt(as well as savings). This means that any disposable income can be used to reduce the capital balance, at any one point in time.
The Mortgage Application – once you have discussed your personal circumstances with your broker, and selected the type of mortgage, values, lenders, from the options provided by your broker, it is time to make an application. Nobody enjoys filling out forms and yet this is a critical area where brokers can assist in making sure silly mistakes are avoided, and that all relevant information is completed properly.
- Arrangement Fees – mortgage lenders will usually charge a fee to process a mortgage application. The helps discourage people who may not be serious about obtaining a loan, from those who are. Most booking fees will be non-refundable, even if the sale of the property falls through, or even if the seller removes it from the market.
- Conveyancing – when you buying a property and there will be a charge levied by a licensed conveyancer or a solicitor or the mortgage lender. Their job will include noting the ownership of the property on the title deeds, including the lender’s interest. In addition, the Land Registry will need to be notified and searches undertaken to eliminate potential risks that may affect the accepted value. It is not always necessary to use the lenders conveyancer, but it is an area in which mortgage lenders have seen an opportunity to simplify the application process as well as raise additional incremental revenues. It is important to stay in touch with the conveyancer to ensure that the paperwork is completed on time and submitted accordingly. Any unforeseen risks identified during the searches should be addressed prior to the final mortgage decision.
- Credit Referencing checks – the lender will perform a detailed series of credit referencing checks on borrowers personal financial and records. This will provide guidance as to whether they are suitable and are likely to be able to repay the loan. Lenders will require proof of address, employment details, copies of utility bills, bank statements, salary payslips and other financial records. They do this to build up a profile of the borrower. County court judgements, bankruptcies, and even missing the odd credit card bill or utility bill will throw up an automatic black mark against the borrower. Consequently, lenders may choose to reject an application or insist on a larger deposit, to offset the potential perceived risk.
- Building Insurance – lenders will make it a condition that the borrower takes out an appropriate buildings insurance policy, to cover the rebuilding cost and the mortgage debt. This will not cover the contents of the property. Homeowners can usually obtain both buildings and contents cover combined from most major insurers, when they take out their new UK home insurance policy