Mortgages

What is a Mortgage?

A mortgage is a loan you take out to buy property. Most banks and building societies offer mortgages, as well as specialist mortgage lending companies. If you change lenders but don’t move home it’s referred to as a ‘remortgage’.

You can get a mortgage direct from the lender (banks, building societies and specialist mortgage lenders), or you can use a mortgage broker. You can buy based on ‘information’ only or get advice and recommendation on a mortgage that suits your particular needs.

Repayment Methods
The two main ways to repay your mortgage are ‘repayment’ and ‘interest only’. With a repayment mortgage you make monthly repayments for an agreed period (the ‘term’) until you’ve paid back the loan and the interest.
With an interest only mortgage you make monthly repayments for an agreed period but these will only cover the interest on your loan. You’ll normally also have to pay into another savings or investment plan that’ll hopefully pay off the loan at the end of the term.

Features
Some mortgages offer you options to vary your monthly payments, or to combine your mortgage account with savings and other income – these are called flexible, current account and 'offset' mortgages.

Interest Rates
You’ll also find a range of interest rates to choose from. For example, 'variable' and 'tracker' rates change in line with Bank of England rates, ‘fixed’ rates are fixed for a set number of years, and ‘capped’ rates have a variable interest rate with a ceiling so your payments won't go above a set amount.

Insurance
A lender may require you to take out life insurance to pay off your mortgage should you die. You can also get insurance to protect your income or just your mortgage payments if you become ill or disabled, or lose your job.

The FSA website ‘The World of Mortgages Laid Bare’ is a great place to find out more about mortgages, whether you are a first time buyer or shopping around for your next mortgage.

Click here to visit the FSA website

Types of Mortgage

When you choose a mortgage, you’ll need to think about the repayment method, interest rate deals and special features of some mortgages. The best one for you will depend on your circumstances – so it’s important to understand your options and shop around.

Repayment Methods
There are the two main ways you can pay off your mortgage. These are called ‘repayment’ or ‘interest only’.

Repayment mortgage:
With a repayment mortgage you make monthly repayments for an agreed period (the ‘term’) until you’ve paid back the loan and the interest.

Interest only mortgage:
With an interest only mortgage you make monthly repayments for an agreed period but this will only cover the interest on your loan. You’ll normally also have to pay into another savings or investment plan that’ll hopefully pay off the loan at the end of the term.

Interest Rates
As well as deciding on your repayment method, you’ll need to look at the interest rate deals on offer. Here we provide a quick overview. For more details follow the Financial Services Authority links below.

Standard variable rate:
With a variable rate mortgage your payments go up or down with the lender’s standard interest rate. This often changes following Bank of England base rate changes.

Standard variable rate with cashback:
With these deals you get a cash lump sum as well as the loan when you take out the mortgage. You’re usually tied into the variable rate for a set period.

Discounted rate:
You pay a lower interest rate to begin with then move to another rate (usually the lender’s standard variable rate) after a set period.

Tracker:
Tracker rates are linked to the Bank of England rate or some other 'base rate'. This means they’ll always go up or down in line with changes to the base rate.

Fixed rate:
You pay a fixed rate of interest for a set period, so you know exactly what you’ll be paying each month during that time. When the fixed period ends, you’ll usually move to the lender’s standard variable rate. There are usually penalties if you pull out early.

Capped or cap and collar:
With a capped rate you pay a variable interest rate, but there’s a ceiling so your payments won’t go above a certain amount for a set period. Some deals include a ‘collar’ too - this is the lowest rate you’ll get. If interest rates fall below the collar, you’ll lose out.

Finding the right one for you
Suitability of different deals will depend on your personal circumstances and any tie-ins or penalties that may be attached. For more information on the pros and of different interest rate deals visit the Financial Services Authority (FSA) website.

You’ll also find information on how the ‘APR’ (annual percentage rate), which is always quoted alongside interest rates, can help you compare deals.

Flexible, Current Account and Offset Mortgages
Flexible, current account and offset mortgages give you more control to vary your monthly payments. They can be used with repayment or interest only mortgages. For example you can:

pay less one month and more the next
make lump sum repayments (and sometimes draw these back)
take a ‘payment holiday’
pay off your mortgage early

Choosing a Mortgage

With hundreds of mortgage deals on the market, it’s hard to know where to start. You can use a mortgage broker, or shop around yourself and go direct to the lender. Whatever you decide, it’s important to understand how mortgages are regulated and sold.

Using a Broker
Mortgage brokers must be authorised by the FSA (Financial Services Authority) or must be agents for authorised firms. This means they have to follow FSA rules when dealing with you.

For example they have to give you certain documents with the ‘Keyfacts’ sign. Keyfacts documents are set out in a standard format to help you compare different services and products with each other. The two mortgage keyfacts documents are: ‘Keyfacts about our mortgage services’ and ‘Keyfacts about this mortgage’ (sometimes called a key facts illustration or KFI).

Check your advisor is authorised
The FSA is the UK's financial watchdog set up by government to regulate financial services and protect your rights. Its standards require firms to be competent, financially sound and to treat their customers fairly.

Provided you deal with an authorised firm or the agent of an authorised firm, you will have access to complaints and compensation arrangements. To check whether a firm is authorised you can use the FSA’s Firm Check Service.

Shop around for the best deal
Instead of using a broker or financial adviser, you can shop around and arrange a mortgage directly with a building society, bank or specialist mortgage company. A useful starting point might be to compare what’s on offer in the mortgage tables in newspapers, on the internet and in specialist magazines.
Of course lenders will only recommend from their own mortgage range – but may have several you can choose from. You’ll still receive the Keyfacts documents described above.

CAT standard mortgages to help you compare
The government ‘CAT standard’ is given to mortgages that it considers offer clear and fair terms. A ‘CAT standard’ mortgage won’t necessarily be the best one for you, but you can use it to compare against other deals.

Mortgage ‘Advice’ Versus Mortgage ‘Information’
If you get written information about mortgage products, it doesn’t mean you’ve had advice. Getting advice means that the adviser looks at your particular circumstances and recommends a mortgage that’s suitable for you. Buying with advice puts you in a stronger position to complain and get compensation if you later discover that the mortgage is unsuitable.

If you take out a mortgage over the internet, by phone or by post you might not have the option to get advice. Consider whether you need to get advice before you buy.
The keyfacts document ‘About our mortgage services’ will tell you whether you’re being offered information or advice.

Mortgage Amount

When you take out a mortgage, lenders look at a number of things to work out how much you can borrow. These include your earnings and outgoings, the property value and your credit history. Whatever you borrow, you need to be sure you can afford the repayments.

Your earnings
Lenders will offer to lend you an amount based on your earnings. They will normally want to see proof of your income and will also look at your regular outgoings.

What can you afford?
It’s important to give your lender as much detail as you can about your earnings and outgoings so that you’re offered a mortgage you can afford. You also need to remember to budget for the one-off costs of buying a property – such as administration and solicitor fees and Stamp Duty.

The FSA website has a range of easy-to-use calculators to help you work out what you can afford and the likely monthly cost of a mortgage.

Your Property

The property value:
Your lender will arrange a valuation to check how much the property's worth. Most lenders will offer up to 90 or even 95 per cent of the valuation if they think you can afford it. This is called 'loan to value' or LTV rate. (If you have high enough earnings or a guarantor they may offer 100 per cent or even more. But interest rates may be higher).

Special types of property:
Some lenders limit the amount they'll lend on certain types of property, for example timber-framed. It's worth shopping around to compare deals.

Your Credit History
Your lender will check your credit history and ask previous lenders or landlords for references. If your record shows you’ve had difficulty with loans or rent payments in the past, it may affect how much you can borrow.

Don’t be put off if a lender refuses you a mortgage or offers you an expensive deal - it’s still worth shopping around.

Self-certification mortgages
If you can't prove your income (perhaps because you're self-employed and don't have accounts going back far enough), you may be able to get a 'self-certification' mortgage. You can learn more about these types of mortgage on the FSA website.

The Mortgage Application Process

Once you know roughly how much you want to borrow and have identified your preferred lender, there are key steps to follow to get a mortgage. These are the same whether you’re borrowing for the first time or changing lender.

Key steps in the mortgage application process
If you understand the application process you can be ready with everything the lender needs. This can help speed up your mortgage application.

1. Get a decision in principle

You can get a ‘decision in principle’ (DIP) from a lender even before you’ve chosen your final property. This shows whether they’re prepared to lend to you and how much. The decision’s based on information you give about:

your income
your employment status
the sort of property you want to buy

Most lenders can give you a decision in principle online as well as through the post. (DIPs trigger a credit check, which show on your credit record. Too many may affect your chances of getting a mortgage so only ask for one when you’ve settled on your lender.)

Never be tempted to overstate your income. You could end up with a mortgage your can’t afford.

2. Choose a solicitor or licensed conveyancer

You’ll need someone to carry out the legal side of things – local searches, drawing up contracts and other legal paperwork. You could use a conveyancing solicitor or a licensed conveyancer - or even do part of it yourself (but make sure you know exactly what you’re taking on). Some lenders have preferred solicitors, or you may be able to get a personal recommendation. You can also search online or in the phone book. (The lender will insist on a professional conveyancer to carry out the valuation.)

3. Make a full mortgage application

When you’ve decided to buy a property, you make a full mortgage application by completing and returning the lender’s form (you can sometimes do this over the phone). They’ll usually also want to see evidence of your income, your identity, your current address and (where relevant) a previous lender or landlord’s reference. They may also want a non-refundable fee to cover their costs and perhaps to pay for a valuation.

If you can’t prove you’ve got a regular income (maybe because you’re self-employed and don’t have enough accounts) you may be able to get a ‘self-certification’ mortgage. This requires a larger deposit as you often won’t be able to borrow more than 75 to 85 per cent of the property’s value. The lender may still want some evidence of your ability to pay.

4. Reference checks

Your lender may get written references from your employer and bank (or accountant if you’re self-employed) and your current lender or landlord. They’ll also run credit checks to make sure you’ve paid off your debts in the past.

5. Property valuation

Your lender will usually have the property valued to make sure it’s worth the price you’ve agreed to pay. If it’s not, it could affect how much they’ll lend you. It’s advisable to get your own survey done too – or to ‘upgrade’ the lender’s valuation survey to a more detailed one.

6. The mortgage offer

If the lender is happy with the valuation and references, you’ll be made a formal offer - usually sent to you and your solicitor. Once you (or your solicitor on your behalf) have signed and returned the offer documents, your lender is committed to providing the money. The mortgage offer usually requires you to take out buildings insurance, in case something happens to the property before you’ve paid off the mortgage.

7. Exchange and completion

If you’re buying, once you’ve got a formal mortgage offer, your solicitor can agree a date for ‘exchanging contracts’ with the seller’s solicitor. At this time you usually pay a percentage of the purchase price as a non-refundable deposit and commit to paying the rest on the agreed completion date (when the property becomes yours).

Applying for a mortgage online

You may be able to apply for your mortgage and track its progress online. If you got your decision in principle online, the main application form will usually have your key details filled in already.

Applying for a mortgage in Scotland

In Scotland, you arrange your mortgage before you make an offer on a property. Please click here for further information.