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Mortgages

What is a mortgage?

The Financial Services Authority (FSA) defines a mortgage as follows:

“A ‘mortgage’ is a loan secured against your home. ‘Secured’ means that if you do not keep up the payments, the lender can sell your home to get its money back”.

A mortgage is a type of loan most often used to buy a property, secured against the property you are purchasing. A standard mortgage is designed so that the mortgage and relevant interest repayments are paid back to the lender in monthly instalments, over a period of 25 years.

Another important aspect the lender will take into account is how much you are willing and able to pay as a deposit (if they are not going to cover the entire cost of the property). If the lender covers more than 75% of the property price, you might have to pay an insurance premium called “Mortgage Indemnity Guarantee”.

If at the moment you are looking for a rough guide to how much you could borrow, visit our mortgage calculator. Many banks and buildings societies also have mortgage calculators on their websites.

What costs are involved in getting a mortgage?

Mortgage broker fee

Brokers offer advice on the best mortgage for each individual. They will either charge a fee or alternatively they will receive commission from lenders.

Mortgage booking fee

Usually a charge of between £100 and £500, paid to reserve mortgage funds.

Valuation fee

Because a mortgage is a loan using the home as security, the property must be valued before the lender agrees to the loan. When purchasing the property you may have already commissioned a chartered surveyor to conduct a survey of the property.

Higher lending charge

The cost of this will depend on your loan to value ratio. If the value of your home easily covers your mortgage (for example if your LTV is less than 70%), this should not be necessary. For higher risk borrowers it represents payments to the bank for insurance cover in the event you do not pay the mortgage and they repossess your home and sell it at a loss.

Fee to insure your property

Whilst lenders may offer home insurance, this is not always the most cost effective solution.

Telegraphic transfer

This is a charge payable to your solicitor if you are arranging to transfer the funds electronically on the same day. Expect to pay approximately £50.

Re-inspection fee

You may see a charge of between £50 and £100 if the lender wishes to re-inspect the property after the original valuation. This is usually required if they lender needs to confirm that you have made agreed repairs.

Early repayment charge

Dependent on the terms and conditions of the mortgage, you may be charged a fee if you wish to repay your mortgage early. Repayment fees. You may need to pay your lender a sum of approximately £150 in addition to the early repayment charge as a booking fee for the repayment.

Is there a limit on how much I can borrow?

Yes. The FSA state that the typical borrowing limit is approximately 3 and a half times your annual salary (before tax). If you are buying a home with a partner or a friend, i.e. a second income, your borrowing limit is likely to increase by one times the second earners income. Alternatively, you may be able to borrow 2.5 times your combined earnings. Outgoings as well as income will also be taken into account, i.e. if you have significant loan repayments your borrowing capacity may be reduced.

It is important to establish how much you can borrow before you begin looking for a property, as your mortgage options largely dictate what type of price range you have. It is wise to reserve some funds for the additional costs included in buying a home, from insurance to décor.

The following types of institution all offer mortgages: a bank or building society, a finance house, a specialised mortgage company, or an insurance company.

If you are buying a new home from a large building company it is also possible that the building company can arrange a mortgage for you.

What type of mortgage is best for me?

Once an offer has been accepted on the house, it is time to complete the mortgage application process and decide on what type of mortgage best meets your needs.

Your lender will usually be happy to provide you with details on the range of different mortgages they offer. The following is an overview of the most common mortgage types and options.

There are several possible mortgage options. Which one you choose depends solely on your personal preference:

  • Repayment – Capital and interest are paid back on a monthly basis, thus increasing your stake in your property over time. This option guarantees that the mortgage will be paid off.
  • Interest Only – Interest is paid on a monthly basis with no repayment of the loan’s capital. In order to cover the actual loan, you should pay into an alternative investment product.
  • Buy to Let Mortgages- A buy to let mortgage is one intended for a property you are intending to rent out to a third party.

How are interest charges calculated?

Additionally, there are several ways in which you can decide how much risk you wish to be exposed to regarding interest rate movements.

  • Tracker – The interest rate moves up and down with the Bank of England base rate.
  • Fixed – The interest rate remains the same, independently of base rate variations. This makes sense for big loans, where rate rises could hurt you quite badly.
  • Capped – The interest rate can fluctuate, but will not exceed a certain value during a certain period of time. Some have both a ceiling and a floor between which they can fluctuate (“cap and collar mortgage”).
  • Discount – The interest rate is lower than the current standard rate, but only for a certain, fixed period of time (e.g. 2 years). After that the rate becomes variable.
  • Standard Variable – The standard variable rate is the mortgage bank’s standard rate of interest which will theoretically vary with the Bank of England’s base rate.

Since the list above is not comprehensive you should consult a mortgage adviser to discuss all the different mortgage options and types available.

What is the role of a mortgage advisor?

The job of a mortgage advisor is to assess the financial situation of their client. They can then use their specialist knowledge of the market to recommend the most suitable mortgage based on your situation. They should also explain the rules of repayment, and mortgage protection.

Your broker or lender is responsible for providing you with a key facts document.

What is the role of a broker?

A broker is somebody who acts as an agent on behalf of the lender to find customers for their borrowing services. They will either charge a fee for their service or receive commission from the lender. They may negotiate the deal on behalf of the borrower. However, they are not responsible for the origination or service of the mortgage.

What is the role of the lender?

The job of a mortgage advisor is to assess the financial situation of their client. They can then use their specialist knowledge of the market to recommend the most suitable mortgage based on your situation. They should also explain the rules of repayment, and mortgage protection.

Your broker or lender is responsible for providing you with a key facts document.

Who monitors practice in the mortgage industry?

The mortgage business is regulated by the Financial Services Authority. They do this through the ‘Mortgage Conduct of Business Regulations’.

Please note that the Mortgage Conduct of Business Regulations is not the same as The Mortgage Code.

The Council of Mortgage Lenders explained the mortgage code as follows:

“The Mortgage Code was introduced for mortgage lenders in July 1997. It was extended to mortgage intermediaries in April 1998 and remained in force until 30 October 2004, when it was superseded by the Financial Services Authority (FSA)’s Mortgage Conduct of Business (MCOB) Rules. The Mortgage Code was monitored and enforced by the Mortgage Code Compliance Board (MCCB), an independent body, separate from the CML, which kept a register of lenders and intermediaries who agreed to abide by the Code.”