A mortgage is a sum of money borrowed from a bank or building society in order to purchase a property. The money is paid back to the Lender over a fixed period of time together with accrued interest.
You will find two main types of mortgage, these are:
- Repayment (Capital and Interest mortgage)
- Interest only
With a repayment mortgage your monthly payments consist of both the capital amount borrowed together with accrued interest. Your lender will keep you advised about how much you have repaid.
With this type of mortgage you only pay the interest accrued on the mortgage each month. The main fact about this method is that the capital balance of the mortgage stays the same during the mortgage term; only the interest is paid to the Lender each month. The borrower must have an acceptable plan to repay the loan at the end of the term. This could be with a savings or investment plan, pension or investment portfolio or sale of the mortgaged (or other) property.
With a Fixed Rate Mortgage the amount you repay to the Lender each month stays the same for an agreed period. When applying for the mortgage you may be offered a Fixed Rate from 1-25 years. Typically these are for 2 or 5 years but sometimes other terms are available
A Capped Rate Mortgage is similar to a fixed rate except when the variable rate drops below the capped rate, should this happen the borrower would make payments based on the lower variable rate.
This option is linked to the lenders Variable Rate. The Lender may offer you a discount to their Variable Rate for a specified period of time. With this option there is no certainty what your future payments could be.
This is a variable mortgage that is either above or below the Bank of England’s Base Rate by a set percentage within a set period.
The Lender may offer you a cash incentive once the mortgage has been taken out.
Some Lenders expect you to stay with them for a minimum period of time. If your Lender has offered you a special scheme (Fixed Rate, Discounted, Cashback mortgage) they may charge you an Early Redemption Charge (ERC) if you decide to repay the loan prior to the scheme ending. It is possible to find Lenders and schemes with No Early Redemption Charges.
Some Lenders may continue to Charge an Early Redemption Penalty after your Fixed, Discounted or Cashback scheme has ended. It is possible to find Lenders and Schemes that do not have Overhanging Penalties.
Having a deposit toward the purchase of your home is preferable but it is possible to borrow 100% of the purchase price. Ideally a deposit of at least 5% is required (but 10% or 15% better).
Having a deposit helps in several ways. the bigger the deposit the more choice of lenders wishing to assist and an increased number of mortgage schemes to choose from.
Lenders will want a valuation to be carried out on the property you wish to purchase, the cost of this report is often covered by the lender but is sometimes charged to you. In addition you may be asked to pay either a Booking or Arrangement fee, these fees are specific to a scheme being offered by the lender.
Finally, (although this is not common in today’s market), you may be required to pay for a Mortgage Indemnity Guarantee (MIG), this is an Indemnity Insurance taken out by the lender; some lenders will only lend you money over 75% of the property value if a MIG is taken out. You should be aware that a MIG is an assurance for the Lender not the borrower.
When buying a home you would usually use a Solicitor to carry out the legal work, the Solicitor will work on your behalf and for the Lender; you are expected to pay for this work.
If you are buying a property in the UK you will be charged a tax called Stamp Duty Land Tax which is charged at different rates depending on your circumstances and the purchase price.
There are some exceptions and different thresholds (e.g. For first Time Buyers) but we recommend that you seek professional advice.
You can use the Government Stamp Duty Land Tax Calculator as a guide
Other costs may include a more detailed survey of the property you are buying and of course your moving costs.
The amount you can borrow will depend on several factors. The lender will decide how much they can lend you based on factors such as: your income, existing credit commitments and your deposit. If you are looking to buy jointly this can increase the amount you are able to borrow. Each lender will have different criteria for the maximum they will lend but as a rough guide you could borrow between 4 and 6 x the joint income dependent on your level of income.
Use our borrowing calculator to find out how much you could borrow based on your household income.
If you are offered the opportunity to buy either your Council home or Housing Association property you could be eligible for mortgage finance. In most cases you would be offered a discount against the open market value of your home, this results in the Right to Buy value. Lenders will often agree to lend you 100% of the Right-to-Buy value. In most cases you would still have to pay the usual fee’s associated in buying a home, including Stamp Duty.
Shared ownership schemes vary depending on where you live. In most cases you buy a share of the property with the help of a mortgage; the Housing Association will buy the other share and will charge you rent on a monthly basis.
This will depend on the extent of your credit problems, if you are still declared bankrupt the answer would be no. If you have less serious credit problems such as Defaults or County Court Judgements you may still be able to get mortgage finance. To be sure about your credit history you should order a copy of your credit report.
A copy of your credit report – can be obtained by signing up to a free 7 day trial with https://www.checkmyfile.com (Can be cancelled at any point. Costs £14.99/m if not cancelled within 7 days)
It is important to take independent advice from an Adviser who is regulated by The Financial Conduct Authority (FCA).