Mortgages
On the surface, it seems obvious to find a property, then apply for a mortgage. However It often makes more sense to seek approval for a mortgage and go through the preliminary financial checks before you even start looking at properties to buy. If you get a positive response from lenders, it makes the process of buying a property much easier.
Mortgages are basically loans from a bank, building society or other financial institution, which is paid back (with interest) over a number of years.The property itself is used as security against the loan. This is why the lender insists, at your cost (but sometimes at their own cost) that a qualified surveyor provides a valuation to confirm that the property is, for mortgage purposes, at least equal to the amount being paid.Also because the property is the security for the loan, your home is at risk if you do not keep up the repayments.
In the event of default, and after providing due notice, the mortgage lender will have the right to repossess your home, evict you and sell it to try to recover the amount loaned.In order to secure a mortgage, your proposed lender will have to check out your ability to repay the loan. They do this by taking references to confirm the amount of income you receive from your employers, by making credit checks to confirm you are creditworthy and also ensuring you have no County Court Judgements (CCJs) against you, for example, for default of loan repayment in the past.
Depending on your age, most lenders are prepared to offer you a loan up to 3 - 4 times your regular yearly income. This is your income net of any other loan repayments or regular payments your have to make. If you're married, engaged or living with your partner, it may be possible to include one year of your partner's annual income, with some lenders being more generous by allowing you 2.5 times your joint net income. Some banks / building societies have disregarded the concept of multiples, and are prepared to lend on the basis of ability to pay meaning that they will lend if they are content that you have sufficient disposable income.
In addition to the level of your income versus the value of the loan you are seeking, there are a number of factors that need to be considered:
- The type of property you are looking to buy - for example, leasehold and converted properties can make a difference to the percentage loan available.
- How much cash you have for a deposit and therefore, given the value of the property you want to buy, the percentage loan you will need.
- Given the percentage loan, whether a mortgage indemnity guarantee is required (an extra payment often demanded if you are borrowing over 75% of the value of the property).
- What your employment status is, full or part time and for how long, self-employed or on contract and the certainty of your income from this.
- Any other loans or liabilities you have, the amount outstanding and the value of monthly repayments.The entire process of gaining a formal mortgage offer typically takes about one month.
Types of Mortgage
Repayment Mortgages
Repayment mortgages are where both the capital (the amount loaned) plus interest against it, is paid back over a set number of years, between 20 or 30 years, but it could be less.
Each month you would repay part capital and part-interest. At the outset the proportion of interest in this repayment will be higher than in later years. As the repayment mortgages reduce, and the amount of capital borrowed steadily decreases over the years, the amount of interest payable also decreases. Therefore, in later years, you will be repaying increasing amounts of capital and reducing amounts of interest.
It is usual for the lender to take out a life insurance policy, to cover the repayment of the capital should you die before the loan is repaid. This would probably be a term policy, co-terminating with the final repayment of capital on the loan.
Interest Only Mortgages
With this, (and Pension Mortgages), the capital is not repaid until the end of the mortgage period. The monthly repayments are the interest element only.
In addition to the interest, you also take out a life assurance policy, and an investment plan these tended to be endowments, but today it is more likely to be an ISA or Unit Trust. Over the years these funds should attract capital growth, and by the end of the mortgage period the value of the investment plan is used to repay the capital borrowed.
A Low Start Capital Repayment option, usually only available to first time buyers, is essentially where, for a given period of a few years, interest-only is repaid. Then gradually an increasing capital element is repaid. Quite often the initial lower repayments inevitably means higher payments later on.
Depending upon your instruction, the skill of the investment managers and the performance of the fund, the final lump sum could be more or less than the loan. If it appears the lump sum will not cover the loan you will be required to increase the level of contributions to your investment plan. Equally, you will receive any surplus left from the plan after paying off your mortgage.
Pension Mortgages
A pension mortgage is similar to an ISA-backed Interest-Only Mortgage, in that interest only is paid off during the mortgage period. The difference is that the lump sum generated by your pension scheme on your retirement is used to pay off the capital.
Rather than then paying premiums to an investment plan, you make contributions to your pension scheme sufficient to ensure both the repayment of the capital element and a wealthy retirement. You will also need to have a separate life insurance policy to cover the capital sum, should you die before retiring.
Pension Mortgages are now used infrequently the downside to a pension mortgage, is that you can only take 25% of the personal pension fund as a tax-free cash lump sum. Therefore, if you have a mortgage of say 100,000, you need 400,000 in the fund at retirement. Once you have paid off the mortgage all you have left is the income. Obviously, the funding required to make 400,000 is much greater than funding for 100,000 by way of PEP or endowment.
Offset Mortgages
Offset mortgages are where the interest on your mortgage is reduced by the funds in both your savings accounts and your current accounts. The more you have in your savings account, the less interest you pay on your mortgage, which helps you to repay your mortgage faster and more cheaply in the long term. Your part of the deal is that you don't receive any interest on your savings or your current account. The main advantage of this is that with base rates low at the moment, savings rates are equally low. Instead of generating small amounts of interest, your savings work to cut down your mortgage payments and repay your mortgage faster. In fact, Intelligent Finance claim that there are some customers who have such a high level of savings that they do not pay any interest at all on their mortgage borrowings.
There's more. All your other debts, such as your credit cards or your personal loans are also linked into the nest of products, and this allows you to repay all of your debts at the mortgage rate, which is likely to be a lot lower than your pay rate on those borrowings. A further advantage is that the credit cards and loans remain unsecured borrowings even though they are paid off at the mortgage rate, so if you can't keep up the repayments on those your home is not at risk.
But do not forget that should you be consolidating your debt into your offset mortgage what you are actually doing is turning short-term debts into long-term debts. These types of debts should be paid off sooner rather than later, because they will cost you more over the long run. Effectively, it's like dumping your savings into your mortgage account in order to pay it off, without losing the easy access to the funds. By 2005, it is expected that offset mortgages will have won 25% of the mortgage market. The people for whom offset mortgages are often suitable are people with volatile incomes, such as the self-employed, or people often paid in large commissions or bonuses. People with significant amounts of liquid savings will also find offset mortgages useful.
Remortgages
In the old days, remortgages were was the last resort of the financially desperate, commonly associated with bankruptcy. Nowadays, it simply means that you are switching your mortgage onto a new deal and probably a new mortgage lender.
Today, almost half of all mortgage borrowers are paying the standard variable rate of their lender, which will never be their best deal. Yet, only 12% of customers re-mortgaged from 1996 to 2001, and yet 30% of customers switched home insurance and 53% of people switched car insurance.
The savings you could make re-mortgaging are even greater than what you could save by changing insurers. Yes, you could incur redemption penalties, usually because you've just come off a discounted or fixed rate deal. But, even if you have a redemption penalty to pay, it may add up in your favour anyway.
People who don't remortgage are often scared off by the thought of the work they'd have to do and all the form filling. They suffer from apathy, but its misplaced, because re-mortgaging is easier than ever, especially with lenders trying their hardest to poach customers from each other.
So, how does it work? Well, the best way to find out what other deals there are on the market is to go to an independent mortgage broker. Either call them, see them or look on their website. They'll usually have a comparison service where you can tell them what mortgage you have, what is left on your mortgage, and they'll tell you what you can save when changing to a different deal.
Once you have chosen your new mortgage, you can start the application process. You can do this through the broker or by approaching the mortgage company yourself. In some ways, you then have to jump through the same hoops as when taking out your first mortgage. The new lender will need to value your home, your solicitor will have to do some conveyancing work and you will need to prove your income again.
You will need to decide how much to remortgage for. You can remortgage the exact amount left on your mortgage, or you could borrow more, to take advantage of the equity in your home. Most lenders will allow you to borrow up to a certain amount, and this is a cheap way of borrowing money.
NOTE: This document is intended to provide a brief overview of the subject. It should not be read as a recommendation to use any particular product, as it does not take into account individual circumstances and attitudes.
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