Frequently Asked Questions about Mortgages

What is a Mortgage?

In basic terms, you take out a mortgage from a mortgage lender as a long term loan to make payments on a property.

The mortgage lender has the option of taking possession of the property and selling it on if the mortgage repayments aren’t made. This is so that the lender doesn’t lose money as they would be making it back from the property sale.
Any time you take out a mortgage, the loan is then split into two aspects. One of which is the interest , which is what the lender charges for lending the money. The other is the capital, which is the actual amount of money used to purchase the property.

How Much Can You Borrow?

The actual amount you’re eligible to borrow will be determined by the cost of the property you wish to purchase and by how much money you make.

Depending on the property’s value

The majority of mortgage lenders will offer a loan of up to 75% of the property’s value. That’s not to say that a lot won’t go up to 90% or even 95%, because there is quite a few that will. There are even some lenders that will go to 100% – however more often than not, you will be made to pay over the odds for this and will most likely be made to purchase mortgage indemnity insurance in addition.

There are some that will, in rare cases, lend over the 100% mark, although there will be circumstantial rules that must apply.

Depending on how much you earn

There is a general rule of thumb that you can borrow around three and a half times the amount you earn annually. The actual figures differ between different mortgage lenders although there are some typical variables to expect:

Couple 1: Up to two and a half times the annual income of both people

Couple 2: Up to three and a half times what the greater income is of the two and one year of the remaining income.

Some lenders will now use more sophisticated credit scoring methods whereby they compare your income with your outgoings. The reason for this is that each prospective borrower will have unique circumstances.
For example, a single person would generally be able to borrow more than a person with two teenage children and a lot of outgoings on the same salary.

A little secret: If you have a good credit history and a regular income then you are quite likely to be offered the finance relatively easily.

Despite the impression you may be given that you’ve got to jump through the hoops, the competition between lenders is fierce and they want your business. To secure the loan though you’ll still be best off playing the game by acting duly grateful though.

The more important question is perhaps “how much can you afford?” Lenders will determine this by checking your average monthly outgoings. For example, any debts you may have as well as the household bills. Some of the lenders will request that you complete a thorough questionnaire by hand, phone or online.

It will always help first time buyers if they can prove that they’ve been paying their mortgage regularly. This is aided further if the regular amounts they have been paying are similar to the intended mortgage amount.

Depending on the area you want to buy in, sometimes lenders’ may refuse a loan if they feel the property isn’t expensive enough for the area. This is more likely to be the opposite – where a property is seen as too expensive.

Read More in our others section about how much you can borrow with a mortgage

What is Remortgaging?

It’s important to understand that remortgaging isn’t the process of purchases a new property but rather switching your mortgage to another provider that offers lower repayments, saving you money. If your home has risen in value, this is particularly relevant.

If you want to read more about this now, see Remortgaging

What is Conveyancing?

Conveyancing refers to the legal work required when buying or selling a property. Generally, it is done by either a licensed conveyancer or a solicitor.

It’s important to have either a conveyancer or a solicitor already lined up because as a buyer, you will need this for the sellers. As soon as your offer is accepted, the sellers, vendors or Estate Agents will immediately contact them.

If you want to read more about this now, click here.

 

 

How do you prove your income?

If you’re employed: The lender will ask for written evidence e.g. payslips and/or your P60 for the past two years.

They’ll also probably write to your employer asking for confirmation.

Some lenders may accept income that’s not guaranteed e.g. commission, bonuses etc., though this would be exceptional.

If you’re self-employed: Traditionally this was more difficult and as a result there are lenders who specialise in the self-employed.

However nowadays any lender should be interested in you. You would need to show three years audited accounts. If you haven’t been in business long enough then the lender should accept a letter of confirmation from your accountant

To read more on mortagages for the self employed click here

How long are mortgages usually for?

The answer is usually 25 years. But this is only because that was the traditional length.

You can get a mortgage for any length. 15 or 20 year mortgages are fairly common.

The reason why people would want a shorter mortgage term is that – despite seeming to be more expensive, i.e. the monthly payments are higher – at the end of the day you’d be paying a lot less interest over the length of the mortgage.

 

How to choose the best type of mortgage

One of the most difficult aspects of organising a mortgage is sorting through the four thousand mortgage packages currently available. However it’s not as bad as it sounds because these are really just variations on a few types of mortgages. To simplify things, we suggest you start by deciding which type of mortgage you want.

Perhaps it may be easier to start by deciding which types of mortgages you definitely don’t want. This will help you draw up a shortlist of mortgages that you will consider. You can then look for a good mortgage lender who’s offering the type you want. (Read more at Types of mortgages now or later)

While it’s quite possible for you to work it all out for yourself you may find it easier to ask an Independent Financial Adviser (IFA), to advise you on the best type of mortgage for your needs. See How to find your mortgage)

Read about How to get a Mortgage

See full contents of the Home Buyers Guide