How to get a mortgage

Getting a mortgage is a massive financial commitment and should be given a lot of serious thought and consideration. This guide on getting a mortgage can help you along the way. We’ll discuss mortgage basics, different types of mortgages, how to get a mortgage and tips to make your mortgage application more attractive to lenders.

Mortgage basics

A mortgage is a loan used to purchase property or land. Mortgages are offered by financial companies, such as banks or building societies. The UK is home to the largest residential mortgage market in Europe, according to Statista. The majority of UK homebuyers rely on a mortgage to finance the purchase of their property.

With a mortgage, a borrower pays back the borrowed amount plus interest. Most mortgages terms run for 25 years, but it can be shorter or longer. Until the loan is paid off, it’s secured against the value of the property. Keep in mind if you can’t keep up with repayments, the lender can repossess your home

Types of mortgages

Borrowers can apply to get a mortgage on their own or jointly with one or more people. There are a range of different types of mortgages on the market, including repayment mortgages, interest-only mortgages and a combination of repayment and interest-only mortgages. With repayment mortgages, homeowners pay the interest and some of the capital each month. With interest-only mortgages, homeowners pay only the interest on the loan and nothing off the capital.

Mortgages also come with fixed or variable interest rates. A fixed-rate mortgage means the repayments will be the same for a certain amount of time. This is usually for two to five years. With a variable rate mortgage, the interest rate can move up or down, usually in line with the Bank of England base rate. There are standard variable rate mortgages and tracker mortgages.

There are even mortgages for specific financial circumstances, such as for the self-employed or for borrowers with bad credit, or for specific purposes, like when purchasing a buy-to-let, second property or new build. There are also mortgages exclusively available to first-time buyers.

 

How to get a mortgage

1.  Figure out what you can afford

It’s important to find out what you can afford to put down as a deposit and for monthly repayments. Don’t overstretch yourself and take running costs of owning a property into consideration. This includes council tax, household bills, maintenance and insurance.

The larger deposit you have, the more likely you’ll have access to better interest rates. When figuring out how much you can afford, it’s important to keep in mind that there can be additional fees charged when getting a mortgage, including:

  • Product fee for taking out the mortgage
  • Application fee for applying for a mortgage
  • Valuation fee for the lender figuring out how much the property is worth
  • Broker fee for taking out a mortgage recommended by a mortgage broker

2.  Research mortgage offers

Borrowers can get some mortgages directly from a lender. There are numerous comparison sites out there, such as Money Saving Expert, MoneySuperMarket, Which? and Moneyfacts, to help you find out the kind of mortgage offers that are out there. You can also use a mortgage broker or advisor to find a mortgage and receive advice on what’s out there. They also often have access to mortgage deals borrowers don’t have direct access to.

To get started, a mortgage broker or lender, will ask questions in a basic “fact find” to work out what mortgage type you want and need and how long you want it for. Additionally, they’ll get into the basics of the borrower’s financial situation to help find out how much a lender may be prepared to lend.

3.  Prepare for mortgage application

In a mortgage application, lenders will ask to see proof of income, any debts the borrower has and current expenditure. Lenders will all have their own individual requirements and standards. However, the following factors will likely impact whether lenders will accept a borrower for a mortgage and how much they will allow them to borrow:

  • property value
  • amount of deposit
  • length of mortgage term
  • age
  • income
  • credit record

It’s recommended to start collecting the documentation needed for a mortgage application early on. This often includes the following:

  • last three months of payslips
  • driving license or passport
  • last three to six months of bank statements
  • household bills, such as utility bills
  • statements showing how much is borrowed on credit cards or other loans
  • P60 from employer or for the self-employed, two to three years of account statements
  • tax return from SA302 for the self-employed or for those who receive earnings from more than one source

Keep in mind that printouts of online statements and utility bills might not be accepted.  You may need hard copies or copies certified by the bank, solicitor or utility provider. Make sure the information on the application form matches all the documents being provided.

4.  Choose a mortgage

After thoroughly researching what’s out there, pick a mortgage that works for your financial situation. Get a mortgage in principle. This will let you know an approximation of what you could borrow and will show you’re serious when viewing properties. It could even make you a more attractive buyer.

5.  Apply for a mortgage

Once you put in an offer on a property and your offer has been accepted, this is when you’ll take out the mortgage. The lender or mortgage broker will start undertaking a full fact find, an affordability assessment and financial stress tests. This often includes detailed questioning of your financial situation and any future plans that could impact this.

If your mortgage application is accepted, the lender will give you a binding offer and a document detailing the mortgage terms. The lender will provide you with a certain amount of time to officially accept the mortgage, this is usually at least seven days to give you time to think about it carefully. After officially accepting a mortgage, the mortgage offer is usually valid for three months.

6.  Manage your mortgage

Once you’ve officially bought the property and are moving into your new home, you’ll need to begin paying the monthly repayments. It’s often recommended to set up a direct debit for this, so you don’t forget to make these payments. However, you’ll need to ensure there is enough money in your bank account to do this.

If you make changes to the property that could impact its value or if you decide to rent out your property, you should inform the lender. Additionally, you can remortgage if you find a better deal that could save you money but ensure the mortgage fees are less than what you’d save by having a lower interest rate.

It is recommended to receive professional advice from a mortgage advisor or broker when getting a mortgage or remortgaging.

 

Posted on 9th October 2020

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