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Mortgage Guide 2017

Decided it’s time to take the plunge and get your foot on the property ladder? How exciting! However before you rush out and start viewing properties, you may want to take a look at our mortgage guide.

In our mortgage guide we’re providing the answers to the most common mortgage related questions. We’ll start by explaining what a mortgage actually is and get more in depth from there. Got a burning question we haven’t answered? Feel free to tweet us and we’ll get back to you with the answer you need.

How to get a mortgage guide

What is a mortgage?

Let’s start with the basics before we get into the more complicated stuff. A mortgage is a loan secured against the value of property or land until it’s paid off. Simple enough, right?

How much can I borrow?

How much you can borrow for your mortgage depends on a number of factors. A key factor is how much you earn, however there are various other things that will be taken into account.

Historically most lenders worked on a multiple of your earnings, for example 3.5 times an applicant’s income. However these days it’s no longer that simple. Today lenders decide the size of your mortgage by using what are known as affordability calculations.

What are the mortgage affordability calculations?

Affordability calculations still rely on your basic earnings but they also take into account other factors. For instance, living and travel expenses and any costs linked to the purchase of a new property are factored in. It’s a chore but the process will run more smoothly if you have all your expenses calculated early on!

Each lender has their own methodology for calculating how much they’ll lend you, so the amount offered will vary. There’s no universal answer that covers all circumstances so it’s difficult to get an idea of what you can get.

Can I borrow more with someone else?

In theory, your borrowing ability increases if you’re buying with someone else and apply together for a mortgage. A second applicant will need an income and shouldn’t have any significant credit commitments. Lenders will take into account each person’s individual expenses, so the lower these are the better.

Affordability is one of the main areas where having an independent mortgage broker working for you can really help. Good brokers will tailor their research and will recommend a lender who will lend you the mortgage you need for your dream home (subject to maximum affordability rules at the time you apply).

What mortgage term should I get?

A mortgage term is the number of years until the mortgage ends. Traditionally most terms were for 25 years, however there’s no rule which says that your mortgage must be this long. The shortest mortgage term is typically five years, whilst the longest is 35 years. In the current marketplace one or two lenders even offer 40 year mortgages.

Simply put: the shorter the mortgage term, the less interest you repay overall. The longer the mortgage term, the higher the interest that you will repay. Essentially, it’s up to you to decide whether you spend less money overall by paying more monthly, or keep your monthly costs as low as possible with a longer mortgage term.

Buying your first home tends to involve more than just a mathematical equation though. Buyers often take a longer mortgage to start with to keep monthly costs as low as possible; even though this costs more in the long term, it may help with the initial costs of buying a house and moving which involves more than just the mortgage.

The good news is that your “deal” is not the be all end all. When your initial deal period ends (e.g. your first 2 year fixed or tracker rate) you can make changes. At this stage, you can change many aspects of your mortgage, including the loan amount and the remaining term. So even though you started with a 35-year term, in two years’ time you reduce the term to 30 years (rather than the default 33 years) due to the fact that your income has increased or you have come into additional funds.

Does my annual bonus / commission / overtime affect how much I can borrow?

Short answer: yes. The higher your income (basic plus bonus or commission) the higher your maximum potential mortgage. However, like with the affordability calculations, not every lender treats bonus or commission the same. This is another area where having an independent mortgage broker can help you get the most out of your mortgage. Some lenders will take a set percentage of bonus or commission (typically 50%) into account, however if the bonus or commission is paid more frequently (monthly or quarterly) then it may be possible to find a lender that will use more than 50%. This can have a massive impact on the available mortgage amount.

Should I take a repayment or interest only mortgage?

Firstly, what’s a capital repayment mortgage? A capital repayment mortgage is where a portion of your monthly payment is used to repay the capital which you have borrowed whilst the remainder is used to service the interest, meaning that providing you have made all your payments on time you will eventually be paying more capital and less interest; by the end of your mortgage term your balance will be zero.

Secondly, what’s an interest only mortgage? It’s where you just pay the interest and still owe the capital amount borrowed at the end of the term.

Essentially the rules about which type of mortgage you can take out have evolved over time. Borrowing more than 75% of the value of a property with a 25% deposit? Your mortgage will most likely be arranged on a repayment basis. For an interest only mortgage most lenders want you to have at least 50% of the purchase price to qualify.

It’s also possible to have a mixture of interest only and capital repayment. However, this will depend on your individual circumstances and will be subject to the lenders’ criteria when you apply.

Should I take a fixed or variable mortgage?

If you would rather know that your mortgage payments will not increase or decrease for a set number of years, then a fixed rate might be best for you. The plus side is that your payments will not increase, even if underlying interest rates (the Bank of England Base Rate is the main benchmark to keep an eye on) do increase. The downside is that if the underlying interest rates do decrease, your monthly payments will not change.

If you have a variable rate of interest, be it a tracker/discount/variable product, your payments would decrease as underlying interest rates reduce. If underlying rates increased, the opposite would be true and your monthly payments would also increase. So it all comes down to whether you want to take the gamble on the costs increasing or the security of knowing your payments won’t change.

How old do you have to be to take out a mortgage?

You generally need to be between 18 and 65 to be able to get a mortgage. Most lenders won’t approve applications from someone who is over the age of 65; however a handful of lenders do have flexible criteria for older borrowers, providing that you are either still working or receiving sufficient pension income.

What is a guarantor for a mortgage?

Guarantors may be needed on a mortgage application if your income is not quite enough for the loan amount needed. A few lenders still offer products that are designed for first time buyers who are getting financial help from close family members, though as these are quite different from a standard mortgage you would benefit from speaking with an independent mortgage adviser to help you figure out what product would be best for you.

How much deposit do I need to get a mortgage?

A standard amount would be 5% of the purchase price for a residential mortgage but as with most things mortgage related, this rule is not applied by every single lender. The deposit funds can either come from your own resources (savings) or could be gifted to you by family members. One main point to note is that the greater the percentage of your deposit, the lower the interest rate will be.

Got a question we haven’t answered in our mortgage guide or want to speak to an independent mortgage broker? Contact us for more information.