Mortgages

When applying for a mortgage, the amount lent will be based on the amount required to buy the property and whether your financial circumstances, such as your income, are sufficient to cover the monthly payments. Typically, lenders will lend up to 4.5 times your annual salary

For instance: If Sarah wants to purchase a property worth £150,000 and has 10% deposit (£15,000), she needs to borrow £135,000. If she earns £30,000 per year, then she needs 4.5 times her annual salary to reach the £135,000

When picking a mortgage you have a few options available to you.

First-time buyer

A first-time buyer mortgage is a mortgage that is available to individuals who have never owned or had a property in their name in the UK or abroad, with the exception of business premises that have no living space attached to it.

Before looking for a mortgage, you have to save for a deposit that is at least 5% to 20% of the cost of your property. For example, if you want to buy a home that has an open market value of £200,000, you need to have an initial deposit of £10,000 if the requirement is set at 5%.

The main financial advantages of being a first-time buyer are that you have access to schemes that make getting on the ladder a little easier such as:

- Help-to-buy schemes
- Shared Ownership
- Right to buy/Right to acquire

Through help-to-buy schemes, you can deposit 5% of the purchased property price and enjoy the first five years with interest-free monthly payments on an equity amount between 20% and 40% which depends on where you live.

With shared ownership, you can buy a part/share of the property from the landlord. You can then take out a mortgage to pay for your share of the property and enjoy less rent on the share you don’t own. Furthermore, if you can afford it, later on, you can buy the remaining share of the property from the landlord by mortgaging it as well.

The government has two schemes in which tenants who have rented from the public sector can apply to buy and mortgage the properties they live in under Right to Buy and Right to Acquire schemes.

Remortgage

When you remortgage, you choose to move onto your lenders standard variable rate, move onto a new fixed-rate mortgage with the same lender or change lenders entirely. Usually, this is to save on interest repayments  but could be to consolidate any debts you may have accumulated, release equity from the property or because of a change in circumstances like marriage etc

Buy-to-Let

A buy-to-let mortgage is taken out with the agreement that the landlord (i.e. the person who buys the home and takes out the mortgage) will rent the property to a third party.  Lenders use different  criteria on a buy-to-let mortgage which are applied on a case-by-case basis, they may insist;

- You are already an owner of a home outright or with a mortgage
- You have a good credit rating
- Your yearly earning is more than £25,000
- Your age does not exceed the upper limit of the lender’s requirement

The deposit amount in buy-to-let mortgages varies between 20% to 40% of the property’s open market value and the interest rates are generally higher than other mortgage products. Most of the time, borrowers prefer taking out buy-to-let mortgages that are interest-only which means that they pay only the interest every month and pay the capital amount at the end of the loan term.

Working with a mortgage broker or going with a direct lender is down to personal
preference.

A mortgage broker is a property specialist that connects you with the best lender out there. An independent mortgage broker (i.e. one that isn’t working for just 1 bank) will have whole-of-market access and can find the best deal available for you from multiple lenders. This means they will likely have access to a larger variety of mortgage products than if they just worked for one lender. They can also expedite the application process and can sometimes get you discounts on other fees such as valuation fees, surveyor fees, and conveyancing fees.

Note: You have to pay a broker fee for the services that can be adjusted to your monthly payments.

A direct lender is a financial institution that is involved in every step of the mortgage process that includes originating, processing, and funding the loans. A direct lender can be a bank, credit union, building society, or a mortgage company that solely deals in Mortgages Most of the time, people avoid approaching a lender directly as it robs them of the advantage of comparing multiple mortgage products and choosing the best one for themselves. Therefore, if you are going to a direct lender, it’s a good idea to speak to several lenders to make sure you are getting the best options available.

With a variable interest rate, the lender charges an interest rate that lasts as long as your mortgage term. You can experience an increase or decrease in the interest rate during your loan term. Most lenders rates are affected by the base rate set by the Bank of England.

 

Variable-rate deals are divided into four categories.

 

Tracker Mortgage Deals

Tracker interest rates track and operate above the base rate of the Bank of England. If the interest rate is falling and hits low levels, the tracker mortgage deal  could be the best deal you can get. However, if the interest rate is rising and you are paying an interest percentage rate that is a few points above the base rate, you can end up paying a lot more.

Tracker mortgages have a short life, usually 2 to 5 years. A few lenders offer tracker deals that last for your whole variable mortgage term or until you shift to another deal.

 

Standard Variable Rate Mortgage Deals

Standard variable rates (SVRs) can be 2 to 5 interest base points above the base rate of the Bank of England. Lenders have their own SVRs that can vary massively between lenders.

SVRs are often expensive and their average rates are way above other cheap deals available from lenders. As the lenders can move interest rates intentionally, it is riskier and that is why it is not the popular form of lending anymore.

 

Discount Rate Mortgage Deals

A discount rate deal is when a lender offers a discount on their standard variable rate for a certain period. You have to be careful as it is not a guarantee that your lender will move its SVR, and the discount associated with it down, if the Bank Of England’s base rate falls.

 

Capped Rate Mortgage Deals

With a capped rate mortgage deal, your lender cannot raise the interest rate above a certain level. Your interest rate will come down if the SVR comes down with the base rate of the Bank of England.

The lenders, however, usually set their cap quite high which allows them to change the interest rate and take it to the upper limit at any time. The interest rate in capped deals is usually higher than the SVRs and fixed interest rates.