Buying a home

Buying a house, particularly for the first time can be daunting. The decisions you make when buying a property could save you – or cost you – many thousands of pounds. Don’t worry, I will do all I can to make the process as smooth and simple as possible.

A mortgage is a loan you take out over a large number of years, called the mortgage term. This is typically 25 years but can be as short as 5 years or as long as 40.  Most mortgage providers have a requirement that the term finishes before you retire. The mortgage is to be fully paid off at the end of the mortgage term.

A mortgage is made up of two components, firstly capital which is the amount of loan you initially take out and secondly interest, which is essentially the charge that the provider makes for lending you the capital.  This is how the provider makes their profit. 

The loan is secured against the property being mortgaged.  This means that if you don’t keep up your mortgage payments in line with the mortgage agreement then the mortgage lender can take possession of the property. 

A lender will consider lending a percentage of the property value, requiring you to put down a deposit.  This is typically a minimum of 5%, although lenders will offer lower interest rates when you put down a higher deposit percentage.  The level of mortgage borrowing relative to the value of the property is called the loan to value (“LTV”).  The lower the LTV the lower the interest rate as the loan is perceived to be a lower risk to the lender. 

A lender will provide a lower interest rate for an introductory period, typically between 2 and 5 years although there are some 10 year introductory periods available.  The loan transfers to the standard variable rate (“SVR”), at the end of this introductory term until the mortgage term is complete. 

There are two types of mortgage which determine how the mortgage is paid off.

• Repayment mortgage. Monthly payments are made up of the interest along with a capital amount each month.  This means that by the end of the mortgage term the mortgage is fully paid off.  The monthly payments are calculated such that the monthly payments stay the same whilst the interest rate stays at the same level.  This means that in the early stages of the mortgage there is a higher proportion of interest than capital repayment, however, the capital balance owing reduces over the term and in the later stages of the term the payment is made up of a higher capital repayment and lower interest amount.
• Interest-only mortgage. Monthly payments consist of only the interest on the amount borrowed, meaning a lower monthly payment than a repayment mortgage.  With this mortgage, the full amount of the mortgage taken out remains outstanding at the end of the mortgage term and requires paying.  This is typically achieved by investing in a suitable investment vehicle throughout the life of the mortgage.  If an interest-only mortgage is taken out on a residential property the lender will want to assess the suitability of the repayment investment vehicle. 

The mortgage lender performs affordability checks, to safeguard you and themselves.  They need to be sure that you can afford the mortgage you are applying for, because if you are unable to make your monthly payments your home could be repossessed.  Mortgage affordability checks were relatively simple until 2014, using a multiple of earnings calculation.

Since then the Financial Conduct Authority (FCA) issued mortgage affordability guidelines after issuing the Mortgage Market Review (MMR).  These rules insist that UK lenders conduct far greater scrutiny and analysis before approving any new lending. These new guidelines require the lender to assess not only your income but your outgoings and credit report.

There have been recent changes with the FCA relaxing the mortgage related stress tests, however the affordability requirements still remain thorough.

A remortgage is the process of paying off one mortgage with the proceeds from a new mortgage using the same property as security. See the Remortgage page for more details

Mortgage providers carefully consider your credit history before offering you a loan so it is really important that you have access to and understand your credit report.  I recommend using Check My File, which checks data from Equifax, Experian and TransUnion – the main credit agencies that mortgage providers use to perform checks on you. Try it FREE for 30 days, then £14.99 a month using the link below, cancel online anytime.

It’s not impossible to obtain a Mortgage if you have poor credit, but you may need to apply to a mortgage provider who specialises in offering mortages to people in similar positions and won’t have the same option of lenders as those with good credit ratings.