A mortgage is probably the biggest financial commitment you will make. From the outside, the process can look complicated, but it’s not difficult. Here’s everything you need to know about the process of applying for a mortgage and the preparation involved.
Why do you need to get a mortgage?
Most people have to get a mortgage to buy a house. A mortgage is a loan and works in a similar way - you pay back a set amount each month and accrue interest on your final balance.
Unless you have the total cash amount, you’ll almost certainly need a mortgage to buy a property.
How do mortgages work?
Let’s start by looking at some standard terms.
There are two main types of mortgages, although one is significantly more common than the other.
Interest-only mortgages - These are mortgages where you only pay back the interest each month. This means your final balance doesn’t increase, but it doesn’t go down either. Interest-only mortgages are most common with buy to let mortgages.
Repayment mortgages - These mortgages work in a similar way to many other loans. Your monthly repayments consist of interest and the loan amount, so it gradually decreases over time. This mortgage type is most common and is very likely to be the sort you end up with.
Tie-in period - Sometimes called an introductory period, this is the length of time that you’re locked into your mortgage. This is often for two, three or five years. Mortgage lenders often tempt you with offers during this period, so your monthly repayments are cheaper.
Payment penalties - Otherwise known as an early repayment charge, these penalties apply if you try to leave your mortgage before the agreed term is over. This can apply during your initial tie-in period or if you try to make overpayments and whittle your balance down before the end of the term.
Mortgage term - This is the length of time you have to pay off your mortgage. The longer the term, the cheaper your monthly payment, but the more money you’ll pay overall, as you’ll accrue interest each month and year you have the mortgage. Mortgage terms often run in five-year intervals and are determined when you start shopping around.
How does mortgage interest work?
Interest is the amount added on top of your mortgage balance, and it’s the way lenders make money for offering their service. Interest rates are applied annually and not monthly. If your rate is 4%, you pay 4% interest across the year and not each month.
For example, you’ve taken out a £250,000 mortgage with an interest rate of 3% over a 25-year term. That means you need to make payments over a year of £10,000 before interest. With interest added on top of that, you’ll pay £10,300 over the year. That works out at a monthly payment of £858.
Interest rates are a percentage of your mortgage payment, so the more you borrow, the more interest you’ll pay over time.
There are several different types of interest mortgages
Standard variable rate (SVR) - After your tie-in period is over (see the definition below) you’ll likely switch to an SVR mortgage. This is the standard interest rate your lender charges and lasts for as long as you have the mortgage or choose to remortgage.
Discount mortgages - These are similar to a tie-in period and offer a discount on the SVR for a set period. For example, if it’s a 3% discount mortgage for two years and the SVR is 7%, your mortgage payments will be 5% interest for two years.
Tracker mortgages- These follow the Bank of England’s base rate. At the time of writing (May 2021), the base rate is a record low of only 0.1%. So if you have a tracker mortgage, you’re likely making record low mortgage payments too. This is a very affordable mortgage when interest rates are low, but the base rate has risen to as high as 15% before, so it’s a gamble. Mortgage lenders may add interest on top, so your mortgage might be advertised as base rate + 3%, making your rate 3.75%.
Capped rate mortgage - This is the same as an SVR but has a capped limit that the interest won’t rise above. The cap can be pretty high, though, but at least it gives you some peace of mind.
Offset mortgages - These types of mortgage are less common and link your savings and current account to your mortgage. You make a monthly payment as usual, but your savings are the overpayment (or interest payment) which helps you clear the mortgage quickly.
Can you get a mortgage with debt?
It’s best to make sure you have no outstanding debt when you apply for a mortgage, especially if you’re a first-time buyer or looking to borrow significantly more.
You can certainly own a credit card which is a fantastic way to build up your credit rating. You can also have mortgage debt too. But ideally, you shouldn’t have any outstanding personal loans or significant credit card debt. Phone contracts are an acceptable debt, so don’t worry about paying yours off straight away.
Ultimately a mortgage lender is checking if you can afford the mortgage and if you will reliably pay it back.
How to get a mortgage without a deposit
If you’re a first-time buyer, you will need a deposit of some kind. Lenders don’t know if you’re a safe bet because you have no extensive financial history. A deposit is a signal that you’re, first of all, serious and then acts as a sort of guarantee that you can afford the property.
In recent years, the government has encouraged and incentivised mortgage lenders to provide low deposit mortgages. It’s possible to get a 95% mortgage with only a 5% deposit, so you might not need to save as much money as you first thought. 100% mortgages used to be much more common, but, primarily since the 2009 financial crisis, these are now incredibly rare.
The larger the deposit you put down, the better deals you’ll have access to and the less money you’ll pay over time.
The average deposit in the UK is 15% of the property price, but it is possible to get a mortgage with a smaller deposit.
How long does it take to arrange a mortgage?
Getting a mortgage is a relatively quick process in the context of buying a house. On average, it takes two to six weeks to get approved for a mortgage. If you work with a mortgage broker, expect a quicker turnaround as they’ll know what paperwork to submit and how to perfectly prepare your application.
An offer is valid for six months so if you don’t complete your purchase within that time, you’ll need to apply again.
As part of your mortgage application, you’ll need three months worth of bank statements and payslips. You might also need to prove proof of identity with a passport or drivers licence, three years of accounts from an accountant if you’re self-employed, your latest p60 form or utility bills.
Ensuring your application form details match all the details you’ve provided will help the process run smoothly too.
Working with a broker really does make applying for a mortgage much easier. You can be confident you’re getting a great deal and that the application will run smoothly. We have in house mortgage advisors who help to make your property purchase journey so much easier. Get in touch today to talk through your options.