What you need to know about mortgages: part two
In the second part of our feature on mastering the mortgage basics, we investigate all the kinds of mortgages that are available, where to get one and just how much deposit you should save.
What about the deposit?
It’s beneficial to have a sizeable deposit to bring down the total loan amount needed. Generally, a mortgage will be at a higher rate with a smaller deposit: bigger lump sums that can be paid off the purchase price will be better for the borrower.
The importance of this is the Loan to Value rate, or LTV and it is the margin between the amount of money borrowed and how much the property is worth. The smaller the LTV, the happier the lender will be, because their risk is reduced. Remember that any 'offers over' the mortgage value will be payable by you, so factor this into any offers you make.
How much can a homeowner borrow?
In the past, lenders multiplied borrower’s annual income to work out how much to lend. These days, the system is a little more sophisticated and is based on affordability with income compared to outgoings and includes consideration of other borrowings and repayment behaviour.
It is the lender’s responsibility to ensure they don’t lend more than a borrower can afford to repay.
Are there other costs?
Many mortgage lenders charge an arrangement fee, a cost which has risen sharply in recent years. In some cases, they can be as high as £2,000.
Some lenders charge a separate booking or reservation fee to secure a fixed-rate or other deal. This is usually around £100-£200 and is non-refundable.
The vast majority of lenders will require borrowers to take out life insurance to repay the loan on the event of their death. It’s also a good idea to think about insurance against loss of earnings, as you don’t want to lose your home during an interim of unemployment.
There are of course follow-on costs if you are successful in your offer - the cost of moving, for example, which could easily account for another £500, on average.
Are there any other kinds of mortgages in the UK and abroad?
- Secured loans
This refers to additional loans secured on a property for things such as home improvements. It is also called a second mortgage or second charge. You can borrow a large sum of money, as you would do with a bank, except your home is at risk if you do not keep up repayments.
- Equity release schemes
This is a way of raising money on the value of a property with the expectation that the loan will be repaid later. Effectively, this means taking out a mortgage but making no repayments until the end of the arrangement. This option is largely restricted to the over-55s.
- Islamic mortgages
Under Sharia law, it is forbidden to borrow or lend with interest. Instead, with an Islamic mortgage the lender makes a different kind of charge for borrowing the money on a homeowner’s behalf. Usually, this would take the form of the mortgage lender entering into a contract to buy the property from the vendor, which is then sold at a higher price to the buyer. The instalments are not subject to fluctuating base rate.
How are mortgage decisions made?
The mortgage market is competitive, but lenders are still cautious about who they will lend to. They prefer borrowers who are on the electoral roll, have a careful credit history and evidence of employment and residence.
Where to get a mortgage:
Borrowers can apply directly to a bank or a building society for a mortgage. They can also use a mortgage broker or independent financial advisor who will compare the different mortgages available on the market.
If using a mortgage broker, it’s important to ensure they look at lenders from the whole market and those which aren’t affiliated with any company in particular.
Where else can I get help and advice?
- Moneysavingexpert.com: Mortgage advice
- Citizens Advice: Mortgages and secured loans
- Which: What is a mortgage?