Mortgages are loans which are intended to help buyers purchase residential property. When you take out a loan, the lender charges interest: the same is true of a mortgage.
A mortgage is a ‘secured’ loan, which means that the loan is secured against the property being purchased until the mortgage is paid off. Sources of residential mortgages include high street banks, building societies and other types of less well known financial institutions.
Basic conditions
Mortgage providers follow a set of rules and procedures when deciding whether or not they will agree to provide a mortgage to purchase a residential property. Although different lenders apply different lending criteria, the amount a potential buyer can expect to borrow of a property’s purchase price is determined solely by the mortgage provider’s requirements.
Here are some of the factors lenders take into account when making their decision:
Affordability
At the moment it is easy to lull yourself into believing you can afford the mortgage you need. However, you need to ask yourself if you can afford your mortgage payments if interest rates rise and whether you can repay the capital if house prices fall.
Let’s say you manage to find a mortgage with an interest rate of three percent, fixed for three years. That’s a great rate. After three years you find interest rates have gone up and the best deal you can now get is six percent. That’s an increase of three percentage points but, more frighteningly, your interest rate has increased by 100%. Will your net take home pay have increased at the same rate?
You should budget on the assumption that interest rates will rise during the term of your loan. So be sure you can afford your mortgage repayments when that happens, not just now.
Deposit
Lenders are no longer happy to take all the risk of buying your new home, and so do not lend 100% of the value of the property. If you are unable, in the future, to pay your mortgage, the lender needs reassurance that it can take your home and cover the loan by selling it. Less risk taking means lower loan-to-value (LTV) ratios, and personal deposits need to be larger than in the recent past.
You will typically need at least 5% as a first time buyer and commonly up to 20% to access the most competitive interest rates on the market.
The source of the deposit may come from your current property, savings, inheritance or a gift.
Occasionally deposits that come from friends or family may not be accepted by the chosen lender or they may change the amount they will lend you, however, there will be other lenders who will accept this, subject to a satisfactory credit score.
Valuation and Survey Fees
Before a lender will grant you a mortgage it will insist on a valuation to prove the property is worth what you’re paying for it. The size of the valuation fee will vary by lender and property value.
The basic mortgage valuation is for the lender’s benefit so that it feels comfortable lending against the property. You may feel you want to add a survey to the valuation that gives you a report on the general condition of the property.
If you are buying an older property, or one in a general state of disrepair, you may choose a full structural survey. This is a thorough survey that examines the structural condition of the property and gives you advice on repairs. Depending on the property expect to pay between £500 and £1,000.
Obtaining comparable examples in the same area and for similar property will help you obtain a benchmark.
Property type
Some properties such as flats over commercial properties, studio flats and ex-local authority premises can be viewed as having reduced future attractiveness and as such some lenders may not operate in that market. This may restrict your lending options.
Listed buildings (e.g. Grade 1, Grade 2) may have restrictions on how you can maintain or alter the property as well as buildings near to it (e.g. garage). Some unlisted properties can also be subject to similar restrictions (e.g. in an area of outstanding natural beauty).
Time frame
Mortgage providers generally have a maximum number of years over which they lend and will set a date when the mortgage must be repaid in full.
