Introduction to Mortgages
A mortgage is a loan that’s secured on a property, which means the lender has a registered interest in the property and the right to repossess it – i.e. sell it – if you don’t meet your monthly payment obligations.
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Different Types of Mortgages
Repayment mortgages are a type of mortgage where you make monthly payments made up of both capital and interest payments. The capital payment is the bit that goes towards paying off your outstanding mortgage balance – which is the amount you owe – and the interest payment is the bit the lender charges you.
Most residential mortgages are repayment mortgages, but it is possible to take out an interest-only residential mortgage.
An interest-only mortgage is a type of mortgage where you only make interest payments each month, not interest and capital payments. This often means your monthly payments will be lower than they would on a repayment mortgage. However, you have to repay the outstanding mortgage balance back by the end of the mortgage term. To qualify for an interest-only mortgage, you must be able to provide evidence of how you’ll repay it.
Typical repayment vehicles include:
- Selling the property/downsizing
- Equity in other properties
- Investments - e.g. ISAs or endowments
Types of Interest-Rates
How They Work
Pretty much every mortgage product comes with an introductory deal. The introductory deal is the rate you choose when you first take out the mortgage – e.g. 5 years at a fixed rate of 1.7% with a full mortgage term of 30 years.
After the introductory deal ends you’ll be transferred onto the lender’s SVR (standard variable rate) for the remainder of the mortgage term, although most people choose to take a new deal with the same lender or remortgage to a new lender when this happens.
SVR (Standard Variable Rate)
The lender’s SVR is a rate they set themselves. It will usually be guided by the base rate that’s set by the Bank of England, but lenders can technically change their SVR as they see fit.
Fixed rates are extremely popular among first-time homebuyers. A fixed rate is a rate that’s set for a specified period of time - e.g. 1.7% for 5 years.
A discount rate is the lender’s SVR but discounted by a set margin – e.g. 1.2% below the lender’s SVR for 3 years.
A tracker rate fluctuates in line the Bank of England’s base rate by a set margin – e.g. 0.24% above the Bank of England’s base rate.
The Mortgage Process
1 First Conversation with Adviser
When you phone us, you can either arrange a phone appointment with your adviser or a face-to-face meeting – whatever suits you. Your adviser will ask you some questions then go away and find you the best deal for your circumstances and future needs. They’ll organise a follow up during which they’ll present you with what they’ve found.
2 Decision in Principle
Once you’re happy with their recommendation, they’ll go about securing your DIP (Decision in Principle) - which is basically a promise from the lender that they’ll loan you money on the condition that the information you’ve provided is correct and subject to a valuation of the property.
3 Offer on Property
After you’ve secured a DIP (Decision in Principle), you’ll be in a great position to make an offer on a property. Sellers like DIPs. They show them you can afford the purchase. What’s more, the fact that you’ve already started preparing for the transaction highlights to them that you’re serious in your intention to buy.
4 Pre-Application and Submission
Following the acceptance of your offer, we’ll send you some information which explains all the documents we need to submit to the lender. You’ll be assigned a client relationship manager who’ll check and submit certified copies of your documents; they’ll liaise with both you and the lender. Your adviser will then submit the fully packaged mortgage application.
5 Lender Underwriting and Valuation
The lender will underwrite your application; this basically means they’ll verify that the information you’ve provided is correct and review all your documents for themselves. They’ll also instruct a valuation for their purposes on the property you want to buy to make sure there are no significant problems with the property and that it’s worth the amount you want to borrow.
6 Mortgage Offer
If the lender is happy with everything they’ve found, they’ll send you a mortgage offer. They’ll also send us a copy.
After you’ve accepted your mortgage offer, you’ll go through the legal part of the process, known as conveyancing. This is where the solicitors/conveyancers draw up contracts and organise the actual, legal purchase of the property. You’ll also need to arrange buildings insurance at this stage, making sure it’s in place from exchange.
Once everything is in place, your conveyancer/solicitor will exchange contracts with the seller’s conveyancer/solicitor. It’s at this point that you put down your deposit and are legally bound to buy the property on an agreed-upon date. You’ll lose your deposit if you pull out after exchange.
The purchase completes when money is transferred on the date agreed-upon in your contracts. This is when the property officially becomes yours. You’ll normally collect the keys at this point and start moving in.