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Introduction to mortgages
BLOG articles: Why you should consider an offset mortgage; The value of overpaying your mortgage The world of mortgages can seem quite daunting, with numerous different lenders, hundreds of mortgage products to choose from and sometimes unfamiliar terms and concepts. With Maxwell Moore, you don't need to become an expert because we will get to know about you and your circumstances in order to expertly recommend a suitable mortgage for you. However, we want you to understand your options so we've put together the following guide to some common mortgage themes.
One very important thing to remember is that a mortgage will be secured against your home. This means that if you fail to make the payments on your mortgage, the lender can apply to take possession of your home and sell it in order to repay the money that you owe.
If you are ever concerned about being able to make your mortgage payments please contact us at the earliest opportunity so that we can support and advise you.
Use the menu at the top to learn more about mortgages for specific purposes!
What is a mortgage?
The term mortgage generally refers to money that a financial company, such as a bank or building society, lends to a person in order to buy a property. Today, a mortgage is created by a lender taking a legal charge over the title to the property in question using a deed expressed to be by way of legal mortgage.
Obtaining a mortgage
The following steps are generally involved in obtaining an offer of mortgage.
- Agreement/Decision in Principle (AIP/DIP) - Brief details about you are given to the lender who will decide if they are likely to lend to you. This will involve checking your credit file with one or more of the three credit reference agencies. Depending on the lender, this may leave a footprint to show the search took place, which is then visible to other lenders checking your file. Lots of recent credit searches can adversely affect your credit score so we don't recommend just getting lots of DIPs from lots of different lenders.
- Full application - Full details about you, your financial situation and your borrowing requirements are provided to the lender for consideration. The lender will carry out initial underwriting and may request additional information at this stage. A full application will also involve a credit search and this will always leave a footprint to show it took place.
- Valuation - If initial underwriting is acceptable, the lender will instruct a valuation of the property.
- Offer of mortgage - If the lender is satisfied with the underwriting and valuation then it will issue a mortgage offer. This may be subject to conditions and will usually be time limited.
Common mortgage terminology
- Capital - The total amount of money borrowed.
- Deposit - The amount of money the borrower is contributing to the purchase price of the property.
- Product - A mortgage deal that defines introductory and reversion rates, ERCs, fees, allowable LTV etc.
- Loan to value (LTV) - This is the capital expressed as a percentage of the property value.
- Introductory rate - The interest rate that will be charged during a pre-defined initial period.
- Reversion rate - The interest rate that will be charged from the end of the introductory rate period to the end of the term. Most products revert to the lender's standard variable rate.
- Term - The period over which the mortgage is taken.
- Repayment method - The basis on which the monthly payment is calculated and therefore how the mortgage will be repaid.
- Booking fee - A fee payable to the lender in order to reserve a certain product.
- Arrangement fee - A fee payable to the lender in order to apply for a mortgage.
- Valuation fee - A fee payable to the lender to cover their costs in arranging a valuation of the property.
- Early Repayment Charge (ERC) - A fee payable to the lender for repaying the mortgage early, usually during the introductory rate period.
- APR - The annual percentage rate is a calculated rate that takes into account the interest payable and any fees, over the full term of the mortgage. Usually an APR will be stated as representative as the exact rate will depend on personal circumstances.
- APRC - The annual percentage rate of charge is similar to an APR and was introduced specifically in relation to mortgages in March 2016. All lenders must publish the APRC for every product they offer. The APRC illustrates the whole cost of the mortgage and allows different products to be compared more easily. Products will quote a representative APRC as the exact rate will depend on personal circumstances.
- Redemption - Paying off the mortgage in full, including any interest chargeable up to the date of repayment.
- Mortgage Exit Admin Fee (MEAF) - A fee payable to the lender on redemption of the mortgage.
Rates can be classified as variable or fixed.
Variable rates can be further divided into tracker or discount and may have a cap and/or a collar.
Variable rates, and sometimes fixed rates, are often linked to an underlying base rate.
- Base rates
- BBR - Bank of England Base Rate is the rate set by the Monetary Policy Committee.
- LIBOR - London Interbank Offered Rate is an average of rates at which participating banks believe they could borrow money from each other.
- SVR - Standard Variable Rate is specific to individual lenders and is set by them. Most lenders will change their SVR following a change in BBR, although there is no obligation for them to do this.
- Fixed rates
- A fixed rate does not change.
- It is usually expressed as a standalone figure, eg 1.99%.
- Variable rates
- A variable rate will change, usually following the base rate to which it is linked.
- Tracker - These rates usually track BBR or LIBOR and are expressed as an addition to the base rate they track, eg BBR+1.49% means the tracker rate payable will always be 1.49% above the prevailing BBR.
- Discount - These rates usually discount the lender's SVR and are expressed as a deduction from that SVR, eg SVR-2.25% means the discount rate payable will always be 2.25% lower than the prevailing SVR of the lender.
- Cap - This is an upper limit above which a variable rate will not rise, eg a tracker rate of BBR+1.49% and a cap of 2.99% will not rise above 2.99% even if BBR goes above 1.5%.
- Collar (or floor) - This is a lower limit below which a variable rate will not fall, eg a discount rate of SVR-2.5% and a collar of 1.5% will not fall below 1.5% even if SVR goes below 4.0%.
Choosing the right mortgage isn't as straightforward as going for the lowest rate. The type of rate is a very important consideration.
There are two common ways of repaying a mortgage.
- Repayment - This is also commonly called the capital and interest method. Monthly payments are set so that both the capital and interest will be paid in full at the end of the term. By choosing repayment and ensuring you always make your monthly payments in full, your mortgage will be paid off at the end of the term. A redemption fee may be payable.
- Interest only - Monthly payments are set to only pay the interest that is due on the capital. The total capital borrowed will still be outstanding at the end of the term. You will need to ensure you have an alternative plan in place that will allow you to repay the capital at the end of the term. Lenders are now quite restrictive about lending on an interest only basis.
It may be possible to arrange your mortgage with part on repayment and part on interest only.
There are three common levels of valuation. A lender will require a basic valuation but the borrower can request one of the more detailed reports. The lender will instruct the valuation but will generally charge the borrower the fee for it.
- Basic valuation report - This is for the benefit of the lender and the valuer acts for the lender. Most lenders provide a copy of the report to the borrower. It is a basic report to confirm whether the property is visibly in satisfactory condition and worth the declared value. The lender needs to satisfy itself that the property will provide adequate security for the loan in the event that you fail to keep up your mortgage payments.
- Home-buyer's report - This is for the benefit of the borrower and the valuer acts for the borrower. A copy is provided to the lender for the same purposes as a basic valuation report. A home-buyer's report assesses a property in more detail. They are particularly useful if you are buying an older property.
- Building survey - Previously known as a full structural survey, this is the most in-depth report. Again, the valuer acts for the borrower.
You can read more about valuations and surveys on the RICS website.
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