Mortgage - All You Need to Know with Guide, FAQs & More
A mortgage can be a prudent way of securing a home for yourself.
Mortgage monthly payments are often lower than rent and after the duration of your mortgage ends, the property becomes completely your own.
Today, we’ll be looking at the pros and cons of getting a mortgage and whether it would be suitable for you or not.
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Average Mortgage Debt in the UK
At the end of 2019, the total value of mortgages in the UK was £1.5 trillion.
Over 351,000 first-time buyer mortgages were approved in the UK in 2019.
With interest rates being low as ever and the demand for houses being as high it is, the mortgage market continues to be a highly competitive space in the UK.
For more statistics and details regarding mortgage in the UK, you can click here.
What is a Mortgage and How Does it Work?
A mortgage is a loan that is taken out by someone who intends to use the money to buy property or land.
The debtor then repays this loan over the course of a very long period. The typical duration of a mortgage is 25 years but it can be shorter or longer.
Mortgage loans are secured loans. They are secured against the property you buy.
This means that over the course of the mortgage duration, if you start failing to make your payments, then your house could be repossessed by your mortgage provider.
The lender would then sell off your house in order to get their money back.
There are mainly two different ways of paying off mortgages that you can opt for: repayment mortgages and interest-only mortgages.
In order to differentiate between the two, you need to be aware of a few terms:
The money you borrow from a mortgage provider in order to buy your property is known as the capital. The provider then charges interest on top of this capital until your debt to them is repaid completely.
The difference between these two methods is whether you want to pay only interest or both interest as well as the capital.
In a repayment mortgage, you will be paying both the interest as well as a portion of your capital off each month.
By the end of your mortgage, you will have paid off your debt entirely.
In this, you pay off only the interest in your payments every month and nothing off of the capital.
You will need to have a separate plan to pay off the capital after the mortgage duration ends.
These types of mortgages are becoming less common as lenders worry that homeowners are left with a ton of debt (the capital) at the end of the term’s duration with no way of paying it off.
What are the Different Types of Mortgages?
Once you’ve decided how you’re going to be paying off the interest and the capital, you will need to decide what type of mortgage you want to go for.
Mortgages come with either fixed or variable interest rates.
If you enter into a fixed-rate mortgage, then your monthly repayments will be the same for a certain portion of your mortgage term. This is typically anywhere between two to five years.
If you enter into a variable-rate mortgage, then your monthly repayments could fluctuate up or down. This would depend on the Bank of England base rate.
How Do I Apply for a Mortgage?
The application process typically consists of two stages.
The first stage isn’t as extensive whereas the second stage involves the assessment of your financial situation in order to find out how much you can afford.
In the first stage, you will sit down with the lender and they will ask you a series of questions in order to determine what type of deal would be best for you.
They will ask if you’re a first-time buyer, what exactly do you need the mortgage for, what your financial situation is like as well as how much you want to borrow.
They will try and understand what your financial situation is like without going into too much detail.
This will help them get an estimate of how much they are willing to lend to you.
It’s also imperative during this stage that you ask questions about the mortgage deal as well.
Ask them about important information regarding the product such as how long it will last, any policies they have that you should be aware of as well as any hidden charges they may have.
It’s extremely important that you do your research well and opt for a deal that has a low interest rate so you don’t end up paying more in interest over the years.
Mortgage rates have been becoming more and more competitive every year and it’s not too difficult to find affordable deals.
The second stage is where the real application begins.
The mortgage lender will look at a number of factors in order to determine whether or not they will approve your application or not.
Some of the factors they will look at are your credit history, how much you earn, what your monthly expenditures are like and whether you have any outstanding debt or not.
Depending on all of these factors, they will perform an affordability assessment. The purpose of the affordability assessment is to understand how much you will be able to comfortably afford in terms of monthly mortgage payments.
They will also ‘stress test’ your ability to make repayments by assuming what will happen if circumstances change. For example, if interest rates rise due to the Bank of England base rate changing or if your income decreases.
If a lender feels that you will be able to comfortably afford your monthly repayments, they will approve your application and send you the complete details and terms of the mortgage deal.
This is usually followed by a ‘reflection period’ during which you can decide whether or not to go ahead with the deal or not.
The reflection period typically lasts 7 days and it’s a good idea for you to compare mortgages to ensure you’re getting the best possible deal according to your situation.
Be sure to compare the interest rate you’re getting with other mortgage rates available in the market.
A mortgage lender is typically not allowed to change the terms that they’ve presented to you during the reflection period except in limited circumstances e.g., the information you’ve provided is false.
If you’re satisfied with the terms presented by the lender, you can go ahead and accept the deal and get a mortgage for yourself.
What is the Loan-to-Value (LTV) Ratio?
While determining your type of mortgage and whether or not you’ll be approved for a mortgage, a lender will calculate your LTV ratio.
The Loan-to-Value ratio is defined as the loan provided compared with the actual value of the asset it’s provided against. So, in the case of a mortgage, this asset would be your home.
Most lenders will approve an application for a home that has an LTV ratio of 80% or lower.
Having an LTV ratio of higher than 80% does not exclude you completely from securing a mortgage but it can make things more difficult.
You may only be able to secure mortgages with a higher interest rate if you have a high LTV ratio for your property.
Can I get a Mortgage with Debt?
People often feel that if they have debt, they will never be able to secure a mortgage.
While it does become difficult, it’s not entirely impossible. In fact, in some cases, you can even make having a debt work to your advantage.
As I mentioned earlier, lenders will make affordability assessments during which they will consider any outstanding debt you may have.
You have the opportunity to tell them why you’ve accumulated the debt and what you’re doing to take care of it as of now.
Most lenders will approve your application if they are satisfied with your explanation.
If you’ve been making regular payments towards your outstanding debt, this will also reflect very well on your mortgage application.
It will suggest to lenders that you are punctual with your payments and that you will practice the same financial discipline when making your mortgage payments for your property as well.
For more information about applying for a mortgage while having outstanding debt, you can click here.
What are Bad Debt Mortgages?
Bad debt mortgages (also known as bad credit mortgages, sub-prime mortgages or adverse credit mortgages) are ones that are provided by lenders to people that don’t have very good credit scores but are looking to buy a home.
You will find that if you have a poor credit score, you will most likely be rejected when trying to apply for a regular mortgage for your home.
In this case, you will have to seek out specialised lenders that deal with giving mortgages to people with poor credit scores.
You’ll have to look at what type of mortgage you want as bad credit mortgages are most commonly fixed-rate with the rate being fixed usually for the first two to five years.
If you’re a first-time home buyer with bad credit, you can easily find bad credit mortgages that could be suitable for you.
Can I Borrow Additional Money on My Mortgage to Clear off My Debts?
While it’s certainly possible in some cases, I would highly advise against it.
Borrowing additional money on your mortgage is known as a further advance and the interest rate for this loan would be separate from your main mortgage.
If you’re struggling with debts, there are a number of ways to tackle it using other debt solutions such as an Individual Voluntary Arrangement (IVA), a Debt Management Plan (DMP) or a Debt Relief Order (DRO).
These are all much better solutions towards paying off your debt rather than borrowing additional money on your mortgage in order to pay it off.
There are some situations for which additional borrowing on your mortgage could be a wise decision but paying off your other debts is usually not one of them.
How does Credit Card Debt Affect Getting a Mortgage?
Just like all other types of debt, your credit card debt will be assessed by your mortgage lender.
They will then determine whether or not you’ll be able to comfortably make payments towards your mortgage along with payments towards your credit card debt.
There are a number of things you can do in order to reduce your credit card debt before applying for a mortgage.
Can I Remortgage with Credit Card Debt?
The process of remortgaging refers to getting a new mortgage in order to replace your current mortgage on your home.
The application process is very much the same as an ordinary mortgage application.
You will have to keep in mind that you will most likely have to pay some type of early repayment/redemption fee to your old mortgage provider for your home.
While a remortgage with credit card debt is definitely possible, it can be a very arduous process and I’d highly recommend against it unless you’ve done your research and are sure it is the best course of action for you.
How Much Debt can I have and Still Secure a Mortgage?
During your affordability assessment, your lender will calculate a value known as your debt-to-income ratio.
This is a comparison of the amount of outstanding debt you have relative to your gross monthly income.
The lower your DTI ratio, the higher your chances are of securing a mortgage for your home.
It’s the main financial measure that a lender will look at when determining whether or not to give you a mortgage for your property.
Can I Remortgage to Pay Off Debts?
While getting a remortgage to pay off your outstanding debts is definitely something you can do, I would highly advise against it.
Not only is getting a remortgage a long-winded and tiring process but it might not even be worth it for you in the end.
If there’s not a lot of equity left in your property, then a remortgage might end up costing you a lot and you may be stuck in a worse position than you were initially in.
Hence, if you’re struggling with debt, I highly suggest you seek help from an independent charity such as StepChange or Payplan.
They will turn you onto debt solutions which you may not have been aware of.
With so many deals available with so many different mortgage rates, it’s understandable to feel overwhelmed when trying to find a suitable one for yourself.
I would suggest assessing your finances thoroughly in order to get a clear picture of how much you can afford.
Only then will you be able to approach a lender confidently to secure a mortgage for your home.