Mortgages Guide | Mortgage Help Product Information

TheMoveChannel.com | Arranging Finance

Introduction

For most people, buying a property is the biggest single investment of their lifetime. Few purchasers can afford to buy outright, so the decision to take out a mortgage and the selection of an appropriate product is likely to be very important.

There was a time when building societies provided almost all the finance for a house purchase. However, thanks largely to the repeated rounds of demutualisation that swept through ranks of the building societies in the last decade, banks have now taken a large share of the market, with specialist direct lenders also enjoying plenty of new business.

The Cost of Finance

All lenders charge interest on their loans and this is the major element in the cost of the finance. Building societies and banks have variable interest rates which may vary according to the size of the loan. However, there are other charges that are normally involved in arraning a mortgage:

  • Arrangement fees - Banks and building societies do not always charge arrangement or setup fees, but many lenders do charge them, particularly for some of the specialist mortgages described later in this guide. Arrangement fees are typically in the range of £100 - £400.
  • Valuer's report - In order to protect its security, the lender will want to be sure that the house is worth the sale price, so will alwas insist on a valuation for mortgage purposes. This will be carried out by a qualified surveyor, who will charge a survey fee, paid by the borrower.
  • Lender's Survey - The lender's survey aims to establish if the value of the house is enough to protect the lender's security. It does not mean that the property is free from any defects. It is therefore recommended that house buyers obtain a homebuyer's report or a full survey to ensure that they are aware of any problems. This will increase the cost but could prove to be a wise investment.
  • Indemnity Guarantee Fee - Some lenders insist on an indemnity guarantee policy if the loan exceeds 75 percent of the property value. This protects the lender in the event of the borrower defaulting on the mortgage and the sale price of the property not being enough to repay the loan. However, this policy is paid for by the borrower and often, the premium has to be added to the loan. In recent times, the threshold for mortgage indemnity guarantees has increased - many lenders now set the level at 90 percent.
  • Stamp duty - This is a tax charged by the Government on the document transferring ownership of the house, paid by the purchaser. The rates are:
    • Nil - up to £60,000
    • 1% over £60,000 but not more than £250,000
    • 3% over £250,000 but not more than £500,000
    • 4% over £500,000
  • Legal fees - There will be legal fees payable to the solicitor or licensed conveyancer handling the transaction. The legal fees will include the local search fees (carried out to reveal matters affecting theproperty) and land registry fees, as well as the lawyer's own charges.
  • Other charges - All mortgage lenders will have a tariff of other charges that you may incur in certain circumstances at various points during the life of your loan. These are not universal charges - lenders will vary in terms of which ones apply, but all should be able to provide details on request.

Borrowing Capacity

Your borrowing capacity is the amount that any lender will be willing to lend you, based on the information that you provide about your personal and financial circumstances. All lenders have different criteria, but the factors that are normally taken into account are as follows:

  • Income - The primary concern of the lender is that the borrower will be able to afford the repayments. The level of the borrower's earnings is therefore a key criterion, although the exact limits vary according to the lender.
  • Single earners can normally borrow up to three or three and a half times their income, though a number of lenders will go up to four times or even higher.
  • A couple can usually borrow either up to three times the income of the main earner, plus one times the value of the other earner, or two and a half times the couple's joint salary.
  • It is normal for the lender to ask for the borrower's employer (or in the case of a self-employed person, their accountant) to confirm the level of earnings. Self-certifiication normally means that these checks are not made, but the interest rate will be higher.
  • Liabilities - Lenders will want to check on any exisiting liabilities as this will affect the ability of the borrower to keep up with mortgage payments.
  • Amount of deposit - The greater the deposit, the lower is the proportion of loan to value, and the better the lender's security. Thus, the more the borrower is putting in, the happier the lender will be.
  • Credit history - The lender will want to be sure that the borrower is a good credit risk. Lenders will require references from an existing lender, a landlord or a bank. Most will also carry out credit checks to discover details of any existing credit arrangements or county court judgements (CCJs) against the borrower. There may also be a bankrupcy check. Existing mortgage arrears or CCJs obviously make it much more difficult to get a loan.
  • However, a number of new specialist lenders now concentrate on lending mortgages to individuals with poor credit records. This 'sub prime' lending is predictably more costly for the borrower, but may be their only option.
  • Employment status - This is valuable to a lender to try to assess the security of income. Lenders will obviously be happier with borrowers who have a good steady job record rather than those who have had many jobs in a short time and periods of unemployment.

Security for the Loan

All lenders require borrower to mortgage the house to them for the duration of the loan. This means that the legal title to the house is assigned to the lender, but the borrower retains the right to live there. When the loan has been fully repaid, the lender has to reassign the house to the borrower. This right to reassignment on repayment is know as the borrower's 'equity of redemption'.

The word 'equity' is also used to describe the difference between the value of the house and the amount of the loan. For example if a £150,000 house is bought with a 90% mortgage, the borrower's equity of 10 % will be worth £15,000. A borrower is said to have 'negative equity' if the loan is more than the value of the property. This usually arises where a property's value has dropped immediately after purchase.

  • Default - If the borrower defaults on payments, the lender is entitled to sell the house to recover the loan. There may be problems in removing the borrower to gain vacant possession and this is usually the option of last resort for a lender. If a lender does sell the house, they are only entitled to keep the amount owed and must pass on the balance of the sale price after expenses to the borrower.
  • Guarantors - In some instances where the lender is concerned about the borrower's ability to meet their commitments, the lender will advance monies provided a guarantor stands behind the borrower. The guarantor will then be responsible for payments if the borrower defaults. A typical example would be a parent acting as a guarantor for a student buying a flat.
  • Protection - Another way that lenders can protect their interests in your property is by requiring you to take out certain financial protection products, either through them or some other provider. This could be mortgage payment protection insurance, which provides money to continue meeting your payments for a period of time should you be unable to work as a result of accident, sickness or redundancy. Alternatively, it could be mortgage protection life insurance, which provides a lump sum payout designed to clear your mortgage debt if the main earner dies.