Mortgages are essentially loans which are secured against a home, property or land. Typically, most people take out a mortgage for the purpose of buying their home.
As part of the mortgage agreement, the borrower is contractually obliged to repay the loan amount plus any interest charged by the lender. This usually happens through monthly repayments which are structured to reflect the type of mortgage product used and the rate of interest charged by the lender.
Whilst the borrower repays the loan the lender retains a charge (or security) over the property. This means that if the borrower fails to make continuous repayments the lender can repossess the property.
With most mortgages available today, there are broadly two types of repayment options for the borrower:
- Repayment mortgages - this is sometimes also known as 'capital-and-interest mortgages'. As the name suggests, with this type of mortgage the borrower makes monthly repayments to the lender which includes an element of the capital and also the interest. The proportion between capital and interest will vary over the term of mortgage. Over time as more capital is repaid, the interest element decreases. At the end of the mortgage term, if all repayments have been made, the mortgage will be repaid and the borrower owns the property outright.
- Interest only mortgages - with this type of mortgage, the monthly repayments comprise of only the interest and does not include any repayment towards the original loan amount. The borrower is still responsible for repaying the full loan amount at the end of the mortgage term. Therefore there are some additional risks with this repayment model that the borrower may not have sufficient funds to repay the full loan amount at the end of the term. To help the borrower avoid this scenario, it is very important that the borrower has a suitable repayment vehicle in place to repay the capital at the end of the term.
Regardless of the repayment model the borrower opts for, they will have a further choice as to the type of mortgage product they have. There are several options aimed at helping borrowers with different needs.
- Variable rate (or standard variable rate) - here payments can move up or down depending on changes to the rate of interest being charged by the lender. Though there may be changes in the Bank of England's Base Rate, individual lenders will decide how they set interest rates for their own products.
- Tracker rate - this is a variable rate loan with an interest rate that tracks movements in the base rate set by the Bank of England or LIBOR (the rates at which banks lend to each other). The lender will set the interest rate initially, and this can be set to be equal, above or below the base rate. The rate then tracks (i.e moves up or down with) the base rate.
- Fixed rate - here the borrower is able to enjoy a fixed interest rate for a specified period. Though usually between 1-5 years, it can be for longer. The main advantage of this is that monthly repayments are 'fixed' for the duration of that period helping the homeowner budget effectively. This is usually of particular benefit to first time buyers or those on tight budgets.
- Discounted mortgage - the borrower gets a discount off the lender's standard variable rate usually for a specified time period. At the end of the deal, you will move to the standard variable rate. This type of interest option can be good for those who know they will have a tight budget in the immediate term and are confident that they will be able to increase their payments when the deal comes to an end.
- 'Capped' and/or 'collared' rates - these are variable rates but with limits. For example, the lender may not be able to increase their rate above a certain amount ('cap'); or reduce it below a certain floor ('collar').
There are many additional features that your mortgage can have (e.g. it may be an offset; flexible or cashback mortgage). Individual building societies provide different mortgage product features, and you should contact them directly to see what their product range is and whether it is suitable for your needs.
Once you have found your dream property, put an offer to the vendor and had it accepted, you will need to secure the finances you need to complete the purchase. This will usually involve getting a mortgage.
Many people find applying for and getting a mortgage highly stressful. However, by making sure that you know what the mortgage application process is like you can ensure that it is both as easy as possible and also that you get the best mortgage for your individual needs.
The first thing that you are going to have to decide is who you are going to get your mortgage from.
List and web-links to all UK building societies
You can apply direct to a building society (or other type of lender) for a mortgage or, alternatively, use a mortgage broker or other intermediary to help you.
Once you have decided what mortgage you want, you will have to complete an application form that will require information from you on both your (and anyone you are applying with) financial situation and information about the property that you are buying.
The information that the building society wants may appear complex and intrusive. However, they want that information for two reasons – firstly to ensure that you are going to be able to afford the mortgage and secondly that the property is suitable for the loan that is being considered against it.
If you apply for a mortgage in a branch, the branch staff may help you complete the form. Likewise, if you choose to apply via a call centre they may take down your details for you, and if you use a broker the broker may complete the form for you.
Staff will use information – such as salary and outstanding credit, to determine if you can afford the loan or if your existing financial commitments are too high. Don’t be tempted to give false information – the information you provide will be checked, and giving false information will not just prejudice your current application and it will prevent you getting any further credit (not just a future mortgage, but any other type of loan) and, since providing false information on a mortgage application is a criminal act, could also see you appearing in court and getting a criminal record as well.
Once you have submitted your application to your building society (or your broker has done so on your behalf), the building society will assess your application. Assuming that the building society finds everything is in order it will then issue you with a mortgage agreement in principle.
The mortgage valuation
Once the mortgage in principle has been confirmed, your building society arrange for a valuation survey to be carried out on the property being bought. The purpose of this is to ensure that the property is suitable to act as a guarantee for the loan that you are taking out.
It is important to remember that the purpose of the survey is to confirm the value of the property. It will give no indication of the condition of the property – if you want to know more about the condition of the property you need to ensure that you also have a structural (or scheme 2) survey taken out. The surveyor who carries out the valuation survey may be able to do this at the same time, so if you want a structural survey you should discuss this with your lender or surveyor.
The mortgage offer
Once the basic valuation has been completed, assuming the value of the property meets your lender’s requirements, you will receive a mortgage offer.
The mortgage offer contains information such as the address of the property, the purchase price, the mortgage amount and special terms and conditions. If your mortgage is being guaranteed by someone else, it will also include their details.
If you have a mortgage, but are having trouble making your repayments, take a look at this factsheet.