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About Residential Mortgages

A residential mortgage is a loan ‘secured’ against the property you wish to (or already) live in. Like any loan, monthly payments are made over a period of time to pay for the cost of interest and you also need to repay the loan by the end of the loan term.

The criteria used to see if you qualify for a residential mortgage does vary greatly from lender to lender. There are many lenders to chose from, with a wide variety of products from each lender, so it is important to get good independent advice on all the options available. Connect Mortgages can help you consider all your options to ensure you obtain the most cost effective and appropriate mortgage to suit your needs.

How much can I borrow?
Each lender conducts an affordability assessment of how much you can borrow, taking in to account your income, your dependants and your other credit commitments. Since April 2014 the lenders have also been talking into account your regular expenditure and any expected changes in your lifestyle.

You will need to provide a deposit towards your purchase. Your deposit, added to the sum the lender is willing to consider, will be the total purchase price you can consider.  You will need to have at least 5% of the properties purchase price as a deposit. However, if you can provide a higher deposit you will have access to more competitive interest rates.

The maximum loan available does vary greatly from lender to lender. A rough rule of thumb is around 3 to 4 times your income. The advisers at Connect Mortgages have access to the lenders affordability calculators and can give you an indication of the purchase prices you can consider before you start looking for property.

Identify your lender choices
Connect Mortgages will firstly help you identify which lenders are available to you. This is done by looking at your personal financial circumstances such as age, income, length of time in employment or self employment, affordability and your credit status and then Connect will match you with a shortlist of lenders who are likely to consider lending to you.

The next step is undertaken once you have a property in mind you wish to mortgage. Again we will look at the lenders criteria around the property you wish to purchase, for example some lenders will not consider flats, some will only lend in certain parts of the country, some require a minimum property value etc. After undertaking this part of the process we will be left with a shortlist of lenders that will suit both yourself and the property and can then help advise you on which offers the most competitive and suitable mortgage product. Contact Us to get help with finding the right lender.

Picking the right interest rate
The Bank of England sets interest rates in the UK and this is called the ‘Base rate.’ When the Bank of England changes this rate it is attempting to influence the overall expenditure in the economy. This is the rate at which money is lent to financial institutions who will in turn offer their own interest rates to borrowers which includes their own profit margin

Most lenders call this their variable rate which means the interest rate on your loan may be varied (up or down) by the lender, often, but not always, as the Bank of England base rate varies. To attract your business the lenders may offer an interest rate ‘deal’ for the early part of your mortgage, some of which are explained below:

      • Base rate tracker – The interest rate varies (up or down) directly in line with the Bank of England base rate rather than in line with the lenders own variable rate. This rate is often lower than the variable rate on offer.
      • Fixed rate – The interest rate and subsequent monthly payments are guaranteed to stay exactly the same for a set period, say for 2,3,5 or longer years, regardless of any changes in the interest rates.
      • Discounted rate – Rather than tracking the Bank of England base rate, a discount is given off the lenders own variable rate for a set period of time.
      • Capped rate – The interest varies but doesn’t go any higher than a set level for a set period of time, even if interest rates rise.
      • Flexible mortgage– Some mortgages offer flexibility such as overpayments, underpayments, drawdown facilities and savings account offsetting. This may be offered in addition to the rate options above.

If you choose an interest rate ‘deal’ you may be tied into a mortgage for the period of the deal or beyond by way of an ‘Early Repayment Charge’. This means if you want to pay off the mortgage early, you will have to pay a penalty.

Connect Mortgages will help you obtain the most cost effective deal taking into account the lenders criteria, the rates on offer, the lenders charges and the finer details such as early repayment charges and flexibility.

Repaying the mortgage
After you have chosen the lender and the interest rate, the next step is to choose how you will repay this mortgage.

The most common method is a repayment mortgage, often referred to as a capital and interest mortgage. You pay to the lender a monthly payment which consists of both the cost of the interest and an amount to pay off some of the debt. This way the mortgage gradually reduces over the term you have taken. A repayment mortgage is a guaranteed way to ensure that your mortgage is paid off at the end of the term, providing you meet each required monthly payment as it falls due.

The alternative is an interest-only mortgage is where your monthly payment to the lender consists only of the interest on the loan with no element of ongoing repayment of capital. A savings vehicle such as an endowment or ISA is usually used alongside the mortgage to build up and pay off the mortgage at the end of the term. There is an element of risk to this type of repayment vehicle as it relies on a certain investment return from the savings vehicle chosen. If this return is not reached then there could be a shortfall in repaying your mortgage. Alternatively a higher return achieved could provide a surplus or allow you to pay your mortgage off earlier.

Most lenders are reluctant to offer an interest only mortgage unless it can be demonstrated that there is a clear way of repaying the mortgage at the end of the term. They often have additional requirements such as a higher than average income level, property value or deposit.

How long shall I take the mortgage over?
The average mortgage term is for 25 years, but you can select a term that is lower or higher than this. If you select a lower term, you will potentially save a considerable sum of money as you will pay interest for a shorter period of time; however on a repayment mortgage your monthly payments will be higher. If you take a longer term, it will cost you more in interest payments in the long run but your monthly payments may be more affordable now.

The maximum mortgage term is 40 years from some lenders; however you should aim to ensure the mortgage is repaid by the time you meet your anticipated retirement age, as most people will see a drop in their income at this point.

What costs do I need to consider?
There are a range of costs when you purchase a property. The largest is often the deposit but in addition to this you will need to pay a survey fee, lender arrangement fees, mortgage advice fees and legal fees including stamp duty where applicable.

Look out for special mortgage deals that may offer to pay for certain fees such as the survey fee or some legal fees especially if you are a first time buyer or arranging a remortgage.

You should also remember to budget for any additional monthly costs such as property insurance and protection as detailed below.

Connect Mortgages can provide you with a mortgage illustration which will detail all the costs you need to consider as well as the monthly payment for the mortgage. Contact Us for a free consultation with no obligation.

Protecting your investment
Having invested the time in finding your perfect home and perfect mortgage, it is important to consider the effect certain life events may have. Your lender will insist you take out property insurance to protect THEM if the property is damaged by events such as fire and subsidence, but how will you protect yourself if you suffer from death of your partner, ill-health or redundancy?

Your home is at risk if you cannot meet your mortgage payments in any of these events and help from the state is at best minimal and sometimes non-existent.

It is not compulsory to take out insurance and existing plans can sometimes be used, but it is important that you seriously consider the impact on your finances for each of these lifestyle events. For example, many believe their employer will continue to pay if they are long term ill, but on checking, discover their employer may restrict payments to a maximum of 3 or 6 months pay or in the worst case, are only bound contractually to pay statutory sick pay, currently just £88.45 per week for a single person! (As at April 2015)

Click here if you would like to read more about protection plans

What if I have had credit problems?
In 2014 141 mortgage possession claims and 99 mortgage possession orders are being made every day. 297 people a day are declared insolvent or bankrupt. This is equivalent to one person every 4 minutes 51 seconds. (Source The Money Charity) Given this, it is likely that a large percentage of the population will struggle to get a mortgage from a high street lender.

Jack was made redundant 2 years ago and as a result had some credit issues occur, unfortunately he got two defaults and a small CCJ. Jack has however, gained new employment and he is looking to capital raise on his current property to help him pay off some of his unsecured debts and to put his finances back in order.
As defaults and CCJs remain on your credit file for 6 years, Jacks’ unfortunate circumstances would see him having problems with obtaining finance from High Street lenders for some time. The good news however for Jack and for other applicants who are getting back on their feet is that ‘near prime’ mortgages from specialist lenders are now becoming more widely available.

How much will my mortgage cost per month?
Your monthly payment will depend on all the factors you have chosen, e.g. which lender, on which interest rate, how you will repay the loan and how many years you take the loan over. Take a look at our Best Buy mortgage rates and use the built in calculator to get a guide. Alternatively Contact Us and one of our advisers will happily provide you a quote

Remortgages and further borrowing
A remortgage is when you switch from one lender to another in order to secure a better mortgage deal.

This may be because you have come to the end of a rate with an existing lender and wish to secure a new deal, or it may be because you wish to borrow more money against the value of your home.

It is not always necessary to remortgage as some lenders will offer new ‘deals’ to their existing borrowers and/or allow them to borrow more money using a ‘further advance’ Connect Mortgages will help you to evaluate whether it is more cost effective to stay with your existing lender or switch to a new lender.

If you would like a free initial chat, with no obligation, we offer face to face and telephone consultations on all types of mortgage requirements.

Contact Us

If you would like to find out what mortgage options are available to you please call one of our experienced mortgage advisers on 01708 676111, or send us a message using the form below.

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