Mortgage Guide 2015

Calculator.co.uk 2015 guide to Mortgages

Mortgage overview

A mortgage sounds simple on the surface. It is a loan to fund a property – usually over 25 years – but the complexity of the market means there are many facets to choosing the right deal.

A mortgage is most commonly used to finance a residential property you live in, but you can also get an overseas mortgage for a home abroad and a home loan for an investment property you plan to rent out, known as a buy-to-let mortgage.

What types of mortgages are available?

As well as picking the cheapest mortgage for your needs, the key decision is whether to get a fixed rate or a variable mortgage. Here is how they both work:

Fixed rate mortgages

With a fix, payments don’t change during the introductory period of typically between two and five years.  It is possible to get longer-term fixes but they are rare.

After the fixed period, you usually revert to your lender’s standard variable rate (SVR). This is always a few percentage points above Bank of England base rate, and moves up or down roughly in line with base rate.

Variable rate mortgages

There are two types of variable rate mortgage: a tracker or a discount. A tracker precisely tracks the Bank of England base rate during the introductory period, but at a margin above (for example, base rate + 2%). Then, it usually reverts to the SVR.

Some trackers are available for the life of the loan, of usually up to 25 years, so stay at the same level above base rate until you pay it off or switch.

A discount is simply a discount off the lender’s SVR; for example, SVR minus 2%.

Other factors to consider

You must also decide whether to get a repayment or interest-only deal. The former means repayments cover the loan and interest, while the latter only covers the interest, so you must save separately to pay off the loan.

You can also take an offset mortgage where your savings reduce the interest paid. On a £100,000 loan with £20,000 savings, you only pay interest on the £80,000 difference.

Can I switch mortgage?

You are not stuck with one loan forever. In fact, it is often wise to switch at the end of an introductory period, known as remortgaging. Do the sums first to ensure it’s worth switching as a wrong decision could cost you thousands of pounds.

How do I qualify for a mortgage?

You’ll now need a reasonable deposit or own a decent chunk of your property outright, though exactly what you need changes, depending on the economic climate.

Before the credit crunch in 2007, you could get a mortgage with no deposit, but during the height of the crunch you needed at least a 25% deposit as criteria became stricter. This makes it all the more important to use a mortgage calculator and really plan out your repayments.

Another factor is your credit rating. If you often miss credit card, loan or mortgage or payments, you  may be denied a mortgage or may have to pay a higher rate. Bad credit mortgages are often called sub-prime or adverse credit deals.

First-time buyers, however, usually require squeaky clean credit records. A mortgage calculator is even more useful for those with less experience in this area.

You’ll also need to prove your income, in most cases. If you are an employee this is simple as you’ll only need to show pay slips. If self employed, you’ll normally need at least two years’ tax returns or company accounts.

For more information, see our guide to how to get a mortgage.

How do I get a mortgage?

Many people go to their bank or building society to get a mortgage but this could be a big mistake.

If you take this route you will only have access to that provider’s limited range of deals.  You may get lucky and find that lender is the cheapest but the chances are it won’t be.

Therefore, it’s crucial to search as many lenders’ offers as possible to give you the best chance of finding the right deal.

Try a broker

One of the simplest ways to do this is by using a broker who can plough through a vast array of mortgages to not only find you the cheapest deal but also advise on the one that is most suitable.

The latter point is important as searching for a home loan is a lot more than just about price.

The mortgage market is full of hidden criteria so you may not necessarily qualify for numerous deals.

For instance, some are only available to those with near-perfect credit histories, but this won’t be obvious from a best-buy table or leaflet in a branch.

Some banks and building societies may not lend on certain properties such as a new build home or a flat above a shop. Again, this may not be immediately obvious.

Other banks may only lend to those with one of their current accounts or may not lend in certain parts of the country. The list goes on.

Credit rating risk

Making an unnecessary application can harm your chances of eventually getting a home so it is important not to make that mistake by applying for the wrong deal.

This is because every application you make is recorded on your credit file and multiple applications in a short time can count against you.

Some mortgages are only available direct

Also consider that some lenders reserve their best deals for those who apply directly with that bank or building society.

Some brokers will advise you if such deals are appropriate. If so, you must make your application via the lender, not the broker.

What mortgage fees do I pay?

Never just consider the rate. Always factor in the huge array of mortgage fees, such as application, legal, valuation and exit charges.

Buy to Let Mortgages

Buying a property is not all about living in it yourself. Many borrowers use a house or flat as an investment by letting it out to tenants and then hoping any rise in property values will provide a profit when they sell it.

Unless you have the cash up-front, to finance such as investment, you will need a special buy to let mortgage.

How do buy to let mortgages work?

As with a standard mortgage, you can make the choice between a variable or fixed rate mortgage.

The difference comes in the repayment method. Most buy to let investors take an interest-only mortgage, where your payments only cover the interest, not the loan amount.

Rental income is designed to cover the mortgage payments and other costs so taking out an interest only mortgage keeps costs down. As mentioned, the bulk of the profit, if things go well, will come from selling the property.

Interest-only repayments are also tax-efficient as, at time of writing, you can deduct mortgage interest payments from an investment property from the rental income and only pay tax on the remainder.

Do lenders treat buy to let mortgage applicants differently?

Rather than consider how much you earn to judge whether you can afford to pay the mortgage, a buy to let mortgage lender will consider your likely rental income. That monthly income must usually be more than your monthly mortgage payments.

Lenders also typically require you raise a healthy deposit. This is largely as a result of many buy to let borrowers getting stung during the house price crash that occurred during the credit crunch.

The more of the property you own outright, the greater the cushion against house price falls as you’re less likely to fall into negative equity, where you owe more than your property is worth.

You may also be required to own your own home before successfully applying for a buy to let mortgage, so lenders have evidence you can manage a mortgage.

What are the risks?

As with any investment, you can lose money just as easily as you can gain it.

The two main risks with a buy to let mortgage is that you may not find the tenants which means you may not be able to cover mortgage payments; or that house prices fall which means you may sell the property for less than you bought it.

How do I get a buy to let mortgage?

As the market is complicated and the risks can be huge, unless you are financially savvy, it’s best to speak to an expert, such as a broker, to discuss your options.

The most straightforward type of mortgage is a fixed rate mortgage.

The reason it is so simple is your payments do not change for the length of the fixed, introductory period – usually between two and five years. Fixes of seven, ten or even 25 years are sometimes available but these are rare.

At the end of the fixed period you often revert to your lender’s standard variable rate which is usually set at a few percentage points above the Bank of England base rate, and moves up or down roughly in line with that official borrowing measure.

Pros and cons

The chief benefit of a fixed rate mortgage is you know exactly what your payments will be during the initial period, which makes budgeting easier.

This is particularly important for those with little spare cash at the end of the month as they may not be able to afford the rise in payments you risk when opting for a variable rate mortgage.

On the flip side, if the base rate falls during your fixed period you may have saved cash by choosing a variable rate mortgage which may have dropped in price. What’s more, you often pay a little more for a fixed rate initially than you would if you chose a variable mortgage.

Other considerations

  • If opting for a longer term mortgage ensure you can take your mortgage with you if you move property (known as porting). Otherwise, you risk being stuck in your home if your circumstances change.
  • You can usually switch mortgage without penalty once the introductory period is over but if you switch during the fixed period you may face hefty fees.
  • If you plump for a fixed rate mortgage, don’t just consider the rate offered but the many other charges, some of which can climb to thousands of pounds.
  • Generally speaking, the longer you fix for, the more expensive your mortgage will be as lenders charge for the additional security of knowing your monthly payments.

Equity Release Mortgage

Older people who need cash can release the money locked away in their property by taking out what is called an equity release plan.

With one, you get a loan which is paid off via the sale of your home after you die.

Equity release plans come in two forms:

Lifetime mortgages

Here, you take out a loan which you can draw in one go or gradually over time.

It is repaid, plus interest, from the sale of your property on your death, or when your surviving spouse dies, which means your surviving partner can continue to live there.

Interest accumulates from the day you take the loan to the day it is repaid. If you take the cash in stages, it is usually cheaper because most lenders only charge interest on your balance as it stands each day so if you delay drawing some money, you keep your balance lower for longer.

Home reversion plans

Here, you sell part of your property in return for a lump sum. When you or your surviving partner dies, the lender gets a pre-agreed proportion of the money from the sale of your property.

What are the risks?

As life expectancy continually increases, it means you could be paying interest for a considerable period, which could add up to a large sum, so you may have little cash to leave as an inheritance.

It also means those who take out a plan too early in their lifespan may pay a large sum of interest. Many experts suggest waiting until at least your 60s.

If house prices fall, it may also leave your kids with little inheritance as a huge chunk of the sale price may go to pay off the debt.

Most lenders guarantee you will never have to pay back more than the value of your home even if the sale price is less than what you owe.

Should you take an equity release plan?

Most experts suggest you speak to your family and consider downsizing (selling your home for a cheaper one) before committing to equity release.

As there are big risks to taking out an equity release plan – but also gains by having access to cash – it’s always worth seeking advice from a broker.

In fact, it can even be cheaper to go via a broker as lenders sometimes offer marginally better rates to those who use a middle man.

Finding the right mortgage requires a lot more thought than just comparing rates. These days, home loans come with a multitude of additional fees which can greatly influence the true cost of financing a property.

In fact, lenders have become experts at manipulating the best buy tables with low rates to get themselves to the top, only to hammer borrowers with huge, hidden charges.

This means you need to do your sums first, which a good broker can help with.

Here is a breakdown of the typical fees you may pay when getting a mortgage, split between applying for a new deal and paying off your existing one.

Applying for a mortgage for the first time

Application fee

This is part of the price of your mortgage. Often, you have the choice of adding the fee to your loan (which means it incurs interest) or pay it up front.

Application fees can vary wildly depending on the deal, from anything from £99 to several thousands of pounds.

A portion of this fee is sometimes non-refundable and must be paid up-front.

Legal fees

You will need to enlist a solicitor to sort the legal details, which can cost a few hundred pounds.

Valuation fee

You lender will usually try to ensure your property is worth what you’re paying, which can typically cost between £200 and £3,000 depending on the value.

Higher lending charge

Some lenders levy a fee if the sum you borrow is close to the property value. A typical charge on a £200,000 mortgage is £3,000.

Other fees

You may pay if you don’t take your lender’s buildings insurance, and to have the money transferred to your account.

Paying off your mortgage

Exit fees

When you clear your mortgage (either because it’s paid off or you’re switching to another deal) some lenders charge up to £300 to close your account.

Early repayment charge

If you clear your mortgage or switch lender during an introductory period you are likely to pay up to 5% of the balance which can run into thousands of pounds, so it’s often best to wait until your deal expires. Sometimes, early repayment charges extend beyond an introductory period, though this is rare.

You don’t need to have a perfect credit history to get a mortgage as some specialist lenders offer deals to those who have had past problems.

That said, a bad credit mortgage, also known as a sub-prime mortgage, is pricier than a conventional home loan so it is best to get your finances in order to cut the cost of owning a home.

What is bad credit?

There is no set definition of bad credit as every lender has its own criteria. Broadly speaking, if you regularly miss credit card, loan or mortgage payments you will be in that category.

Some lenders, but not all, may overlook the odd missed payment, which means you would qualify for a cheaper, standard mortgage.

For some borrowers, their financial situation is far more precarious. Even if you have been declared bankrupt or had to take out an IVA to manage debts, you may qualify for a bad credit mortgage as long as you have cleared your arrears and/or you’ve been discharged as bankrupt.

However, only a few lenders will forward cash to borrowers deep in the mire.

How do lenders judge you?

If you miss payments or run into other problems these are recorded on your credit file, which lenders usually view before deciding whether to accept your application.

To complicate matters, there are three credit reference agencies – Call Credit, Equifax and Experian – which all hold their own record on you.

Are bad credit mortgages always available?

Before the credit crunch in 2007, sub-prime mortgages were being sold like hot cakes but during the crunch itself they virtually disappeared. This shows it is not always possible to get a mortgage if you have a patchy credit history.

How do I get a bad credit mortgage?

Few will want a bad credit mortgage as it costs more, but a good broker, which will have the experience of knowing lenders’ criteria, can help you decide whether to apply for a conventional or sub-prime mortgage, depending on your circumstances.

And as many high street lenders do not offer bad credit mortgages, you often need a broker to locate the lenders that do.

Improve your credit rating

To increase your chances of getting a cheap mortgage, it’s important to keep your finances in order. This primarily means paying all bills on time. Also ensure you are on the electoral roll to help lenders identify you.

First-time buyers planning on taking that exciting initial step on the property ladder can find it tough, but contrary to some headlines, it is not impossible.

How do first-time buyers get a mortgage?

The key is having the necessary salary to afford the loan repayments and enough of a deposit to qualify for a mortgage.

Most lenders require you stump up a reasonable amount of cash for a deposit – typically between 10% and 25% of the property value – before they lend you the cash.

Unfortunately for first time buyers it can be hard to get sufficient funds in place because most are young so have not yet amassed enough cash, though help is at hand (see below).

You also need to have a decent credit history which means you need to be up-to-date with any loan and credit card payments and not have any other outstanding arrears.

Lenders often demand first-time buyers’ credit records are even better than other borrowers’ to give them the confidence to lend in the knowledge they are likely to get their money back.

Some deals are designed specifically for first-time buyers but that does not mean they cannot apply for a standard mortgage. A broker can tell you which are best.

Help for first-time buyers

Many twenty or thirty-somethings are forced to resort to the bank of mum and dad to get on the housing ladder if they don’t have enough cash for a deposit.

But if that’s not an option for you, you may be forced to look elsewhere.

Some developers offer money off for first-time buyers while the Government may also be another source of help.

At times, it has waived the tax you pay when buying a property, called stamp duty. So check whether that applies when you buy.

In addition, you can sometimes get help buying a home via a shared equity or shared ownership plan, sponsored by the Government.

With one of these, you buy a share of the property and, for the remaining share, you either pay rent to a housing association or pay it the money back over time.

To qualify for a shared equity or shared ownership deal, your household income usually needs to be £60,000 or under and you often need to live or work in the area you are buying.

Those deemed to be key workers, such as teachers and police officers, tend to get priority treatment.

A broker can tell you which schemes are available and whether they are suitable for you.