Frequently Asked Questions

1 - What are the different types of mortgage?

2 - How much can I borrow?

3 - What are the options for repaying my mortgage?

4 - What other costs will I incur?

What are the different types of mortgage?

Variable rate

The interest rate goes up and down during the lifetime of your mortgage, broadly in line with interest rates in the economy as a whole.

Capped rate

This is a variable rate mortgage and so your rate goes up and down. However, you have the comfort of knowing that when the rate goes up it will not go above a certain figure - the 'capped rate'.

Fixed rate

This provides you with a guaranteed rate of interest for an agreed period of time. The advantage is the peace of mind that if rates increase, your repayments will remain the same. But if interest rates fall, your mortgage payments will stay the same until the end of the fixed term, so you should think carefully about how long you want to be locked into the same rate. When the fixed period ends, the mortgage usually reverts to the lender's standard variable rate. There are normally penalties incurred if you decide to switch your mortgage during the fixed period.

Discounted & tracker rates

Some mortgages come with a discount on the lenders standard variable rate for an agreed period of time. A tracker rate differs in that instead of offering a discount off the lender's standard rate, it offers a rate which directly increases or decreases in line with movements in the Bank of England base rate.

With both types, at the end of the offer period, the interest rate simply reverts to the standard variable rate. There are often penalties incurred if you decide to repay your loan during the discount or tracker period.

Flexible mortgage

These mortgages allow you to pay extra amounts to reduce your outstanding loan or build up money you can draw on in the future. Some allow you to vary or even stop payments for periods of time. Interest is usually calculated daily, so you can see the benefits of overpayments immediately. This means you could end up saving a significant amount on your mortgage or even be able to pay it off early.

Some allow you to 'offset' your savings against your loan. This means that your loan is effectively reduced by the amount you have in savings and you only pay interest on this reduced amount.

Cashback

This is where you receive a lump sum shortly after completing your mortgage. This sum is yours to use for any purpose, possibly to buy furniture, carpets or make home improvements. Cashback mortgages often have financial penalties if you want to switch to a different loan or repay your mortgage during a specified term.

Buy to let

This is a mortgage for a property you want to buy and then let out, for rent. The amount of rent you receive over and above the mortgage payment will help cover the management and maintenance costs of the property. Remember that you are responsible for making the mortgage payments even if you have not received the rent. You will typically require a deposit of at least 15% for a buy to let purchase. Also, the lender will normally value the rental potential of the property and require it to cover the mortgage, plus an additional 20 - 30%.

Shared ownership

Shared ownership has been introduced to help people who cannot afford to buy a home outright. Through shared ownership, you buy a share of the property and pay a rent on the remaining share that is owned by a 'Registered Social Landlord'. Gradually you may buy further shares and eventually own your home outright.

How much can I borrow?

Income multiples

You can usually borrow around 3.5 times your income, or 2.75 times joint incomes. This is a general guide and some lenders may offer higher multiples of income. However, before taking out any mortgage, you need to be sure that you can afford the repayments and associated costs. Lenders will usually base their calculations on guaranteed earnings, but most will also include a proportion of your other sources of income, e.g. regular overtime, commission or bonuses.

A useful step in the mortgage application process is to obtain an 'agreement in principle'. By providing key information to the lender, they decide whether they are prepared to lend you the requested amount of money. The agreement is normally based on your financial circumstances, including income and credit history.

Deposit

Most lenders are happy to consider lending 90 to 95% of the purchase price. The remaining amount is paid by you as a deposit. Some lenders will provide a 100% mortgage, which means that you can borrow the full value of your home. Your deposit is paid when you exchange contracts.

Self-certification

A self-certified mortgage is one which does not require evidence of income. They are designed for people who find it difficult to prove how much they actually earn. You are still required to declare your earnings, but the lender does not need verification. A larger deposit is normally required, typically between 10 - 25%.

Guarantors

If you are unable to borrow the full amount you require, you might be able to persuade a member of the family to act as a guarantor. A guarantor signs a promise to repay your loan if you're unable to do so.

What are the options for repaying my mortgage?

Repayment mortgage

A repayment mortgage works in the same way as most kinds of loan. You make a regular monthly payment to the lender. This payment will be made up of capital (in other words, repaying the amount you owe) and interest. As long as you always keep up the correct payments, at the end of the term you will have repaid the loan in full.

Interest only mortgage

With an interest only mortgage, you pay only interest to the lender. This means that you do not pay back any of the loan, so need to make a separate payment into some sort of savings plan (e.g. endowment, ISA or pension), in order to build up a lump sum to pay off the mortgage at the end of the term.

A combination of repayment & interest only

Some lenders allow you to combine both repayment methods. For example this may apply if you took out an endowment mortgage for your first home for £100,000 and you are buying your second home at a cost of £150,000. You may want to keep your £100,000 endowment until the policy is due payment, but borrow the extra £50,000 as a repayment mortgage. If you are a first-time buyer, you can use an existing savings policy such as an ISA to contribute towards a combination mortgage.

What other costs will I incur?

Higher Lending Charge

Most lenders are happy to consider lending up to 75% of the purchase price or valuation of your home. If you want to borrow more than this, the lender may need extra security. This usually comes in the form of an insurance policy known as mortgage indemnity. The lender will arrange this for their own benefit but you may have to pay a one-off premium for it. If you do, most lenders will allow you to add it to the mortgage amount.

The insurance policy covers any loss if the lender has to repossess, then sell your property, but does not recover the full amount you owe from the sale. If this happens, you will be legally responsible for any shortfall on the mortgage. Even if the lender has the insurance in place, the insurer generally has the right to recover the shortfall from you.

Valuation survey report

You normally have to pay the lender a fee for a surveyor to value your new home. This is done for the lender's benefit, to confirm the property is adequate security for the loan. It should tell you if there is something seriously wrong with the property, but it doesn't involve a detailed inspection. The percentage you can borrow will be based on the figure in the report, and not necessarily on the price you have agreed with the seller.

Other surveys

For your own peace of mind, it's a good idea to arrange your own survey. If you're buying an older property or planning to live in an area that's suffered from subsidence in the past, you should get a survey done. You may be able to save money by using the same surveyor who carries out the lender's valuation.

A 'homebuyer survey' is usually more thorough than the lender's report and tells you whether the property is structurally sound. But it gives no guarantees.

A 'building survey' costs more but gives the added guarantee of legal protection against incorrect information.

Stamp Duty

Stamp duty is a tax on buying property and applies to properties worth over £125,000. Your solicitor will collect the stamp duty from you. Since November 2001, stamp duty has been abolished for certain property transactions in certain areas to help improve and rebuild those areas. The amount of stamp duty payable depends on the purchase price of the property and the band into which it falls, as follows:

£125,000 to £250,000 = 1% of purchase price
£250,001 to £500,000 = 3% of the purchase price
Over £500,000 = 4% of the purchase price

Solicitor fee

As well as paying a solicitor or licensed conveyancer for the work that he or she does, you will have to pay the cost of land registry charges and local search fees. The whole process means that once the sale goes through, the property really belongs to you and you are fully aware of any factors affecting the property.

Mortgage product fees

Mortgage lenders may charge an application fee to cover their initial administration costs. Fees are particularly common with limited offers like fixed-rate deals and may not be refunded if your purchase falls through.