What is a mortgage?
A mortgage is a loan secured against your home. Because your
home provides a high level of security, lenders are willing to give
you a lower interest rate than other types of loans. If you sell
your home, the loan will usually be repaid to the mortgage lender
first and you will receive any money left over.
How much can you borrow?
Before taking out a mortgage you need to satisfy yourself that
you can afford the mortgage payments and associated costs. Most
lenders are usually prepared to lend up to three times your annual
income or two and a half times a couples income. Some lenders will
lend more than this. The calculation is usually based on basic
salary, but lenders will consider taking overtime and bonus into
account. If you presently have a personal loan or other credit
facilities the lender will usually take these into account by
reducing your mortgage borrowing maximum.
Mr B basic salary £15000, has an existing car loan £100 per month
Miss A basic salary £12500
£15000 + £12500 = £27500 - £1200 (£100 p.m car loan x 12) =
£26300 x 2.5 =£65750.
Miss C basic salary £24000, has an existing H.P. agreement £24 per
month and owes £3000 on her credit card - minimum payment £150 per month.
£24000- £2088 (12 x £24 + 12 x £150) = £21912 x 3 = £65736.
These calculations should only be used as a rough guide, some lenders
have larger income multiples. Most lenders will lend up to 75% of the
valuation of your house. If you need to borrow more than 75% you may
need to take out an extra insurance policy, arranged by the mortgage
lender. This policy is known as a 'Higher Percentage Advance' or
'Mortgage Indemnity Guarantee'. It's a one-off fee and most lenders
will allow this cost to be added to the loan. This insurance makes
sure that the loan is repaid to the lender if something did go wrong
with your repayments. Many lenders are now choosing to cancel this
charge for mortgages of less than 90%.
Most lenders are happy to consider lending 90-95% of the purchase
price, or valuation whichever is the lower. Some lenders will even give
a 100% mortgage. The deposit is payable when you exchange contracts
(not in Scotland).
Proof of income
Most lenders will require your last three months pay slips and
your most recent P60. If these cannot be found the lender will
usually check your details with your employer. If you are self-employed,
you may need to show your last three years trading accounts. Some people
may find it difficult to prove how much they actually earn; perhaps they
have only been in business for a year or two. Self-certification or
special status mortgages can overcome this. A self-certified mortgage
is where you declare your earnings but the lender does not require
evidence. You'll need to put down a bigger deposit to qualify for a
self-certified mortgage and meet the lenders other criteria. Interest
rates may be higher as well.
Other costs to bear in mind
- Solicitor's fees - £350 upward.
- Stamp duty (government tax) - if the purchase price is over £60000.
- Survey fee - Valuation report only for lenders purpose £125-£200.
- Homebuyers report (more detailed report) £250-£500.
- Removal costs.
- Mortgage application/arrangement/booking fee £95-£495. This can be
added to the loan by some lenders.
On-going costs (where appropriate):
- Building insurance.
- Contents insurance.
- Mortgage payments protection insurance.
- Life insurance.
- Critical Illness insurance.