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.

Example

Mr B basic salary £15000, has an existing car loan £100 per month
Miss A basic salary £12500

Calculation:

£15000 + £12500 = £27500 - £1200 (£100 p.m car loan x 12) = £26300 x 2.5 =£65750.

Second example

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.

Calculation:

£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%.

Deposit

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

One-off fees:

• 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.