What is a mortgage?

Put simply, a mortgage is a loan that is secured against property or land. The mortgage provider will lend an amount based on their assessment of the security of the value of the property (subject to affordability checks, and a maximum loan to value ratio), in order to allow you to purchase the property.

Any mortgage must be repaid to the lender in full by the end of the term of the loan

How much can I borrow?

That will depend on a number of factors such as the term of the mortgage, the loan to value ratio, any other commitments you have and other regular outgoings.

As a rough guide, you should be able to borrow up to 4.5x your salary (or profits if self-employed) and maybe a little more. The lender will run an affordability calculation to determine the exact amount.

How can I get the most suitable deals on mortgages?

The best thing to do is consult a professional mortgage adviser who can assess your personal circumstances and search across the mortgage market to find the most suitable deal for you. At AFP we will review your financial situation and compare across the market to ensure we find you the most suitable deal possible.

Can I raise money using a mortgage?

Yes, you can raise funds on your property for a number of reasons including home improvements, debt consolidation *, additional property purchases (buy-to-let or holiday home) or to assist a family member with a purchase of their own, by providing a deposit.

What types of mortgage are there?

There are various types of mortgage available, but they can be separated into broad categories according to the repayment method and interest rate type.

Mortgages can be split into two types according to how the monthly repayments are formed:

Repayment Mortgages

This is the most popular type of mortgage. Each month you repay a portion of what you borrowed, plus interest, until the whole amount is paid off in full. With a repayment mortgage, you are guaranteed to have repaid the loan at the end of the term, providing you maintain the monthly payments.

Interest can be charged on repayment mortgages on either a daily, monthly or annual basis. The daily basis will work out cheapest. Most mortgages nowadays charge interest on a daily basis.

Interest-Only Mortgages

These are a higher risk method of repaying your mortgage. Each month you pay only the interest that is being charged, you do not make any contribution towards paying off the actual balance until the end of the term of the mortgage. At which point you must pay off the amount that you borrowed in full. Overall, this method will cost more than a repayment mortgage, although monthly payments will be lower.

You can repay your mortgage through investments or other savings you hold, by making lump sum or regular overpayments during the mortgage term, by the sale of other property and so on, but it is important to make sure that any repayment strategy you have is both realistic and regularly reviewed.

Standard Variable Rate Mortgages

When you take out a variable rate mortgage, you pay interest at what is known as the specific lender’s standard variable rate, or SVR. The SVR will fluctuate regularly, very broadly in line with inflation and with changes in the Bank of England’s base rate, but exactly how it does change is ultimately up to the lender. Some lenders offer an initial discount from their standard variable rate for new customers.

Tracker Mortgages

The interest rate on a tracker mortgage is directly linked to the Bank of England’s base rate, remaining constantly at a set percentage (usually 0.5-2%) above it. It will change when the Bank of England’s base rate changes.

Fixed Rate Mortgages

With a fixed rate mortgage, the interest rate you pay stays the same for a fixed period, usually between two and five years. This enables you to budget with confidence.

Once the fixed period ends, you generally revert to paying the lender’s standard variable rate (SVR), unless you switch to a different product or re-mortgage to another lender.

Can I mortgage a property I want to let out?

If you wish to let a property, then you take out a specialised buy-to-let mortgage. These are based largely around the rental value of the property as assessed by the lender, as well as your ability to service the loan when no rent is coming in. You, or a member of your family must not occupy a property you own while a buy to let mortgage is outstanding on it.

Can I still get a mortgage if my credit rating is bad?

There are mortgage products out there to suit people in a whole range of financial situations and so if your credit score is less than perfect the chances are that there is a product out there for you.

If you do have a poor credit record, while you may still be able to get some kind of mortgage you probably won’t be able to benefit from the best deals. You’ll probably be offered slightly higher than average interest rates, or maybe a lower loan to value ratio. This is to reflect the increased risk that the lender is taking by allowing you to borrow money with a less than perfect track record of repaying in the past. A professional mortgage adviser will search the market for a lender most likely to accept you if you fall into this category.

What if I want to move house before I’ve paid off my mortgage?

If you want to move house, you may be able to take your existing mortgage, if, for instance, you are within a fixed rate period, over to your new property and continue paying it off as usual. This is called ‘porting’.

Alternatively, a new mortgage can be arranged with a new lender. You will have to undergo new affordability and credit checks.

Will I need to pay any fees when I take out a mortgage?

Usually, you will be charged some fees when you take out a mortgage. Typical fees include:

Legal costs

Valuation costs

Arrangement fees (essentially administrative fees charged by the lender)

Broker fees

Exactly which of these fees (and any others) you’ll be charged will vary from lender to lender and case to case. You will be informed of these prior to your application, and the level of fees involved will be a factor in determining the most suitable mortgage for you by your mortgage adviser.

What insurance do I need for a mortgage?

You will be required to have adequate buildings insurance in place for the property to be mortgaged and the lender will need sight of this before releasing the funds.

You should also consider life insurance and critical illness cover which would provide a lump sum should you die or suffer a range of critical illnesses. You should also consider how you would repay your mortgage if you are unable to work through long term illness and consider Income Protection Insurance which would pay you an income during that period. At AFP we can help to ensure you have the right level of protection for your circumstances.

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