There are various factors that you should consider before applying for your mortgage. We've outlined the key considerations below.
Upfront costs. You'll need to spend quite a lot before you even start paying for the mortgage, on things like:
Usually a solicitor or licensed conveyancer needs to be appointed to deal with the legal aspects of buying a property. There will be costs involved and these can vary, so it's worth gathering a few quotes.
Your lender will value the property to make sure it's an acceptable security for the loan. The type of valuation will depend on the property type and who your lender is. Some lenders conduct a drive-past valuation for low risk properties, although if you want to buy a listed thatched cottage, for example, the valuation will be more in-depth and so more expensive.
You should always consider whether to rely on the lender's valuation, or to have your own survey done to highlight any shortcomings in the property, like damp in the walls or in the roof. The price of the survey could save you a fortune on unforeseen repairs in the future.
Sellers of properties in England or Wales must provide an Energy Performance Certificate, which has replaced the old Home Information Pack. Your estate agent will be able to arrange this for you.
Most mortgage lenders charge an arrangement or application fee when you take out a mortgage, although some will let you add the cost of this to the mortgage advance. The fee depends on the lender and the mortgage offer.
Before you fall in love with your dream home, make sure you can get a mortgage to buy it. You may need a substantial deposit.
The ratio between the amount of the mortgage and the value of property is called the loan-to-value (LTV). For example, a £90,000 mortgage on a property worth £100,000 would result in an LTV of 90%, so you'll need a deposit of £10,000.
Mortgage rates tend to be closely linked to the Bank of England base rate, and the rates at which banks lend money to each other.
Rates can vary, and this makes a big difference to how much you have to pay each month.
Look beyond the initial rate, as there may be hefty fees payable.
The figures can be pretty scary, but the true cost figure highlights how much your mortgage will cost over the years. Unless you are on a 25-year fixed mortgage it will no doubt change, but still gives you a good method to compare mortgages.
With a repayment mortgage your monthly repayment covers both the interest and capital amount. The repayments are calculated to make sure that your mortgage is completely paid off at the end of the term.
Interest-only mortgages are cheaper than repayment mortgages, but leave the full mortgage amount outstanding at the end of the term. So the saving on the mortgage itself needs to go towards a savings plan designed to repay the mortgage when it is due. If you are lucky, the savings plan may reach the mortgage amount early so you can repay the loan. However, it may underperform, leaving you with an outstanding debt – there are no guarantees. [Note: these mortgages are increasingly hard to come by these days given the risks involved, with most lenders offering repayment terms as the first option.]
You can get fixed rate mortgages, variable rate mortgages and discounted rate mortgages on either a repayment or interest-only basis. You may also be able to get a proportion of your mortgage on each basis to hedge your bets, but you'll need to speak to your lender.
Your lender should do a careful assessment of your ability to repay the mortgage and should only lend what they think you can repay. Things change, however, so you should try to have a contingency fund available. Bear in mind, too, that affordability criteria are becoming increasingly strict, so you should make absolutely certain that you can afford the repayments now as well as when rates rise – and make sure you can prove it – as otherwise you could find your application declined.
Fixed rate mortgages let you budget precisely, while discounted rate variable mortgages keep the cost down in the early years, so you'll need to weigh up a few things before you make your decision.
If you think you may move in the next few years, make sure your mortgage is portable, as this could save you a lot of money. If a mortgage is portable, it means you can keep it with the same lender if you move house.
Lenders may waive or reduce early repayment fees if you're on a fixed rate or discounted rate deal.
If your mortgage isn't portable but you want to move, you'll probably be hit with early repayment fees, which can be hefty.
You'll need to take out various forms of insurance when securing a mortgage, and these can also add to your outgoings. Types to consider include:
If you use a mortgage broker, make sure they are authorised by the Financial Conduct Authority. You can check by looking at the FCA's register of authorised firms at www.fsa.gov.uk/register.
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Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.
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