What is a Standard Mortgage?
A standard mortgage is essentially a loan from a bank or building society secured on a property. Each month you will usually pay back instalments of capital and interest. A common mortgage term is 25 years, but this can be longer or shorter depending on what you need.
How Standard Mortgages Work
In effect a mortgage is a loan which helps you to buy a property. If you have access to substantial savings you may not need a mortgage. Although you may still choose to have one to retain access to your money.
The mortgage lender will charge you interest on the amount they lend. The amount of interest can vary quite a lot depending on the circumstances.
More often than not, you will put down a cash deposit.
The mortgage will have a term, so over a period of years you’ll pay this back the mortgage and interest in monthly instalments.
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How Do You Get a Standard Mortgage?
A good starting point is to talk to a mortgage broker. It usually makes sense to do this early in the house buying process as this can help you understand your options, and any action you need to take to help things run smoothly. A mortgage broker can give you expert advice and guidance on the whole house buying process.
Another important aspect to buying a property is to have a deposit. Often, lenders will ask for a minimum deposit of 5% to 15% of the property value. A deposit can come from your personal savings or could be a ‘gift’ from friends or family.
If you don’t have a big deposit, there are schemes available such as Help to Buy and Proportunity, to give you a helping hand onto the property ladder.
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How Much Standard Mortgage Can I Afford?
How much you can get and how much you can afford should be the same thing. However, it’s important to get a professional view on whether the mortgage is affordable before applying.
It is vital that any mortgage is affordable over the long term. An unaffordable mortgage can result in arrears, defaults, and ultimately repossession of your home. Notwithstanding a whole lot of stress and unnecessary debt recovery costs.
If you apply for a mortgage which isn’t affordable the lender will know and your application is likely to be declined.
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How Much Standard Mortgage Can I Borrow?
The amount of mortgage you can borrow will be based on an affordability assessment.
There are mortgage calculators available online which can estimate how much you can borrow. However, every lender has different criteria they apply to work this out. As such the best way to accurately calculate how much you can borrow is to speak to a mortgage advisor.
The most important factors in deciding how much you can borrow are:
- Your income
- Your expenditure
- Your debt
- Your credit profile
The above areas are essentially used to work out your household income and outgoings, inclusive of basic salary, benefits and bonuses.
Trying to ascertain affordability, can be a complex process. Taking into account household bills, along with any debts, such as credit cards and loans. With the result that you have enough money to cover monthly mortgage repayments.
A mortgage calculator can only work out your basic information and therefore can only give you an estimation. Having a mortgage broker can help you get specific personal advice.
How Much Mortgage Can I Get?
As above, the amount of mortgage you can get, chiefly depends on your income, expenditure, debt, and credit profile. Lenders will take all of this information into account.
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What Sort of Mortgages Are Available?
The right standard mortgage for your individual circumstances depends on many factors. For example your view on interest rates as well as your necessity for known mortgage costs, or flexibility for large capital repayments.
Getting a good mortgage deal can save a substantial amount of money.
There are generally three types of mortgage available; standard variable rate, discounted / tracker rate, and fixed rate mortgages.
A fixed interest is the most common type of mortgage. This interest rate will remain fixed for a period of time agreed at the outset. A fixed interest rate protects you from any movements in the underlying benchmark rate (both positive and negative). This mortgage brings the benefit of predictable mortgage payments for a certain period of time. However, it does not generally allow you to repay the mortgage in full or make substantial overpayments without a financial penalty. Often, a fixed rate will come with an allowance to overpay 10% per year without penalty.
Standard Variable Rate (SVR)
A standard variable rate means your mortgage payments can increase or decrease depending on shifts in interest rates. Generally, this allows more flexibility than a fixed rate mortgage as you can make substantial overpayments or redeem the mortgage in full without penalty.
Discounted or Tracker Rate
A discounted or tracker rate loan means it has an interest rate set at a certain amount below or above a benchmark rate. Commonly, the benchmark could be the lender’s standard variable rate or the Bank of England base rate. Your mortgage payments will increase or decrease as the benchmark moves. Again, these mortgages can offer the flexibility to make overpayments, but can offer lower payments than a standard variable rate.
What Do I Need To Get a Mortgage?
To get a mortgage, you need to be earning an income which you can evidence is sufficient to cover your personal costs and the mortgage repayments. Generally, you will need to have a deposit contribution to put towards the purchase. The deposit will be at least 5%, but 10% or more is preferred. Ideally you should have a history of repaying credit to show trust. Otherwise you will pay a higher interest rate for a mortgage.
This helps to show lenders that you are a sure bet and will make your mortgage payments on time. Lenders will review your credit report, to see if you have a favorable repayment history.
Mortgages When You Are Self Employed
Any mortgage lender you apply to, will require that you can prove your income. Proving income can be more difficult if you are self-employed. The key principle is that the lender is looking for steady earnings.
If you are self-employed you should be able to show two years’ accounts. However, certain lenders will accept one years accounts. Just be aware your choice of mortgage may be more limited.
You will also need to provide, passport, driving licence, council tax bill, six months of bank statements and utility bills dated within three months.
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How Are Mortgages Calculated?
Each mortgage lender may calculate a mortgage slightly differently. The calculations can be very complex as most lenders calculate interest on a daily basis.
Basically, the interest rate is applied to the amount you owe each month, considering the number of days in the month. If you make a payment then two calculations are made: one before the payment, and one after. A further part of the calculation is to calculate how much of the payment is towards interest and how much towards capital. Then the lender works out how much mortgage is left.
All mortgage lenders differ in how they calculate mortgages. For this reason, we don’t use a standard mortgage calculator. However, if you must use one, try this free calculator from the Citizens Advice website: Click here
How Many Mortgages Can I Have?
You can have multiple mortgages. It is up to a lender however, as to what they’re willing to offer. Some lenders typically allow a maximum of two. One as your main residence and one as a holiday home. Or perhaps for a family member to live in.
Mortgages for properties rented out are different. These are called buy to let mortgages.
You can also obtain mortgages on commercial properties.
Are Mortgages Haram?
If you don’t want Riba (interest), then going for a traditional mortgage probably isn’t for you. Alternatively, Home Purchase Plans can be offered as an Islamic Mortgage or Sharia Mortgage. A property can be bought in conjunction with the lender while still following the rules under Sharia Law.
Who Lends The Most?
There are many big name brands out there. This can predominantly hinge on income and other financial commitments. Sometimes lenders not on the high street can offer the highest loan amounts. Mortgages for those working in certain professions, known as Professional Mortgages can offer high loan amounts. A mortgage broker can analyse this for you, as we know which lenders extend the furthest.
Will Standard Mortgage Rates Go Down?
This is one of the most common questions buyers ask a mortgage broker. The honest answer is no one knows!
It’s important to understand what will happen to your mortgage if interest rates change. Fixed rate mortgages can protect you from interest rates increases but you wont benefit from any reduction. Tracker rates allow you to benefit from interest rate reductions but if rate go up, so does the standard mortgage payment.
Can Mortgages Be Paid Early?
Technically you can pay off most mortgages early. Even make a monthly over payment on your agreed monthly limit. Numerous lenders grant you to overpay up to 10% a year without a penalty. Equally important, since lenders could lose money for outright prepayment of the entire mortgage, paying even part of the balance, can incur penalties. Before taking a mortgage it’s important to consider whether you will be making any additional payments, and how much.
Mortgages Where Parents Can Help
There are many ways in which a parent or grandparent can help. Yet be aware that these options come with their own set of risks.
This is generally acceptable to lenders and can help increase your deposit. Lenders will usually require that the money is an outright gift, and not a loan. Some lenders have restrictions on overseas gifts.
A parent can use their home or savings as security or be named guarantor on their child’s mortgage. In which case, the parents home or savings could be at risk, if the borrower defaults on mortgage payments. On the other hand, if you don’t have much deposit or your financial situation isn’t the best, having a guarantor mortgage can help.
A parent can buy the property and enter into a joint mortgage with their child, both parties are jointly responsible for mortgage payments. Moreover you’ll need to pay second property duty rates, if you’re already a homeowner. In addition the parent still has to be in employment, plus this option is only available before a certain age.
Family Assist Mortgage
A Family Assist Mortgage is where parents can offset their savings or property against their child’s mortgage. By putting their savings into an account linked to the mortgage or securing some of the loan against their property. Sometimes the money is sealed until their children have repaid a percentage of the mortgage.
Commonly, Equity Release is used to assist younger generations to buy a home. This involves a standard mortgage on an existing property to release equity. There is an option to make mortgage payments, but no requirement to do so. Instead the interest accumulates until the loan is repaid. The loan does not have to be repaid until the owners die or move into long-term care.
Who Regulates Mortgages?
The Financial Conduct Authority or FCA regulates mortgages and mortgage advice in the UK.
Who Offers Mortgages?
High street lenders, banks building societies and specialist lenders offer mortgages. There are a myriad of ways mortgages can differ, so finding the right one requires expert knowledge. There are countless sites for comparison, but it’s generally wiser to go with a mortgage broker.
Can Mortgages Be Transferred?
Yes, it is possible to transfer a standard mortgage. So long as the new property meets the lenders criteria. For instance, changing from a single to joint mortgage, or vice versa is a mortgage transfer. Transferring a mortgage is called a Transfer of Equity.
Sometimes it is also possible to ‘port’ your standard mortgage to a new property. This can be helpful if you decide to move but are on a good deal, or would have to pay a penalty to repay the mortgage.
Looking to move home or remortgage? Watch the latest vlogs from our mortgage advisors,
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