Your mortgage is likely to be the biggest financial commitment you will ever undertake. This applies if you are remortgaging or purchasing a new home. Buying and selling a home is said to be one of the most stressful events of your life.
So taking a bit of time to get the right deal is paramount.
Deciding which is the right mortgage deal is not easy. It is not just working out if you can afford the monthly payments - you have to be sure that the rate you are being offered is right for you - even if your circumstances change. And that can be difficult.
Some of the best rates have conditions which can make them less attractive longer-term.
Even before you go for a loan, you can do simple sums to work out how much you can afford.
First, you need to ask yourself two basic questions:
- How much deposit or equity do you have? i.e. cash down payment if you are purchasing or the stake that you own in your home (the property value less the mortgage loan outstanding)
- What is your single or joint income including any bonuses / overtime etc?
When you have this information:
- Ask your Mortgage Adviser to select two or three lenders and provide them with this information, comparing how much they will let you borrow
- Request a written agreement in principle that confirms this amount (if you are purchasing a property this shows the seller and their agent that your intentions are serious)
- You are now ready to make a realistic offer
Finding a property is stressful enough, but the anticipation of securing a mortgage can be daunting as well. Since the "Credit Crunch" began in 2007, mortgage lenders have been tightening their lending criteria and demanding much larger deposits, leaving some first-time buyers feeling they have no hope of securing a deal.
But don't despair - there are still mortgages available for first-time buyers. If you have a regular income, a clean credit history and can put up a sizeable deposit from 10%, you are likely to remain attractive to lenders despite the current economic climate. The larger the deposit, the better rate of interest can be applied, making it easier to afford the loan.
How much can you borrow?
Salary earners paying PAYE
Most lenders lend you at least three times your gross annual income (including bonuses). For a joint application, you can expect to be offered two and a half to three times both your incomes; or three to four times the income of the highest earner plus that of the other applicant. With current low rates, lenders may be prepared to consider other earnings or increase income multiples.
Traditionally you had to provide audited accounts for three years; and rates could be higher than the standard variable. In today's climate you may find self-certification, supported by your accountant, will be accepted. To obtain the best rates you need specialist advice. More high street lenders are willing to offer competitive rates to the self-employed (with the right track record) - so make sure your adviser does the shopping around.
Which mortgage is best for you?
Simple and straightforward - you pay interest and capital each month. If you pay on time for the agreed term you are guaranteed to clear your mortgage. The interest element is larger in the initial years. Towards the end of the term you are mainly paying off the debt. You can make lump sum payments off your capital. You need to change your payments when interest rates change.
Your monthly payments only cover the interest not the debt. To settle the actual debt you take out a separate investment. This can be either an endowment policy, a pension plan or an Individual Savings Account (ISA). To clear the debt the investment must generate sufficient income.
An endowment policy combines a savings policy with life insurance. If you choose a with-profits plan your monthly premiums are part of a joint investment with others. Traditionally you were awarded an annual or reversionary bonus according to performance plus a larger terminal bonus at the end of the investment. With a unit-linked endowment your premiums are used to purchase specific units in stock market linked investments. The growth potential is larger than endowments but they also carry a greater risk. Recent stock market performance has shown how risky these plans can be.
Many investors now face a shortfall at the end of the term requiring additional funds to clear their mortgage. Interested in selling your Endowment Policy? You maybe elligible for compensation if you were mis-sold an endowment policy.
New style mortgages
These allow you to link your personal pension plan to your mortgage. You use part of the tax-free lump sum it generates at the end of the mortgage term to pay off the outstanding debt. The remainder must be used to purchase an annuity in the same was as a standard pension plan. The annuity is used to buy a guaranteed annual income until your death. The disadvantage is that you can only access this money when you are over 50; and you can only use up a maximum of 25% of the plan's value.
Different from traditional mortgages, they give you more control over your finances - but this can cause pitfalls. If you make underpayments and take payment holidays, for example, you debt increases. You need to increase your monthly repayments or extend the term of the mortgage to compensate. Most flexible mortgages come with an initial offer period - an introductory discount, fix or cap.
Lenders' Standard Variable Rates on flexible mortgages tended to be higher than on their standard home loans but most are now more competitive. Many non-flexible mortgages now have some flexible features such as penalty-free overpayments and daily-calculated interest.