Mortgage

Approximately 1.37 million properties were purchased last year in the UK and out of that, around 90% were bought using a mortgage. For those that are unable to buy the property outright, a mortgage is the only viable method of purchasing. Therefore getting a mortgage and buying a house are usually very much intertwined.

What is a Mortgage?

A mortgage is loan you take out from a mortgage lender to help pay for a property which can be obtained from banks, buildings societies or specialist mortgage lenders.

The mortgage lender will use the property as security for the loan and will typically take a legal charge over the property. This gives them certain rights over the property such as the ability to take possession and sell if the mortgage is not repaid as agreed in order to recoup their money. The legal charge is only released once the loan has been repaid in full.

Mortgages are made up of two elements, capital and interest. The capital is the amount originally borrowed to buy the property and the interest is the amount the lender charges for lending the money. Although there seem to be many different types of mortgage repayment, they can really be categorised into two main types, repayment (where both the capital and interest is fully repaid) or interest only (where only the interest portion is repaid leaving the original amount borrowed at the end).

The Mortgage Application Process

One of the first steps would be to find the property you are looking to purchase. However, if you have not yet found a property or are unsure what value of property would be affordable, it is advisable to firstly establish how much you can borrow. Knowing what you can afford will help you narrow your search. Mortgage lenders will provide a 'mortgage in principle' otherwise known as a 'decision in principle'. Using information regarding your financial history, income and expenses, they will be able to calculate the amount they are prepared to lend. A decision in principle can often be useful when placing offers with estate agents as it shows the estate agent that you have already got the funds provisionally approved. This allows you to move quickly to secure the property.

Once your offer has been accepted by the seller, you will need a solicitor to carry out the legal side of things such as local searches, drawing up contracts and other legal paperwork. It is worth mentioning that at this point, you are not legally obligated to buy the property.

Whilst the solicitor is working on the legal side, your next step is to start the mortgage application. The mortgage lender will ask you to complete an application form which will then go to their credit department for approval. Note that a mortgage in principle does not guarantee that the lender will provide the funds. The lender will usually ask to see evidence of your income, identity and current address and may also require a reference from a previous landlord or lender where applicable. The lender may also want a non-refundable fee to cover their processing costs and a property valuation.

The lender will then have the property valued to make sure it is worth the price you've agreed to pay and that there are no issues that may prevent a sale in the future. If there are any issues raised in the valuation, it may affect your application.

If the lender is happy with the valuation, references and application, they will approve the loan and make a formal offer called a 'mortgage offer'. This is usually sent both to you and your solicitor as they will need this to complete the purchase. You are then asked to carefully read the mortgage offer, sign and return. At this point, the lender now guarantees that the funds will be available. Most mortgage lenders will have a requirement that buildings insurance is in place prior to completion in order to protect the property until the mortgage is repaid.

Lastly, once the solicitor has received their copy of the mortgage offer, they will be ready to complete the transaction. The solicitor will agree a date to exchange contracts with the seller's solicitor. At this time, you will pay any deposit and stamp duty and commit to paying the rest on the agreed completion date. Once contracts have been exchanged, you are now legally obligated to buy the property. On the completion date, funds are transferred from the lender to the solicitor who will then forward this to the seller's solicitor (along with your deposit). The property is now considered yours. The solicitor will then organise the necessary amendments to the deeds via the Land Registry and will send them to the lender who will retain them until the mortgage is repaid.

Summary

• A mortgage is a loan provided by a mortgage lender to help purchase a property
• There are two main ways to repay a mortgage, Capital & Interest and Interest Only
• To establish how much you can borrow, you will need a 'decision in principle'
• The lender does not guarantee the funds until a 'mortgage offer' has been issued
• Once you have exchanged contracts, you are legally obligated to purchase the property

For more information about 'Mortgages', you can call us on 020 8783 1337 or submit an online quote.