How to get a mortgage

Make sure you understand the mortgage basics before you sign on the dotted line.

Written by: Aaron cage

IN THIS GUIDE
  • Mortgage terminology
  • Finding the best mortgage deal
  • What type of mortgage to get?
  • When to apply for a mortgage?
  • Do I need a mortgage broker?
  • How much can I borrow?

Getting a mortgage is probably the biggest financial commitment you will ever make - make sure you understand what your options are and what is best for you.

A mortgage broker is more likely to be able to get your mortgage approved but in addition to this, they may well be able to get you a lower interest rate.

Some mortgage brokers are free but depending on your circumstances, it may make sense for you to pay for their services.

Complicated borrowing cases generally take more time for the broker to research options and find the best lender for you. Like with everything, the more time something takes, the more it costs...mortgage brokers are no different.

You may benefit from a mortgage broker's expertise if you fall under one of the following categories:

  • bad credit history.
  • unearned income (interest earned, dividends received etc.).
  • second jobs.
  • part-time workers.
  • bonus payments need to be taken into account.
  • overtime needs to be taken into account.
  • the self-employed.
  • multiple people on mortgage application.
  • company directors.

However, even after a mortgage broker's fees are taken into account, you are still likely to save a significant amount of money by using a broker.

Note: Automated mortgage brokers (we're talking about the chatbot kind of mortgage broking) only tend to work for simpler mortgage cases - they tend to be free but they may not be able to get you a mortgage offer. We recommend avoiding these types of mortgage brokers.

Mortgage terminology

Make sure you understand the key terminology that you'll be asked about whilst applying for a mortgage.

  • Deposit - this is the amount of your savings that you will put toward the cost of the purchase of the property.
  • LTV - loan to value. This is the ratio of your deposit to the amount you want to borrow.
  • Repayment mortgage - each month when you pay the lender, a bit goes towards the interest cost and the remaining amount goes towards paying off the sum that you initially borrowed (see Interest only mortgages).
  • Interest only mortgage - each month you only pay the interest on the mortgage. When the mortgage expires at the end of the term, you need to pay the lender the whole amount you borrowed (when you bought your house).
  • Mortgage term - how long the mortgage will need to be paid for - commonly 25 years but some lenders will lend for up to 35 years.
  • Interest rate - this is the amount the lender will charge you for lending you the money (it is usually quoted as an annualised rate).
  • Decision in principle (DIP) - a lender will provisionally approve a loan amount and offer you a rate. Many estate agents will ask to see your DIP when you make an offer for a property.
  • APRC - annual percentage rate of charge. This is the total cost of your mortgage, including fees, over the entire mortgage term of the loan.
  • SMR - standard mortgage rate. This is the interest rate you'll pay after the introductory rate ends.
  • Introductory rate - this is the initial rate the lender will charge you before you revert to their Standard Mortgage Rate.
  • Fixed rate mortgage. The interest rate is fixed on a Fixed Rate Mortgage for an agreed length of time (usually between 2 to 5 years).
  • Variable rate mortgage. On a Variable Rate Mortgage, the interest rate can change over time. When interest rates change, it affects how much you need to pay back to the lender each month.

How much can I borrow?

Many lenders will lend up to about 5 times your income.

However, almost every lender has different criteria as to what counts as income so this is where your mortgage broker can guide you.

Some lenders are known to be 'friendly' to certain professions/occupations. Guiding you through which ones are best to approach is where your mortgage broker becomes invaluable.

How long is a decision in principle valid for?

After you have been given a 'decision in principle', it is usually valid for up to 6 months. Make sure it doesn't expire before you complete overwise you may find yourself in a position where you can't get the funds to complete and yet are contractually bound to buy the property.

Most lenders will extend your decision in principle although you may well find that the rate changes. Beware that if you lose your job and need to get another decision in principle, this may get rejected as it will be based on your new circumstances.

How long should I get a mortgage for?

The length of time you decide to borrow for is typically a balancing act between how much money you can afford to repay each month versus the higher total interest cost over the lifetime of the mortgage.

The longer the mortgage repayment period, the lower the monthly repayment costs will be.

Should you send your decision in principle to an estate agent?

When you put an offer in for a property, a good estate agent will often want to gain assurances that you can afford to purchase the property and have the financing in place.

They may well ask to see evidence of your deposit and your decision in principe. Be cautious in supplying this before your offer is accepted, as the estate agent may well use knowledge of your finances as the basis to advise the seller to push for more money in any negotiations.

Traditionally a 25 year mortgage term was pretty standard, things that would cause borrowers to reduce this is if they were older, the lender may not be prepared to have them plan on still needing to pay back a mortgage after they are due to retire.

Recently thouogh with the increase in house prices, more people have started to go for 30 or even 35 year repayment terms. The benefit is reduced monthly payments whilst still being able to purchase a property, with the downside being that over the entire mortgage term, you will end up paying more in interest.

Should I get a Fixed or Variable Rate Mortgage?

The key difference between a Fixed Rate Mortgage and Variable Rate Mortgage is whether the interest rate payable can change.

Lots of home owners chose to get a Fixed Rate Mortgage so they can avoid any unexpected increases in their mortgage repayments during the fixed term.

The downside is Fixed Rate Mortgages can be slightly more expensive than a currently available Variable Rate Mortgage.

So if you want to reduce uncertainty around how much your repayments will be each month, you will be better off to get a Fixed Rate Mortgage.

Interest only or repayment mortgages

Most lenders will offer two types of repayment mortgages - either interest only or a repayment mortgage.

The key difference between the two types is that with a repayment mortgage, once your mortgage term ends (say in 25 years time), you will have completely paid off the financing for your property by simply making the regular monthly payments.

If you opt for an interest only mortgage, at the end of the mortgage term, you will need to pay the lender the initial sum of money that you borrowed - all payments to the lender up to this point have simply been for the interest costs, so you still need to pay off the sum you borrowed when you purchased the property.

Most owner occupied property owners tend to chose a repayment mortgage as it ensures they can definitely keep the property when the mortgage term ends. Interest only mortgages tend to suit landlords (for 'buy to let' properties) where cash flow is tighter and they don't neccessarily intend to keep the property to live in as their home so they always have the option to sell the property.

How to find the best mortgage deal?

If you're not looking maximise the amount you can borrow, have a large deposit and are a permanent employee with a full time salary and are not given bonuses or overtime payments, you can probably look at the mortgage comparison websites like Money Supermarket to find one of the best mortgage deals available.

However, if you don't fall into the simple mortgage case category (which most people don't), the only way to find the best mortgage deal is to use an independent mortgage broker (not an automated chatbot one though!).

Beware not all mortgage brokers offer the same level of service and some won't recommend the cheapest mortgage as they may not make as much money from suggesting you get that product.

Look for a Whole Market mortgage broker - these brokers are allowed and willing to search across all lenders in the market and so are more likely to not only get your mortgage approved but at a better rate than another mortgage broker that is only able to suggest mortgage products from a few lenders.

What is a Mortgage broker?

The best way to think of a mortgage broker, is like a money comparison website (like MoneySupermarket).

Nowaday's most people don't just phone one insurance provider when looking for new car insurance, just like you shouldn't just apply to one bank for a mortgage.

Some mortgage broker's will charge you a fee for their services, but in many cases, they will save you far more money on lower repayments over the years so are still well worth using.

Using a mortgage broker isn't simply about saving money though, they are more likely to be able to get you a mortgage or a higher borrowing amount if you require one.

A good mortgage broker will have access to a significant proportion of lenders - whole market mortgage lenders can access every mortgage (pretty much) that is available.

By having knowledge of the whole market, they are more likely to obtain better rates for you, which can lead to you saving money each month.

Other things to note about mortgage brokers:

  • They can get access to exclusive deals that you can't access directly from a lender yourself.
  • They are aware of what mortgage enquiries have been made on your behalf and so can control how many credit searches are done on your behalf during the application process (if you make too many applications, you can damage your chances of getting a mortgage approved).
  • They can look at multiple income streams in different ways to help you obtain enough money to purchase the property (different lenders have different rules on what counts as income).

What counts as income?

To find out the biggest mortgage amount you can borrow, you'll need to let them know your income.

Unfortunately, most lenders have varying criteria as what counts as income for the purposes of taking out a mortgage.

What makes it even harder for you to work out your income is they don't have clear published guidelines on what they will and what they won't accept - for example some lenders will accept only a small subset of the below income types.

  • Regular salary
  • Regular Bonuses
  • Contractor day rates
  • Overtime
  • Discretionary bonus
  • Unearned income (interest payments received, dividends etc.)
  • Second jobs
  • Rental income from a Buy to Let

Mortgage brokers constantly keep in touch with the lenders to know the detailed criteria (possibly even more so than their in-house mortgage advisors) - if you need to borrow more money, we advise you to contact a mortgage broker to see if they can find additional income that may count towards the mortgage application.

How much money do I need for a deposit?

Most lenders offer multiple mortgage products.

Some lenders will offer a 0% deposit mortgage - this is also known as 100% loan to value (LTV).

The reason why most people try to save up as much as possible before buying is that the larger your deposit, the more mortgage products you will have available to you. This leads to you being able to get a better (lower) interest rate.

What does the term “loan to value” mean?

Most lenders offer mortgage products that have a minimum loan to value ratio. A loan to value ratio of 95% would require that for every £95 the bank will lend you, you would need to contribute £5 deposit.

So for a house costing £200,000, if you were to get a 95% loan to value mortgage, you would need to have £10,000 deposit.

Can I borrow the money I need to pay my stamp duty?

Yes, so long as you still meet the banks loan to value ratio to qualify for the mortgage product that you have chosen.

When to apply for a mortgage?

It’s best to contact a mortgage broker early in your search for a new home so that you know what you can afford. After all, there is no point in finding your dream home only to realise you can't obtain a suitable mortgage.

Estate agents (and the seller) like to see your mortgage offer before accepting any offer and taking the house off the market.

How long does it take to get a mortgage offer?

From application to the decision being made can take as little as 2 weeks but can be substantially longer if you have a tricky application.

Mortgage applications can take longer if you can’t utilise mainstream lenders due to previous credit (debt) issues, being self-employed or you need to rely on inconsistent income like bonuses etc.

What is a decision in principle?

A decision in principle is a one page document that allows you to prove to an estate agent or the vendor (i.e. the homeowner) that you are in a position where you are able to afford to buy the property at the price you have offered.

What is the advantage of using a mortgage broker?

Your bank will only offer you mortgage products that they sell - they will not suggest the best mortgage product available to you as they won't consider any other mortgage lender even if they have a lower interest rate.

A mortgage broker on the other hand, is not tied to a single mortgage lender and so searches a lot of lenders to find you the best deal. Using a mortgage broker is a bit like using a price comparison website (they both try to find you the best deal).

Soft credit check versus a hard credit check?

A soft credit check happens when a business uses a credit ratings agency to check your credit history.

Certain credit checks only trigger a soft check (i.e. a decision in principle) but applying for a full mortgage triggers a hard credit check.

If you have lots of hard credit checks on your file (your credit checking history), it can negatively impact your credit rating so we don't recommend applying for the mortgage before you are sure you need it and will go through with it (a mortgage broker will be able to advise exactly when you should apply for the mortgage).