What is a mortgage?
A mortgage is an agreement between a lender and a home-buyer to provide the home-buyer with a loan to purchase a property. In return the home-buyer will give the lender a ‘charge over the property which is legally binding, so that the lender has rights to ensure that payments are made if the terms of the mortgage contract are breached. If the home-buyer defaults on the loan, the lender can repossess the property and sell it to pay the loan.
How Much Can You Borrow?
Lenders will assess your status and lend you a multiple of your income. This was traditionally three to four times income, although some lenders will lend more and some will lend less. The calculation for lending usually takes into account guaranteed earnings, with overtime and bonuses considered at an agreed reduced level. Your lender may need to see some recent payslips and will check your income details with your employer.
If you are self-employed, your last three years accounts may be needed. You will also be asked about your regular outgoings such as credit cards or personal loans, to ensure you can afford the mortgage. Some people find it difficult to prove earnings, perhaps they have only been in business a year or two. Self-certified or non-status loans can overcome this problem, but you may need a much bigger deposit and the interest rate may be higher.
How Much Deposit?
Thanks to Help to Buy you may only need to out down a deposit of 5% of the value of the property which is payable on exchange of contracts.
What Is A Mortgage Offer?
You will receive an offer of mortgage from your chosen lender detailing the conditions of the loan. A copy automatically goes to your solicitor.
What Happens On Exchange?
On exchange of contracts, the deposit will be lodged with the vendor’s solicitor and you are legally committed to purchasing the property. After this point, it is not normally possible to withdraw from the purchase without forfeiting the deposit. Before exchange, it is imperative that you understand all the details of your commitment. Never commit yourself financially until you have a formal mortgage offer in writing, the contents of which you are happy with. All necessary insurances need to be in place by the time of exchange, as from this point you are responsible for anything that happens to the property.
When Is Completion?
This is when the property finally changes ownership, at a date agreed between you and the vendor It usually occurs two weeks or more after exchange. Your solicitor will complete the legal documentation and arrange for the mortgage money to be paid to the vendor’s solicitor. You will have to arrange to collect the keys to the property. usually held by the estate agent.
The cost of buying a home can be daunting, especially if you’re buying for the first time. As well as the cost of your new home you need to plan for a number of other charges:
What Fees & Charges Might I Have To Pay?
Broker’s Fees
As with all businesses we need to cover costs and earn a living and therefore we have found that we now have to charge a fee for the work involved in researching and arranging a mortgage for our clients. A typical fee of £399 will be payable on application for the administration involved in researching and submitting your application. The exact amount will be confirmed by your adviser at the time of your first interview. We will also be paid a procurement fee from the lender.
Solicitor’s Fees
You will need to pay a solicitor legal fees for the conveyancing. Also, the cost of land registry charges and local search fees will be passed to you. Ensure you ask your solicitor for an estimate of charges before they start work.
Surveys
You will have to pay for a surveyor to value your prospective new home. The Lender’s Valuation Report is undertaken primarily for the lender’s benefit, but you may be allowed to see a copy of the report. The report will tell if there is something seriously wrong with the property but is not detailed. You may wish to take a more detailed survey of the property such as a home buyer’s report or a full structural survey. These will cost you extra but can prove to be money well spent. Keep in mind that a more detailed report can lengthen the mortgage process.
Stamp Duty Land Tax (SDLT)
Stamp duty land tax is a Government tax on property purchases above a specified amount. The amount of tax is based on a percentage of the total purchase price and increases in price bands, as shown below: (correct at time of print)
Stamp Duty Land Tax Rates
Purchase Price of property % duty payable
| Value of property* | % duty payable |
| Up to £125,000 – | Nil |
| £125,001 – £250,000 | 2% |
| £250,001 – £925,000 | 5% |
| £925,001 – £1.5 million | 10% |
| £1.5 million + | 12% |
Example
If you buy a house for £275,000, the SDLT you owe is calculated as follows:
0% on the first £125,000 = £0
2% on the next £125,000 = £2,500
5% on the final £25,000 = £1,250
Total SDLT = £3,750
Rates if you’re buying your first home
You can claim a discount (relief) so you don’t pay any tax up to £300,000 and 5% on the portion from £300,001 to £500,000.
You’re eligible if:
- you, and anyone else you’re buying with, are first-time buyers
- you complete your purchase on or after 22 November 2017
If the price is over £500,000, you follow the rules for people who’ve bought a home before.
You can check current rates of SDLT on the HM Revenue & Customs (HMRC) website.
Higher Lending Charge
This is a payment often demanded by a lender if they feel that they are taking on risk by lending above a certain percentage of the property’s value. This is usually a ‘one-off payment’ paid on completion that is not refundable. It protects the lender against you defaulting on the loan and covers some of the costs associated with having to repossess the property. The premium can vary considerably between lenders.
Application Fees
Some mortgage lenders charge an application fee to cover their initial administration costs. Be aware that these charges may not be refundable if your purchase falls through. Some lenders offer mortgage deals that will cover all or some of these fees.
Early Repayment Charges
Many mortgages have financial penalties for early payment or switching of mortgage type. These charges may apply for the entire term of the loan or for a limited period.
Your Prospect Mortgage Services adviser will ensure that you are made aware of any potential charges.
