23 October 2024
Buying a home is an exciting milestone, but the mortgage process can feel overwhelming, especially if you're a first-time buyer. In this blog post, we’ll break down the essentials of what you need to know before applying for a mortgage. Whether you're months away from buying or just starting to think about it, planning ahead can make all the difference.
What Is A Mortgage?
In simple terms, a mortgage is a loan specifically used to purchase a property. A lender—whether it's a bank, building society, or finance company—provides the funds, which you repay over time with interest. The interest is essentially the lender's fee for letting you borrow the money.
Mortgages can feel daunting because they are typically large sums of money spread over many years. But at their core, they’re not much different from other loans, like a car loan—just on a larger scale with more regulations and longer commitments.
Key Differences In The UK Mortgage Process
Although the basics of a mortgage remain the same across the UK, the process for buying a property can differ slightly between regions. For example, in Scotland, homebuyers rely on a home report, which is essentially a survey of the property, before making an offer. In England and Wales, surveys are typically done after an offer is made and accepted.
While the steps in the buying process may vary, the mortgage itself is largely the same whether you’re in Scotland, England, or Wales. Lenders like Halifax, Santander, Nationwide etc etc will offer the same mortgage terms regardless of where you are in the UK.
Types Of Mortgage Products
When you take out a mortgage, you’re not locked into the same terms for the entire life of the loan. Instead, mortgage products are typically structured for shorter fixed periods, usually two, three, five, or ten years. After this initial period, you'll either need to renew your mortgage terms or switch to a new product.
Fixed Rate Mortgages: As the name suggests, the interest rate remains the same for a set period. This offers stability and peace of mind, as your monthly payments won't change regardless of what happens in the economy. However, if interest rates fall, you’ll still be locked into your higher rate.
Variable Rate Mortgages: These mortgages track an interest rate, often the Bank of England base rate, and your payments will fluctuate depending on the wider economic environment. While this offers flexibility, it also means more volatility in your payments.
Interest-Only Mortgages: These were more common in the past. With an interest-only mortgage, you only pay the interest each month and don’t reduce the loan itself. At the end of the mortgage term, you still owe the full amount borrowed. This type of mortgage has become much less common for residential buyers due to the risk that people would not be able to repay the principal.
What Happens When Your Fixed Rate Ends?
One of the most important things to remember is that when your fixed rate period ends, you’ll likely roll onto the lender's Standard Variable Rate (SVR), which is often significantly higher. It’s crucial to review your mortgage terms before this happens to avoid a sudden increase in payments. Your mortgage broker should contact you in plenty of time, but be aware of the end date so that you can start looking for a new deal as early as possible.
You can typically start this process about three months before the fixed rate period ends, although some lenders allow you to lock in a new rate six months in advance. Don’t wait until the last minute! If you do nothing, your payments could jump, often doubling if interest rates have risen.
Right now the standard variable rate is sitting at 9% plus with many lenders - they're always significantly higher than the other deals on the market. You certainly don't want to be caught out when it's the month of November or a month before a big birthday and all of a sudden your mortgage goes from £600 to £1,200 because you haven't done anything about it.
You have a couple of options at the end of your fixed rate. If you want to fix into another rate you can stay with the same provider, or you can go to a different provider. If you want to switch a variable rate, you can do that as well.
You have a lot more flexibility now. For example, you could borrow more money and put an extension on your home, or if you've come into some money and you want to pay more off, you can do that as well. We can change everything when your rate's due for renewal.
Other Mortgage Options
A less common option is the capped and collared rate which is based on a variable rate. The cap is the top rate - the highest interest rate you could pay, and the collar is the lowest it could fall to. Even though your monthly payments could change, there would be a set limitation, enabling you to budget for the maximum it could reach.
There is also the offset mortgage where you hold money in a bank account with your lender and they would offset your savings against the mortgage balance. You won't receive interest on the savings but they reduce the interest that you pay on the mortgage balance.
The Importance Of Speaking With A Mortgage Broker
If you’re thinking of buying a home in the next few months—or even a year—it's a good idea to speak to a mortgage broker early on. A broker can give you a realistic idea of what you can afford, identify any credit issues, and help you budget for the associated costs of buying a home, such as legal fees and surveys.
A good mortgage broker will also be proactive, reaching out to you when it’s time to renew your mortgage and helping you avoid unnecessary expenses, like moving onto a high SVR.
Dos and Don’ts Before Applying For A Mortgage
DO:
Check your credit report: Make sure there are no surprises that could affect your ability to borrow.
Save for a deposit: While it's tempting to put every penny into your new home, make sure you keep an emergency fund.
Get professional advice: A mortgage broker can guide you through the process, ensuring you make informed decisions.
DON'T:
Take out new credit: Avoid making significant purchases or applying for additional credit in the months leading up to your mortgage application.
Rely on interest-only loans: In most cases, it’s safer to go for repayment mortgages, where your monthly payments chip away at both the interest and the loan itself.
Preparing For Homeownership
One of the most common mistakes buyers make is focusing on the property itself before understanding what they can afford. As exciting as house-hunting is, it's crucial to get your finances in order first. By speaking with a broker and reviewing your budget, you’ll have a better idea of how much you can comfortably borrow. This not only prevents disappointment but also makes the home-buying process smoother and more enjoyable.
Bear in mind that buying a house isn't free. You're going to have legal fees searches, surveys and other unexpected expenses. You want to know exactly what you can afford before you walk through the door and fall in love with a house. Especially in Scotland, where we have closing dates, you could be competing with several interested buyers. By knowing exactly where you stand, you can give yourself the best chance of winning the property of your dreams.
In summary, a well-planned approach to securing a mortgage can save you both money and stress. Start by talking to a broker, understanding the different types of mortgage products, and preparing your finances early. Buying a home is one of the most significant financial commitments you’ll make, but with the right advice, it can be a smooth and rewarding experience.