When you're looking for a mortgage, never be afraid to ask questions. If you don't understand something, you are not alone and no, you are not an idiot. Remember, your mortgage is unique to your own personal circumstances and you do not have to navigate through the mortgage maze on your own.
Let's look at typical situations in which many borrowers, who are looking for a mortgage to suit their needs and eligibility, find themselves. General guidelines are given to illustrate the options that may be available. Any information given is for illustration purposes only.
Get to grips with the basics
Mortgages are, by their nature, long-term loans and, more often than not, for very large sums of money. It is essential that you can afford the repayments now and during the term of the loan, otherwise the security given to the lender, which is the mortgaged property, may need to be sold to repay the loan. The consequences are potentially severe - you stand to lose your home.
The choice of provider and type of mortgage is important. Every borrower has her own individual needs and two cases are never the same. The best advice is either to shop around yourself, or take independent mortgage advice from a qualified mortgage advisor before signing up to any commitment.
Keep in mind that if you go to a bank or building society they will only be able to offer you their own mortgage products. On the other hand, if you see an independent mortgage advisor they will have access to a number of different lenders, offering you a more flexible plan to better suit your circumstances because they aren't working for one sole lender.
In any case, the mortgage you are offered will depend on your own individual circumstances and the level of risk you pose to the lender.
Six scenarios and possible solutions
- You are a single 21-year-old. You are looking to buy your first house. The nights out on the town have taken a toll on your deposit. Unfortunately you've found your ideal home but the 5% deposit you need is no longer there, the decor is not to your taste and the kitchen needs replacing. You have a good credit history and a small loan. Will you have to let the opportunity pass you by?
- Mortgage products exist where you can borrow up to 125% of the value of your prospective house. For example, the first 95% is secured on the property and the remainder - up to 125% - is as an unsecured loan, which can last the same term as the secured element. This allows you to consolidate existing debts, raise money for repairs/alterations to your new home and eliminate the requirement for a deposit.
- You are a doctor but the years in medical school have meant you've incurred a lot of debt. You now have less money available to you for a mortgage because of the large sums of money you are paying back to your creditors on a monthly basis. Will you ever get your house or will you have to wait until all your loans are paid off?
- Some lenders will now lend you up to five times your income - even up to 100% of the purchase price - if you are classified as a professional (medical doctor, pharmacist, optician, dentist, solicitor or accountant). This can be helpful when you are making hefty repayments, as most lenders will add up your yearly loan repayments before they multiply your income. For example, a £100 per month loan repayment would mean that £1200 is subtracted off your income before it is multiplied.
- These professional income multipliers allow you to buy a more expensive property than the normal multipliers, which typically range from 3.25 to 4.25 times your income.
- You took out a mortgage six years ago over a 25-year term. Your initial discount has long since expired and you're now paying the standard variable rate, which you can comfortably afford. Your colleague at work has just remortgaged and saved herself a small fortune every month. It sounds like it would be a lot of hassle but is it worth looking into?
- Do you know that rates are the cheapest they've been in over 40 years? For example, let's say you have a 19-year mortgage, with £100,000 outstanding on an interest only basis. By moving over from a typical standard variable rate to, for example, a new discounted or fixed rate mortgage, the savings achievable per month can be £200 or more. It all depends on which deal is right for you - it's certainly food for thought.
- In the late 1980s, when you bought your endowment mortgage they were all the rage and you had already planned on how you were going to spend the £30,000 surplus at the end of your mortgage term. However, the projection letters from your endowment company are saying you may potentially make a loss. Where do you go from here?
- Rather than changing to a repayment mortgage or increasing your endowment contributions, think outside the box. Many lenders allow you to do a split deal, where one part of the mortgage is interest only and the other element is capital and interest (repayment).
- For example, if you had an £100,000 mortgage and a potential £10,000 endowment shortfall, you could move £20,000 over to a repayment mortgage. This would cover the potential shortfall plus, any further reduction in the value of your policy.
- Moving £20,000 over to a repayment guarantees that the projected shortfall is covered. However, if you stay interest only, the endowment company could still come back to you and ask for more money if the fund continues to under-perform.
- You're in business as a florist. You're just entering your second year of trading. You've already spoken to a High Street lender and they asked you to produce three years' worth of accounts. You simply can't do this. So, it looks like re-mortgaging to buy that conservatory you wanted is out of the question, or is it?
- There are lenders who will allow you to certify your own income with a 'true self-cert'. This is done by filling in a simple declaration, which is all that is required as proof of the income that you receive. This eliminates the need for accounts to be provided. This type of mortgage usually relies on you having at least 15% of equity in your property.
- You're burning hundreds of pounds each month in rent, which you really hate doing but, what choice do you have? Your bankruptcy only discharged a year ago and your friends in the pub have told you that for six years no creditor will touch you. You've now resigned yourself to the fact that you'll have to keep renting.
- Provided you have at least a 5% deposit and have been discharged from bankruptcy for, typically, at least a year, there are lenders in the marketplace who will consider you for a mortgage. Borrowers with a more minor adverse credit history with perhaps a small County Court Judgment against them, may even be considered by the lenders with 100% products. There really is a solution to most problems.
Too good to be true?
You'll be amazed what lenders can offer you so, don't despair if you have made bad choices in the past. It's not the end of the world. But, remember - always read through any paperwork you have to sign, no matter how boring it looks!