A mortgage guide for the uninitiated home owner

Things are going to get a little complicated

Words by Ishaan Malhi of Trussle

Most people can’t afford to buy a home in cash so need to take out a loan, called a mortgage. The home is used as security for the loan, meaning that the lender has the right to take ownership of your home should you be unable to afford to repay your loan.

Mortgage Rates

Comparing mortgages isn’t as easy as it should be - with thousands of products offered by hundreds of lenders (each with their own lending criteria), choosing the right mortgage requires expertise, Speaking with a mortgage broker can help you make sense of your options.

First, you’ll want to work out how much you’re able to put towards a deposit and how much you can afford to repay each month. The higher the deposit is, the less interest you’ll pay on the loan (and generally the lower your monthly payments will be). You’ll also need to decide the type of mortgage you want – whether it’s at a fixed rate or variable. A fixed rate does what it says on the tin - it won’t change for a set duration, while a variable rate fluctuates according to a benchmark set by the lender, or the Bank of England’s base rate.

It’s also important to remember that there’s more to consider than just the interest rate - comparing mortgage deals by rate can prove costly. You’ll need to take into account the ‘true cost’ of your mortgage, which includes fees and incentives (such as cashback, a free valuation, and free legal fees) over the initial period of the loan to work out which is the most cost effective option for you.

Interest Only Mortgages

With some mortgage deals you’ll have the option of only paying the interest owed each month, then paying the full mortgage amount at the end of your mortgage term. While the monthly payments will be lower, you won’t be decreasing the overall loan amount and you therefore won’t be reducing your level of debt. To get an interest only mortgage you’ll need to demonstrate that you’ll have enough money to repay the full loan amount; this could be from savings or cashing in on an asset such as shares. It can be quite difficult to get a residential interest only mortgage, whereas securing a buy-to-let interest only mortgage is typically more common.

Mortgage Payment Calculator

Whether you’ve just started saving for a deposit or have already found a home you want to buy, it’s worth using an online mortgage calculator to see how much you’ll be able to borrow. Remember not to include bonuses or other unguaranteed payments in your income. Not only will you be able to search within your means but you can apply for a mortgage with confidence. You can find three easy-to-use calculators on the Trussle website.

Do I need mortgage insurance?

A mortgage is likely to be the biggest financial commitment of your life and your highest monthly outgoing, so it’s a good idea to take out insurance. If you suddenly become unwell or lose your job, you’ll still need to make mortgage payments. While lenders are sometimes able to offer payment holidays if you’ve previously made overpayments, this is short term relief. Mortgage insurance covers the cost of your mortgage during periods of financial uncertainty, taking the stress out of an already stressful time. You can choose either a specific mortgage policy or general income protection to provide you with the cover needed.

Mortgages for the self-employed – how do they work?

There’s no ‘one-size fits all policy’ when it comes to getting a mortgage if you’re self-employed. Although it can be trickier than usual, there are a number of things you can do to make getting a mortgage if you’re self-employed easier.

You’ll need to provide evidence of your income - usually, this is done using a history of your accounts or looking at your SA302 (a tax form provided by HMRC - allow up to 14 days to receive this). Give yourself plenty of time to organise your accounts and use an accountant to help you. This will speed up the process as you’ll be able to quickly provide your lender with the evidence they need to complete your application.

Be aware of the different definitions of ‘self-employed’ - not all lenders agree on the same terms and the different definitions can affect how well the lender caters to your needs. Some lenders class ‘self-employed’ as owning 15% of a company, whereas others state it must be 25%. While this could suit a sole trader, it may not suit a company founder who’s a salaried director.

Mortgages with bad credit

It can be more difficult to find a loan if you have a bad credit score, but it’s not impossible. If you do have a poor credit score, the best thing to do is seek advice and be honest about your situation. It’s also a good idea to find out if there are any reasons why your application could be refused. Viewing your credit report in advance of applying for a mortgage is one way of flagging an issues early. Simple oversights such as not being registered to vote, or failing to close credit card accounts that you no longer use can have a negative impact on your credit rating.

If possible, saving for a larger deposit makes getting a mortgage if you have bad credit more likely, as the loan to value ratio (LTV) is reduced. A higher LTV reduces some of the risk to the lender, making you a more attractive borrower. Saving for longer will also give you more time to build up your credit score in the meantime, giving you the chance to settle any debts and make all monthly payments on time. Doing these things before applying for a mortgage will improve your financial footprint, putting you in a better position to find a more competitive deal.

Can I take out more than one mortgage?

There are a few options to take when it comes to a mortgage in addition to the one you already have. Most commonly, people apply for a second mortgage if they’re investing in another property, or taking out a second loan on their home (known as a second charge mortgage). A buy-to-let mortgage is suitable if you’re looking to buy a home to rent out, whereas a second charge mortgage gives you the opportunity to take out another loan on your existing home.

Taking out a second charge mortgage will increase your debt, so the decision to do so should be taken very carefully - particularly if you don’t have the healthiest credit rating. As a result, the process of getting one is often more complicated than securing your first mortgage. It’s therefore worth speaking to a reputable broker who can guide you through your options and advise of the most suitable route for your unique circumstances.