Mortgages Explained

1. What is a mortgage?

A mortgage is money borrowed from a lender, typically a bank or building society in order to buy a property. The money is then paid back over an agreed period of time together with any interest that is charged. There are different types of mortgages and lenders may offer low initial rates or features such as cash back in order to attract customers.

AMortgageforU is committed to finding the one that suits your own particular circumstances.

2. What types of mortgage are available?

Mortgages generally are either granted on a repayment basis or on an interest only basis.

(a) Repayment mortgage.

Your monthly repayments will be calculated to repay the capital element of the loan as well as any interest charges that will accrue over the life of the mortgage. You will receive a mortgage statement, normally on an annual basis, you will see that the amount borrowed decreases throughout t that the loan period.

Advantages

At the end of the term, you are safe in the knowledge that the total amount of the debt has been repaid.
Overpayments and lump sum payments into your mortgage account can help to reduce the length of the mortgage and lead to a saving in interest charges.
Life assurance cover is recommended but not mandatory for this type of mortgage.

Disadvantages

Some lenders apply financial penalties for making lump sum or overpayments. At the start of your mortgage most of what you repay is identified against the interest charges instead of the capital. If you tend to move home on a regular basis this may result in very little capital being repaid.
If you elect not to effect life assurance cover and die before the loan is repaid, the mortgage outstanding is still repayable to the lender. This may mean that the property might have to be sold to repay the outstanding debt.

(b) Interest only.

No capital is repaid to the lender with the borrower meeting the interest charges only. The borrower will need to effect an alternative method of repaying the capital amount. The most common methods of repaying the loan are:
1. Endowment life policy.
2. ISA Plan
3. Pension plan.
All of these methods carry some element of risk and AMortgageforU can provide advice on request. It is important that whatever repayment method is chosen that payments are maintained otherwise there may be insufficient funds to repay the mortgage at the end of the term.

3. How much can I borrow?

The amount that you can borrow is dependent on your level of income and whether you want to buy the property on your own or with someone else. Most lenders will currently lend: 

1. A maximum of 3.25 times the first income plus one times the second income (if applicable). or

2. Some lenders will be prepared to add two incomes together and multiply the combined figure by 2.5 times if this gives a higher figure.

Some lenders offer higher multiples particularly for certain professions and guaranteed other income e.g. commission, bonus etc can be generally included.
Various mortgage products are available. AMortgageforU can help determine what is best for your own particular circumstances. Although low initial rates can be attractive in the short term it can result in you paying considerably more than a standard mortgage over the life of the mortgage.

4. What types of mortgage can I obtain?

Various mortgage products are available. AMortgageforU can help determine what is best for your own particular circumstances. Although low initial rates can be attractive in the short term it can result in you paying considerably more than a standard mortgage over the life of the mortgage.

	Fixed rate mortgage If you choose a fixed rate mortgage your monthly repayments will not change for the period of the fixed rate, regardless of the interest rate in the market place. This may be important to you if you have a limited budget as you are protected from rising interest rates. However, if the variable rate falls below the fixed rate level, your repayments will not fall. At the end of the fixed rate period your mortgage will usually be converted to a variable rate.
	Capped rate mortgage A capped rate mortgage has a maximum interest rate for a given term. The interest rate you pay cannot go higher than the agreed capped rate, thus you know the maximum amount your monthly repayments could rise to. However, if the basic interest rate falls below the capped rate, repayments will also reduce.
	Discounted rate mortgage A discounted mortgage offers you reduced repayments for a given term. The lender gives a discount off a variable rate. For example, the variable rate may be 5% with a discount of 1% making your initial interest repayment rate 4%. If the variable rate on which your discount rate is based falls, your repayments will fall. However, if the lender's standard variable rate rises, so will your repayments. Whilst a discounted rate may be helpful initially, you should consider how much your repayments will be when the discounted period ends.
	100% Mortgage A 100% mortgage offers you a borrowing of 100% of the value of the property, i.e. no deposit is required. Rates may be fixed, variable, discounted or capped. Opting for a 100% mortgage means that you could risk facing a negative equity situation if house prices fall. You may also be charged an above-average interest rate and a mortgage indemnity premium.
	Self-certification mortgage Self-certification mortgages are available for contract workers and the self-employed. The lender will ask for details of the borrower's income but they will not require to see proof of total earnings. Other terms will depend upon the lender's requirement at the time and in accord with the rates prevailing in the market place.
	Variable rate Mortgage A variable rate mortgage is one in which the amount you repay increases or decreases in line with any interest rate changes. This means that you cannot predict the monthly cost of the borrowing, which could cause financial concerns within the mortgage period.
	Buy-to-Let Mortgage Buy-to-let mortgages are provided for property purchase for investment in the private rental sector. They are assessed as though they are ones for residential occupation. Assessment of borrower affordability can be based on projected rental income and/or earnings dependent on the lender's individual policy.
	Current Account and Offset Mortgages  A current account mortgage allows you to operate your mortgage borrowing through a current account. This method enables you to save interest as your normal cash flow will alter the outstanding debt. You will be required to pay your salary into the account. An offset mortgage allows you to keep your balances e.g. mortgage, savings, current account etc in separate accounts but all balances are offset against each other thus allowing the possibility of reducing the interest paid and could result in the mortgage being repaid early.
	Base Rate Tracker Mortgage A base rate tracker mortgage will be based on the Bank of England base rate and a possible loading for a set period or for the term of the loan. The rate payable will alter in line with any change to the Bank of England base rate.
	Cashback Mortgage A cashback mortgage provides a cash rebate on completion of the purchase. The sum is either a percentage of the advance or fixed. This cashback could help you to cover some of the expenses of setting up home but, this bonus is often subject to higher repayment rates and may include penalties for repaying the loan early.
	Flexible Mortgage The main feature of a flexible mortgage is the facility to make extra payments when you have extra money. You may also be able to reduce monthly repayments or even take repayment holidays, although you will normally have to build up a reserve through making overpayments before this arrangement is allowed. Such mortgages are usually offered on a daily interest basis. Flexible mortgages usually provide a loan drawdown facility that allows you to borrow extra funds at a set predetermined rate.

5. What documentation will be required?

Once we have received your initial enquiry in order to proceed with your mortgage application it is likely that some of the following documents will be required. What is required varies by lender and you will advised of the individual mortgage provider's requirements once we have identified the lender and product that matches your requirements.

• Proof of Identification - Current driving licence or passport.

• Proof of residency for the last 3 years - Utility bill.

• Last 3 months bank statements.

• Your current lenders latest annual statement or proof of last 12 months mortgage payments.

• Last 3 months or 8 weeks payslips if employed or last 3 years accounts if self employed.

• Current P60 end of tax year assessment.

• Right to Buy papers if applicable.

• Copy of current Tenancy agreement if Buy to Let.

• Cheque for valuation/administration fee if applicable or debit cards details.

To commence the application process please complete the short enquiry form  or call our Mortgage Helpline on 0131 312 7777 for help and advice.