Guide to mortgages
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Hello and welcome to our guide!
We’d like to thank you for requesting Gocompare.com’s guide
to mortgages. We know that choosing a mortgage is a major life
decision, and we’re delighted that you’ve come to us for help.
In everything we do we’re committed to finding you the right product at
the right price, and that’s why we’ve partnered with L&C. They’re one of
the UK’s leading fee-free mortgage brokers, and are ideally qualified to
provide you with expert advice on your mortgage needs. They’ve won
more awards than any other mortgage broker in the UK and are available
to speak to seven days a week.
If you are currently looking for a mortgage for a residential or buy-to-let
property, or you would like to switch your existing deal to a new lender
to save money, please visit www.gocompare.com/mortgages, where
you’ll also find more information and guidance.
If you’d prefer to speak to someone, you can get free, no-obligation
advice from one of L&C’s experts by calling 0844 409 9724*. They’ll be
happy to help you, and you can also request a call back.
Happy mortgage hunting!
Sean Davies, Website editor
Your home or property may be repossessed if you do
not keep up repayments on your mortgage
*Calls made to you by London & Country are completely free of charge. If you decide to call London & Country
calls to their 0844 number will cost up to 5p per minute from BT landlines. Call charges from mobiles and other
networks will vary and may cost more. Your call may be monitored or recorded for training and security purposes
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Written by Melanie Wright
Melanie Wright is a former deputy editor of the Daily Telegraph’s
Your Money section and has been freelancing for the past 11 years.
She writes the Sunday Mirror’s Money page every week, and also
contributes regularly to the Telegraph and the Sunday Times, as well as
various other publications and websites. She has appeared regularly on
TV as a personal finance expert. In 2010 she was awarded Freelance
Journalist of the Year at the Santander Media Awards, coming runner
up in the same category the following year. She has also won the
Freelance Journalist of the Year category at the Headlinemoney
awards three times.
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CONTENTS
Contents
Introduction: Why finding the right mortgage is so important
5
Mortgage jargon buster
6
First-time buyers
8
Next-time buyers
11
Remortgaging: What you need to know
13
Buy-to-let mortgages
14
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5
INTRODUCTION: WHY FINDING THE RIGHT MORTGAGE IS SO IMPORTANT
Introduction: Why finding the
right mortgage is so important
Your mortgage is likely to be your biggest monthly outgoing,
so it’s essential you don’t pay more than you need to.
Lenders rely on our apathy to generate profits, only offering the best
deals to those who are proactive and shop around for them.
So, if you haven’t reviewed your mortgage for a while, are planning on moving home, or if you’re buying your first property, make sure you
keep costs to a minimum by finding the right mortgage to suit your requirements.
Of course, given the current difficult economic conditions, this isn’t
always as straightforward as it sounds, especially with many banks and
building societies imposing stricter lending rules than ever before.
It’s even harder for those with only a small deposit, with most of the best
rates reserved for borrowers with at least 25% of the property value to put down.
That’s why it’s more important than ever to do plenty of research before
applying for a mortgage and, if in any doubt, to seek expert advice from a
mortgage broker who can explain all the options available to you.
Take a look at the various types of mortgage on offer, ways you can
improve your chances of being accepted if you are finding it difficult to
get on the property ladder, plus tips to help next-time buyers and those looking to remortgage.
For more help from Gocompare.com and L&C, why not visit
www.gocompare.com/mortgages?
Guide to mortgages
www.gocompare.com/mortgages
Lenders rely on
our apathy to
generate profits,
only offering the best
deals to those who
are proactive and
shop around
for them
6
MORTGAGE JARGON BUSTER
Mortgage jargon buster
Finding the right mortgage is often complicated by the amount
of jargon that’s around. Here, we explain what the most common
mortgage terms mean:
Arrangement feeThis is the fee charged by the lender for setting
up the mortgage. Fees can be a couple of
hundred pounds, but they can run into a couple
of thousand pounds. If you don’t have the
money to pay the arrangement fee up front,
most lenders will allow you to add it to
the mortgage.
Capped-rate mortgageThe rate on a capped-rate mortgage is variable,
but, as the name suggests, it cannot go higher
than a certain level, or ‘cap’. There will usually
be an early repayment charge if you pay off the
mortgage during the capped period.
Discounted mortgageThis is a variable-rate mortgage which offers a
discount off a certain interest rate, usually the
lender’s standard variable rate. The discount
is typically for two-to-five years, although it
can last for the whole term of the mortgage.
There will generally be an early repayment
charge if you pay off the mortgage during the discounted period.
Early repayment charge
This is the fee imposed by lenders if you switch
(ERC)mortgages or repay your mortgage early.
It usually only applies if you are on a fixed,
discounted or other special deal. So, for
example, if you have a two-year fixed rate, you
will have to pay an early repayment charge if
you want to get out of that deal within the first
two years.
Fixed-rate mortgageWith this kind of mortgage the rate is fixed.
This is usually for two-to-five years, but it is
sometimes longer, giving you peace of mind
that your payments won’t change for the term
of the deal, regardless of what happens to
interest rates. There will generally be repayment
charges if you want to leave the deal early.
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7
MORTGAGE JARGON BUSTER
Loan to value
This is the amount of the mortgage expressed
(LTV)as a percentage of the property’s value. The
lower the loan to value, the more equity there
is in the property.
Interest-only mortgageThese are mortgages where you only pay the
interest until the term ends, when the debt
itself must be repaid. Most lenders won’t allow
you to take out an interest-only mortgage
unless you can provide evidence you are
saving to pay the debt off.
Offset mortgageWith an offset mortgage, rather than earning interest on your savings, you don’t
pay interest on the equivalent amount of
your mortgage debt, enabling you to reduce
your interest payments and pay off your
mortgage early.
Repayment mortgageIf you take out a mortgage on a repayment
basis, your monthly payments will include
both interest and payment towards the capital
loan amount.
Standard variable rateThe standard variable rate is a type of
mortgage interest rate that you will usually
move on to after finishing an introductory
fixed, tracker or discounted deal. As it is
variable, your payments could go up or down
at any time.
Tracker mortgageThis is a variable-rate mortgage which tracks
or follows the Bank of England base rate at
a set margin above or below it. So, for
example, if the base rate is at 0.5%, a tracker
deal might track this rate at 2% above it,
giving a payable rate of 2.5%. This kind of
deal can last for a year or two, or may last
the entire mortgage term, and again there are
likely to be repayment charges if you leave
the deal early.
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8
FIRST-TIME BUYERS
First-time buyers
Getting on the property ladder can seem an impossible dream with
banks and building societies increasingly strict about who they will
lend to, but a bit of careful planning can improve your chances.
Here are some top tips to help first-time buyers boost their chances of
getting a mortgage…
Work out how much you can afford to spend
There’s little point in property hunting without first working out exactly
what your budget is. Lenders will want to know how much you earn,
what your outgoings are, and whether you have any existing credit
arrangements, such as personal loans or credit cards.
Clear existing debts
If you have several outstanding credit card debts or loans, concentrate on
paying these down before you apply for a mortgage.
Reducing the amount you owe on credit cards, overdrafts and loans will
help to push your credit score higher. Keeping well within your credit limit
will also help.
Try to make more than the minimum monthly payments on your credit
cards too, as this will demonstrate to lenders that you are a responsible borrower.
Save for a deposit
Remember that the bigger the deposit you save, the wider the choice of
mortgages you will have. While there are several deals available to those
with only a 5% deposit to put down, you will have a much greater range of
options - and access to more competitive mortgage rates - if you can save
10% or more of the property value.
Get help from your family
With some specialist mortgages, you only need a small deposit plus the
backing of someone who wants to help you onto the property ladder and
is prepared to put their savings up as additional security for the mortgage.
They can still earn interest on their savings, but it means that you can
benefit from lower mortgage rates similar to those available to customers
with a 25% deposit. For example, the Lloyds TSB Lend a Hand mortgage
enables parents to put money equivalent to a minimum of 20% of the
property’s value into a fixed-rate bond. You contribute a 5% deposit, but
get access to mortgage rates normally only offered to those with 25% of the property value to put down.
Guide to mortgages
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If you have several
outstanding credit
card debts or loans,
concentrate on
paying these down
before you apply for
a mortgage
9
FIRST-TIME BUYERS
Help to Buy
Another option worth considering is Help to Buy – a range of home
ownership schemes, launched by the government in March 2013.
Help to Buy is a broad term that can be divided into two distinct
categories – equity loans and mortgage guarantees.
Help to Buy: equity loan
With a Help to Buy equity loan, the government loans you up to 20% of
the cost of a new-build home, so you only need a 5% deposit and a
standard 75% mortgage to make up the rest. For the first five years
the equity loan is interest free, but after that it costs 1.75% of the loan’s
value per year, rising on an annual basis by the retail price index (RPI)
plus 1%.
Help to Buy equity loans are open to both first-time buyers and home
movers on new-build homes in England worth up to £600,000.
Help to Buy: mortgage guarantee
The Help to Buy mortgage guarantee scheme is available across the UK
and can help you buy a home with a deposit of as little as 5%. The
scheme aims to improve the availability and cost of mortgages requiring
smaller deposits – the government is providing lenders a guarantee on
part of the loan, and for this the lender pays a commercial fee.
The mortgage guarantee scheme is available to both first-time buyers
and home movers on homes worth up to £600,000. It is not restricted
to new-build properties. Other existing government schemes include
NewBuy and shared ownership schemes – information on all these can
be found at www.helptobuy.org.uk† and www.gov.uk† and also on
our website.
don’t forget additional costs
When buying your first home, remember to take into consideration all
the fees and taxes you need to pay for. For example, you will need to
cover conveyancing costs, survey and valuation fees, and, if applicable,
mortgage arrangement fees.
Other expenses include buildings and contents insurance for your
new property, and you may want to consider life insurance so that the
mortgage will be repaid in the event of your death.
†
Please note, we cannot be held responsible for the content of external websites and by using the links
stated to access these separate websites you will be subject to the terms of use applying to those sites
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FIRST-TIME BUYERS
You will also need to pay stamp duty on the property you are buying. The amount you will have to pay depends on the property’s price.
Property price
Stamp duty
Up to £125,000
You won’t have to pay any tax
£125,001 to £250,000
Incur 1% tax
£250,001 to £500,000
Incur 3% tax
£500,001 to £1m
Incur 4% tax
Over £1m to £2m
Incur 5% tax
£2m plus
Incur 7% tax
For more information on first-time-buyer mortgages, visit
www.gocompare.com/mortgages/first-time-buyer/
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neXT-Time bUYers
Next-time buyers
If you’re planning on moving home soon, your first step should be to
check the terms of your existing mortgage.
If you are currently paying your lender’s standard variable rate then
you should be free to move to an alternative deal, although if you are
borrowing more than your existing mortgage you will need to check that
the lender is prepared to grant you the additional amount you need.
However, if you are currently locked into a fixed or other special
mortgage deal, you will need to check your mortgage small print to find
out if the deal is portable or not.
If it is, then you should take it to your new property. However, remember
that in order to do this you will effectively have to re-apply for the
mortgage, so the lender will need to see your bank statements, as well
as proof of income, again.
While your circumstances might not have changed, your mortgage
provider’s lending criteria might have got much stricter. This means you
may no longer be eligible to move your mortgage across, even though it
is portable. You should also bear in mind that if you need to borrow more
than your existing mortgage, then this will probably be at a different rate
of interest.
A mortgage broker can help you work out the most cost-effective
options, so it is well worth seeking advice when planning your move.
other costs
Remember that, as well as conveyancing costs for your new property,
you will also have to pay these costs on the home you are selling.
You will need to complete a form about the fixtures and fittings in your
current property, and your conveyancer will also have to get copies of
your Land Registry title deeds.
Provided all goes according to plan, your buyer will then pay a deposit typically 5% of the sale price - when contracts are exchanged. When the
sale is completed, the buyer will pay the full cost of the property and your
conveyancer will hand over the title deeds to their conveyancer.
Guide to mortgages
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A mortgage broker
can help you work
out the most costeffective options, so it
is well worth seeking
advice when planning
your move
12
neXT-Time bUYers
If the property you are moving to is more expensive than your existing
property and you are taking out a larger mortgage, you may want to
consider arranging additional life insurance to cover the extra borrowing.
Sometimes it will be more cost effective to take out an extra, separate
policy rather than buying a new policy for the full amount, but, if in any
doubt, seek advice.
Finally, remember to include the cost of removals. Get at least three
different quotes from removal companies first, and make sure they are
properly insured in case any of your possessions are damaged in
the move.
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13
Remortgaging: What you need to know
Remortgaging: What you need to know
It is essential to regularly review your mortgage to ensure that you
aren’t paying more than you need to.
While many people are currently benefiting from the fact that several
lenders’ standard variable rates (SVRs) are at historic lows, costs do vary
widely depending on which lender you are with and in many cases you will
still be able to make significant savings by remortgaging.
If you aren’t on a standard variable rate and want to leave your existing
fixed, discounted or capped deal early, make sure you check what
penalties are in place. If you are locked in, then switching ahead of time
could end up wiping out any savings you would make by moving to a
cheaper deal, so always ask for advice before proceeding.
What you will need
When remortgaging, as well as asking your existing lender for a
redemption value – the amount you need to repay your mortgage –
you will have to provide all the information you needed when you first
applied for a mortgage. That means proof of your current income, bank
statements showing all your outgoings, and usually three years’ worth of
accounts if you are self-employed.
Your new lender will also want a valuation of your property before it will
grant you a mortgage, so it’s a good idea to check websites such as
www.zoopla.co.uk† to get an idea of what similar properties are going for.
What to do with any savings
If your new mortgage has meant you make savings every month, you
could use these to overpay your mortgage so that you can ultimately pay
it off early.
If you already have substantial savings in place, then you may want
to remortgage to an offset deal. Rather than earning interest on your
savings, you don’t pay it on the equivalent amount of your mortgage
debt, enabling you to reduce your interest payments and pay off your mortgage early.
For more information on remortgaging, visit
www.gocompare.com/mortgages/remortgages/
†
Please note, we cannot be held responsible for the content of external websites and by using the links
stated to access these separate websites you will be subject to the terms of use applying to those sites
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14
BUY-TO-LET MORTGAGES
Buy-to-let mortgages
A buy-to-let mortgage, as the name suggests, is a mortgage you
have on a property which you have bought specifically to rent out to tenants.
If you are thinking of buying a property to let out, do as much research
as possible into the area where you are buying, and think carefully about
the sort of tenant you are looking to attract. For example, if you want
to appeal to students, you may want to choose a property which has
several bedrooms and has good transport links to the relevant university.
However, if your target tenants are young, professional couples, then you
are likely to only need one or two bedrooms and a decent-sized living
space, and you will again need good transport links.
How much can I borrow?
When assessing how much they will lend to you, mortgage providers will
focus on the rental income the property is likely to generate and the size
of the deposit you can put down rather than your salary. Typically, lenders
will want the rental income to be at least 125% of the monthly mortgage
payments. That means if your mortgage is £800 a month, you would need
to be paid at least £1,000 a month in rent.
As with standard residential mortgages, the bigger the deposit you are
able to put down, the better the mortgage deals you are likely to be
offered. You will usually need a deposit of at least around 25% of the
property value. You can choose from fixed or variable deals, but many
landlords prefer fixed-rate mortgages because rental income is fixed.
They can also give peace of mind that payments won’t change for a set
period of time, regardless of what happens to interest rates.
Many buy-to-let deals are only available through brokers, so you may
struggle to find a mortgage if you go it alone. If you do choose to use a
broker, they will have the advantage of having access to all the available
deals at the time, so they will be able to help you choose the right
mortgage for your needs.
Buy-to-let mortgage rates are usually higher than standard residential
rates and the best-rate buy-to-let mortgages also come with large
arrangement fees, which you will need to factor in to your overall costs.
You will also need to think about whether you plan to manage the property
yourself, or employ a letting agent to do this for you. If you do intend to
use an agent, you will need to budget for fees of about 10-to-15% of your rental income each year.
Guide to mortgages
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You will usually need
a deposit of at least
around 25% of the
property value
15
BUY-TO-LET MORTGAGES
Remember…
You shouldn’t consider becoming a landlord unless you have sufficient savings to cover any periods when you don’t have tenants,
known as ‘void’ periods. You will also need to factor in the cost of any
repairs, as you and not the tenant are responsible for the maintenance of the property.
Know your legal rights and make sure you thoroughly check any potential
tenants’ references to avoid getting stuck with someone who doesn’t pay
their rent on time, or who is likely to cause you problems.
For more information on buy-to-let mortgages, visit
www.gocompare.com/mortgages/buy-to-let/
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