Your mortgage broker can help you by introducing you to qualified lenders and answering any questions you have about the mortgage process. Brokers know the market, and a good broker should understand which lender and product best fit you and your needs. When choosing a broker, be sure to look for a “whole of market” mortgage broker—they’re not tied to any specific lender, so you’ll have more mortgage options available.
A term that you’ll hear your broker and your mortgage lender is LTV, or Loan-To-Value ratio. The LTV is a number that compares how much the lender owns to how much you own. If you put down a 15% deposit, the bank will lend you 85%—that’s an 85% LTV mortgage. If you have a higher LTV mortgage (85% or above), you’ll pay less deposit up front, but you’ll make higher interest payments, and it may be harder to get a mortgage. (If you haven’t heard yet, the deposit is the sum of money you’ll need pay up-front for the house.)
A Mortgage in Principle is the first document you will need from your lender. The MIP is a non-binding agreement from the lender that says the lender is willing to lend to you, and how much that lender is willing to lend. Sometimes it’s called a Decision in Principle (DIP) or an Agreement in Principle (AIP). A DIP or AIP is the same thing as an MIP.
After securing your MIP, one of the key decisions you’ll need to take is what type of mortgage you want. The options you’ll usually see are:
- Fixed-rate mortgage: a mortgage that allows you to keep the same interest rate for several years (usually 2-5). After this “fixed” period, it’ll usually convert to a standard variable rate mortgage.
- Variable rate mortgage: a mortgage where your interest rate will change. These come in two flavours: Tracker Mortgages, which are based on the Bank of England’s interest rates, and Standard Variable Rate (SVR) mortgages, which are based on the lender’s own interest rate.
Fixed-rate mortgages give you a lot of security from day one: you know what payments you’ll be making for years in the future. However, if interest rates drop during your fixed term, you won’t be able to take advantage of the lower rates easily. This isn’t a problem with tracker mortgages- although if interest rates rise under a tracker mortgage, you’ll end up paying more. SVR mortgages are the least transparent of the three: the lender can decide to raise or lower rates as they please.
Another mortgage option that you might see is an interest-only mortgage. In an interest-only mortgage, your monthly payments only pay the interest on your loan. This means you’ll need to pay the balance of the loan at the end of the mortgage term as a lump sum. This is different from a traditional mortgage, where you pay both your interest and part of your mortgage debt every month. While payments might be smaller with an interest-only mortgage, they can be more expensive than other mortgage plans, because you pay interest on the whole amount for the life of the loan.
One of the most common ways to compare mortgages is through the Annual Percentage Rate of Charge (APRC), which shows you the total cost of your mortgage, not just the interest on an annual basis. These other costs can include fees from the bank, or from their surveyor.
Once you’ve decided on a mortgage you want to progress with, you’ll need help to make sure that there are no legal problems with the purchase. (You can do this yourself, but the consequences of missing an important detail may be enormous!)
You can hire a conveyancer, or a solicitor.
- Conveyancer: these are specialist lawyers who can professionally manage and carry out your legal matters directly related to the property purchase. There are many specialists available, and you can even find inexpensive options online.
- Solicitor: can provide a wider range of legal services (versus the solicitor) might be a better choice for complex transaction, but most likely going to be more expensive. While solicitors can act as conveyancers, not every solicitor may be experienced in conveyancing, so if you decide to go with one, make sure that they specialise in real estate.
Once you’ve geared up with the right team, contracts and a good understanding of some of the key terms, it’s time to start house hunting!