Residential Mortgages

What's a mortgage?
A mortgage is a loan 'secured' against the value of that home. This means you could lose your home if you don't keep up the mortgage payments.

Which sort of mortgage should I take out?
There are 3 parts to a mortgage that you will need to consider:

• Who is going to lend you the money and at what interest rate?
• How are you going to repay the money you have borrowed?
• How are you going to protect the mortgage you have taken.

1) Most lenders have a Variable rate - the interest rate on your loan may be varied (up or down) by the lender (often, but not always, as the Bank of England base rate varies). To attract your business most lenders offer interest rate ‘deals’ for the early part of your mortgage, some of which are explained below:

• Base rate tracker - the interest rate varies (up or down) directly in line with the Bank of England base rate. This is usually set at a lower price than the variable rate
• Fixed rate - the interest is guaranteed to stay at a set level for a set period, regardless of any changes in the base rate.
• Capped rate - the interest varies but doesn't go any higher than a set level even if the base rate does go higher.
• Discounted rate - the interest can be fixed or variable, but for a set period you pay at lower-than-usual rate of interest; for example, a discount of 1% lower than the lender's variable rate for a period of say two years.
• Flexible mortgage- Some mortgages offer flexibility such as overpayments, underpayments, drawdown etc The amount of flexibility varies greatly fro lender to lender, so check the small print carefully to check it offers exactly what you require.

If you choose an interest rate ‘deal’ you may be locked into a mortgage for the period of the deal and for the very cheapest deal you can often be locked in on the higher variable rate for some years after your initial rate ends. To get out of a ‘lock in’ say if you wish to move home, or no longer require a mortgage, will normally incur a (sometimes substantial) penalty.
Connect IFA advisers will help you obtain the most cost effective deal taking into account the lenders criteria, the rates on offer, their charges and the finer details such as lock-ins and flexibility.

2) After you have chosen the lender and interest rate here are basically two ways for you to choose from to repay this mortgage:

• Repayment mortgages (also known as capital and interest)
• Interest-only mortgage loans (such as endowment, ISA, PEP and pension)

A repayment mortgage is where you repay to the lender on a monthly basis a mixture of capital and interest from day one and where the amount of loan outstanding gradually diminishes over the term. A repayment mortgage is a guaranteed way to ensure that your mortgage is paid off at the end of the term, providing you meet each required monthly payment as it falls due.

An interest-only mortgage is where your monthly payment to the lender consists only of the interest on the loan with no element of ongoing repayment of capital. A savings vehicle such as an endowment or ISA is usually used to provide the final repayment. There is an element of risk to this type of repayment vehicle as it relies on a certain investment return from the savings vehicle chosen. If this return is not reached then there could be a shortfall in repaying your mortgage. Alternatively a higher return achieved could provide a surplus or allow you to pay your mortgage off earlier

3) Finally, It is important to protect your selves fully from the effects of death, ill-health and redundancy. Your home is at risk if you cannot meet your mortgage payments in any of these events. Help from the state is at best minimal and sometimes non-existent.
It is not compulsory to take out insurance that is not relevant and existing plans can sometimes be used. It is important however that you seriously consider the impact on your finances for each of these events. For example, many believe their employer will continue to pay if they are long term ill, but on checking, discover their employer may restrict payments to a maximum of 3 or 6 months pay or in the worst case, are only bound contractually to pay statutory sick pay, currently just £66.15 per week for a single person!
You will also need to insure the property. Please read our ‘protection’ section for more detail about how all these plans work.

OTHER CONSIDERATIONS

How much can I borrow?
Usually, you can borrow a multiple of your annual income and that of anyone else you are buying the property with - for example, three times your income plus one times your partner's income or two-and-a-half times your joint incomes. Some lenders will consider lending more than this but most will take into account your other fixed financial commitments when deciding how much to lend you.

Some lenders will advance the full value of the property where other may require you to make your own contribution to the property called a ‘deposit’.

Don't just borrow the maximum on offer. Check how much you can afford to pay given your other commitments. Make an allowance in case the cost of your mortgage goes up if interest rates rise.

Generally, the more money you can put towards the purchase yourself, the better overall deal you may be able to get.

Giving proof of your income
Many people do not have any difficulty proving their income. If you are in regular work you will usually have payslips and if you have a bank account your employer may make regular payments into it. Payslips and bank statements can be a way of showing your lender how much you earn.
If you are self employed or have several different jobs it can be more difficult to show your income. However, if you have some or all of the following: certified accounts, tax returns or wage slips you may have enough to show your income over a sufficient period. If you can provide the information this way you may be able to get a better rate than you do with a "self certified" mortgage.

"Self-certification" mortgages
The key feature of self-certification mortgages is that the borrower does not have to give the lender proof of income – he/she just declares their earnings and the lender accepts this. Self-certified mortgages were designed to cater for people who are self-employed and have difficulty in showing that their earnings are enough to make the payments on the mortgage they are applying for. This could be because they have not been trading for long enough, they have more than one job, or they rely on bonuses for a large part of their total pay.
Don't be tempted or persuaded to apply for a self-certification mortgage if you can easily prove your income another way. You could end up paying a higher rate on your loan, because lenders often charge extra for self-certification.

Overstating your income
There has been some coverage in the press about people who have used self certification to get a mortgage and have claimed their income is higher than it is. Sometimes people are tempted to do this when their true income is not enough to borrow the amount they require.
Lenders have systems to check information that you give to them. If they find that you have lied, and report this to the criminal authorities, you could get a criminal record.

How long should I borrow for?
The number of years you take out your loan for is called the 'mortgage term'.
Traditionally, most people have opted for a 25-year term. But you can always choose a shorter term than this and your lender might agree to a longer term.

The shorter the term, the less you'll pay in total for your mortgage. But, if you have a repayment mortgage, your monthly payments will be bigger.

Do not choose a term which extends beyond the date you intend to retire unless you are absolutely sure that you'll have enough income in retirement to carry on meeting your mortgage payments.

Whatever term you choose at the outset, you can pay off your mortgage early - but check whether there will be extra charges if you do this.

Will it be difficult to get a mortgage if I've been in debt in the past?
It may be. If your debt has now been repaid, was a one-off problem and is unlikely to happen again, you may still be able to get a mortgage fairly easily from the main lenders.
If your debt problems were more persistent, the main lenders will probably reject you, but some smaller, specialist companies are more helpful.

In either case, you will probably be charged a higher-than-average rate of interest.
We will be able to help you find a suitable deal in most circumstances.

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