Almost certainly your mortgage will be the largest financial commitment you take on during your lifetime. It is a commitment that will last for many years. It will affect the home you can live in and the lifestyle you can lead. It is important to get the arrangements right.
Given that most people will only take one or two mortgages during their entire lifetime, here’s some of the questions you should ask your mortgage adviser when looking to take out a loan.
What is the maximum amount I can borrow?
The way in which the maximum amount of a loan is calculated varies between different banks and lenders. All lenders will however use a formula combining income multiples together with an assessment of your income and outgoings so as to determine your borrowing capacity.
In recent years, and in particular since the financial crisis in 2008, banks have applied a stress-testing process. They look not only the affordability of the mortgage for you in your present circumstances, but also if income was diminished in some way or the interest rate went up during the term of the loan.
When asking how much you can borrow, you should also ask how that amount is calculated so you can ensure you maximise your borrowing capacity.
What different types of mortgages are available?
There are numerous different mortgage types, (sometimes called mortgage products), from which you can choose depending on your circumstances. The most common is a repayment mortgage whereby you make monthly payments, part of which discharges the interest on the mortgage and part of which repays the capital. At the end of the period of the mortgage, the whole capital amount would be repaid.
Some lenders offer interest-only mortgages. As the name suggests you only pay interest due on the capital amount each month, but no capital repayment is made. At the end of the mortgage term, the whole of the capital remains due. This kind of mortgage is really only suitable for short-term ownership, where for example, the property is to be renovated and sold on.
The manner in which interest is charged differs from product to product. A variable mortgage will have an interest rate which is fixed by the lending bank from time to time during the loan. The rate can charge upwards or downwards at any time of the bank’s choosing.
Alternatively, the interest rate can be fixed, usually for a period of two, five or even ten years. You will have certainty as to the rate that you will be paying, protected from any upward change, but you would not be able to take advantage of any downward change in market interest rates from time to time.
A Tracker Mortgage has an interest rate which is generally at a fixed percentage above the Bank of England base lending rate and will track that rate from time to time. The rate can therefore go up or down.
The quantum of the interest rate and the type of mortgage product available to you will vary depending on the amount of the deposit that you are putting down to purchase the property. In general terms, the bigger the deposit, the wider range of products available to you and the cheaper the interest rate.
A good mortgage adviser will ask detailed questions about your plans so that the product best suited to your needs can be chosen.
What are the penalties for paying off a loan early?
If you take out a mortgage with a fixed or tracker rate or a discounted interest rate, then you will undoubtedly be subject to an early repayment charge. Usually these charges are calculated by reference to a formula referring to a percentage of the capital amount to be repaid and the years left in the mortgage.
You should get a clear understanding of any early repayment charge or similar penalty as the amounts due can be very significant indeed. Whilst you may plan to live in the house for many years to come, life does not always run in a straight line. A forced sale of the house and repayment of the mortgage before the fixed term of the interest rate has expired could give rise to a hefty penalty.
As you discuss different types of mortgage products you should enquiry as to any penalties that apply.
Is it possible to over-pay the mortgage?
Over-paying a mortgage means paying an additional capital amount so as to reduce the time it takes to pay the mortgage off. While many mortgages include early repayment penalties, many will allow you to make a minor over-payment without paying any additional fee or penalty.
This could be important if, for example, your income is irregular or you have bonus payments which you would like to apply to the mortgage. A discussion in relation to that aspect will make sure that you have the right product available to you.
Do I need life insurance?
It might be appropriate to take life insurance in the amount of the mortgage. A straight life cover on the life of yourself and your partner will mean that you have a lump sum to pay the mortgage off if either of you passed away.
Again, there are different types of products which might be suitable. Decreasing term cover will reduce the amount of the lump sum you have on the death of either party to the mortgage in correlation with the reduction of the mortgage as you pay capital down over the years.
Equally, you might combine life insurance with critical illness cover. If you or your partner suffer a critical illness as defined under the policy, the lump sum will be payable meaning the mortgage can be paid off. That would be important for example if one of the breadwinners in the family was unable to work and therefore the mortgage repayments could not otherwise be met. A mortgage adviser will usually be allied to an insurance broker who would be able to advise you what kind of insurance would be appropriate.
What documents are required?
The application for a mortgage is invariably a heavily documented process. All banks will require proof of your name and identity so as to comply with money laundering regulations.
You will also need to demonstrate your income. More than likely you will be asked to provide copies of your bank statements and credit card bills for at least the last three months, together with pay slips and income tax assessments.
Early enquiry of your mortgage adviser as to what will be required will allow you to get a head start on gathering the necessary information.
What are the costs of arranging the mortgage?
The mortgage will have some up-front costs which you will need to discharge. The costs will include:
- Arrangement fee covering the bank’s administration costs of arranging the mortgage
- A rate booking fee, if you are selecting a fixed interest rate or similar
- Valuation survey fee, repaying the bank for the cost of the surveyor to assess the value of the property
- Bank’s lawyers’ fees to reimburse the bank for the cost of engaging lawyers to draw up the documents to secure the mortgage against the property
You should ask the mortgage adviser for a clear statement of the costs relating to the particular product that you are choosing.
Remember also that on registration of the loan when you buy the house, stamp duty of ½% of the amount borrowed plus £90 registration fee will be deducted from the amount of the loan that is advanced to you.
Take these lists of questions with you as you go to your first meeting with your mortgage adviser. These will help to make sure that the biggest financial commitment you will make is set up on the right terms for you and your family.
Abigail Watkins is a solicitor in the property team at Benest & Syvret, one of the busiest conveyancing teams in the Island. She advises home-buyers and people taking a mortgage on a daily basis and has over 30 years’ experience in the legal world. If you wish to discuss any aspect of mortgage arrangements, contact Abigail on 875875.