Frequently Asked Questions
Find the most frequently asked questions relating to mortgages.
Exchange of contracts is where the seller or developer and buyer formally commit to the sale and purchase and a completion date is agreed. The two solicitors send each other contracts to buy and sell the property, and the arrangement is then legally binding. Contracts are not exchanged until both the seller or developer and buyer are definitely ready to go ahead. After this point, neither side can pull out without suffering a financial penalty.
A deposit is a down payment on the purchase of a property. Many buyers pay a deposit of 10% of the purchase price, and get the rest from a mortgage lender. Deposits are usually offered to the seller or developer when contracts are exchanged. The money is held by the buyer’s solicitor and passed over, along with the mortgage money, on completion. Deposits have to come from buyers’ own resources – in other words, not from a mortgage secured on the property or other loans.
Restrictive covenants are legal promises to do (or not do) certain things on a property. They are usually set up by the former landowner or developer. Restrictive covenants are very important as they bind whoever owns the property. You need to consider how they will affect your use of a property, and make sure you get permission in writing for anything that needs it.
With shared ownership, a house or flat is owned partly by the buyer and partly by a developer or housing association. The buyer pays rent on the share they do not own. Sometimes, they can increase their share of the property by buying more of it, and then pay less rent. Mortgage providers will lend for shared-ownership properties, but there are strict criteria. The mortgage must also be approved by the developer or housing association.
New-build transactions involve the sale/purchase of a completely new property. Usually, the developer owns the whole site and is selling it bit by bit, in the form of housing plots. Sometimes, they use a slightly different conveyancing procedure from the normal one, to make it easier to deal with a large number of sales at the same time.
‘Completion on notice’ is where a fixed completion date is not available, usually because the property is still being built by the developer. Normally, the developer will be able to give an estimated date for when the property will be built. They will also provide a ‘termination date’, which is the latest date when they can finish the building.
When you buy your home, you will most likely take out a loan – a mortgage – to pay for it. The mortgage is secured against your home. If you don’t keep up your mortgage payments your mortgage provider, or lender, may be able to sell your home to recover the money you owe.
Whenever the property is sold, as the lender has a ‘first charge’ – or in Scotland a ‘standard security’ – the mortgage must be paid back first. With your home as security, the lender is usually able to offer you a lower interest rate than you find with other types of loan.
If you change your mortgage to a new lender – remortgaging – you may benefit from a better mortgage rate. Some lenders also offer to pay the legal costs and valuation fees associated with remortgaging. The process for remortgaging your home can take around 4 to 12 weeks, as the new lender will want to make similar checks to when you bought your home originally. Your current lender may charge you exit fees when you leave your current mortgage, which may include an early repayment charge.
With a repayment mortgage, your monthly payments to the lender go towards reducing the amount you owe as well as repaying the interest they charge. This means that each month you’re paying off a small part of your mortgage.
It’s a clear approach – you can see your mortgage getting smaller and provided you maintain the required payments, you also have the certainty that your mortgage will be repaid at the end of the term.
Initially, the majority of your payments go towards interest on your mortgage, which means in the early years, the amount you owe won’t reduce by very much.
With an interest only mortgage you only pay the interest charged on your loan, so you’re not actually reducing the loan itself. You’ll need to have some other arrangement or plan in place to repay your loan at the end of the term. For example – investments, savings plan, downsizing (where you sell your property and buy a cheaper one using the equity to repay your loan), making lump sum payments or changing to a repayment mortgage.
If the savings or investment plan you choose performs well, then you could pay off your mortgage earlier compared to a repayment mortgage. At the full mortgage term there may be a lump sum available after the mortgage has been repaid.
Very few investments or savings plans are guaranteed to repay your mortgage in full. At the end of the mortgage term, you’re responsible for repaying the mortgage in full. If your savings or investment plan doesn’t cover the full amount, you’ll be responsible for paying the difference. Your mortgage lender can demand repayment, and they’ll charge you interest on any outstanding balance until it’s repaid.
Lump sum payments or changing to a repayment mortgage may not be possible if your circumstances change and you can no longer afford the increased amounts.
Downsizing is not a guaranteed method of repaying your loan as, even if you have enough equity now, house prices could fall and may leave insufficient equity to repay the loan. It is not advisable to rely on house prices increasing as this might not happen.
Some people may hope to rely on inheritance. However, there are several risks associated with this: people can change their Wills and, therefore, your inheritance is not guaranteed; the amount you receive may be different to what you expect; you may not have inherited by the time your mortgage term ends or you retire and there can be a delay in receiving funds from an estate.
Many lenders will only accept certain plans to repay an interest only mortgage. Your adviser will be able to guide you.
This is a standard interest rate, which a lender will set and can go up or down in line with market rates (such as the Bank of England’s base rate).
- You have more flexibility and can usually repay your mortgage without any early repayment charges.
- Your monthly payments can go up and down and this can make budgeting difficult.
- Standard variable rate mortgages are not usually the lowest interest rates lenders offer.
With a fixed rate mortgage, your monthly payment won’t change for a set period. At the end of your fixed rate, your lender will usually change your interest rate to their standard variable rate (SVR). It’s a good idea to review your mortgage at this stage because the lender’s SVR may not be the best deal around.
- You know the exact amount you’ll need to pay each month, which makes budgeting easier.
- Your monthly payment will stay the same during the fixed period, even if other interest rates increase.
- Your monthly payment will stay the same during the fixed period, even if other interest rates decrease.
- If you want to repay your loan early, there could be early repayment charges.
With a tracker mortgage, the interest rate charged by your lender is linked to a rate such as the Bank of England base rate. This means your payments can go up or down.
- The rate you pay tracks another headline rate (for example, the Bank of England base rate or the lender’s base rate). If the headline rate changes, your tracker rate changes by the same amount. So normally your interest rate will be following trends in the marketplace.
- Some lenders impose a collar which means the interest rate won’t fall below a certain level, even if the rate it’s tracking continues to reduce.
- Your monthly payments can go up or down which can make budgeting difficult.
- If you want to repay the loan early, there could be early repayment charges.
When you apply for a mortgage (or any sort of credit) the lender will usually ‘credit score’ your application. This helps them decide whether to accept your application, the amount of money they’re prepared to lend to you and what rate of interest you’ll pay.
Credit scoring works by awarding points based on your circumstances. Each lender has their own scoring system. You’ll generally score more points if you’ve been in your job longer, own your own home and have paid all of your loans on time in the past. Having a good credit history will improve your chances of getting the best rate mortgage.