Mortgage Handbook


A Step-by-Step guide to the Mortgage process.

Find Lender/ Affordability
Choosing the rate.
Decision
Key Features
Costs and Fees
Types of valuations
Documents that you
Methods of paying
Offer
Legal
Exchange
Completion



1.Find Lender/ Affordability

Unless you are a premiership footballer or a chart topping musician, buying a house is the largest financial transaction most people will carry out in their lives. So it is important to find the right mortgage deal for you and your finances.

There are many different lenders in the market. Well known high street banks as well as less well known regional based old style building societies.

Each can have their own criteria for lending or underwriting and special deals for different customers and hence different advantages and disadvantages.

The rate is important, but it should not be the only benchmark for selecting a lender.

Other objectives that may be important to you needs to be considered. Therefore, the lender with the lowest rate may not be the best suited to achieve your goal of buying a home.

Here are some of the criteria that differs with each lender:

  • Maximum allowable loan or income multiples/ affordability.
  • Types of income considered e.g. part time, second jobs, benefits, pension.
  • Minimum deposit required.
  • Maximum age to term.
  • Type of property.
  • Cost of the loan or the fees (see our rate comparison guide pg ).
  • Redemption penalty.
  • Length of lease.

An experienced mortgage advisor would be able to guide you through the different criteria for each lender. Different lenders will bring different advantages and disadvantages to each deal, such as:

  • Flexible over or under payments
  • Arrangement fee
  • Flexibility in underwriting
  • Redemption penalty
  • Speed of processing applications
  • Valuation fee
  • Income multiples
  • APR
  • Booking fee
  • BoE or Libor?



2. Choosing the rate.

2a.Following criteria are important when choosing a rate.

  • Fixed, tracker or variable.
  • Initial or headline rate.
  • Tie in period
  • Tied to Bank of Eng or lender’s SVR
  • Booking fee
  • Redemption penalty
  • APR

2b.Types of rates
Chart below shows how different rates relate to each other and how the change in Bank of England rate can affect them. The rate charged by each lender is depend on the rate they will pay to borrow money in the money market from other lender’s as well as the bank of england (first Thursday of each month is when the BoE committee meets to decides what the new rate will be).
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Five main type of rates.

  • Fixed rate – where the rate is fixed for a limited period (rate control period) or for the whole term.
  • Tracker – is a variable rate that tracks a default rate. This could be the Bank of England rate or the lender’s standard variable rate. There are different advantages to the different methods of tracking. Ask your broker to explain the difference.
  • Discounted/ variable – where the rate given is normally a discount from the lender’s SVR.
  • Lender’s standard variable rate – this is the normal rate a lender would lend money and is based on the cost of borrowing in the money market. Other rates are really a perk to attract customers.
  • Bank of England variable rate – the rate bank lends to the money market.

2c.What is the rate control or tie-in period?
Usually the special rate you receive is for certain period only. This can be none, to 1 to 5 years and even whole of the term. You are obliged to stay with the lender during this period. However, you may leave after paying the redemption penalty.

2d.Redemption penalty
If the total of the loan is redeemed or paid back within the tie-in period, the lender will generally apply a penalty or a fine. Further information in KFI document. See also portability.

2e. Portability- means that all loans can be transferred to a new property (in the event you want to move) even within the tie-in period without a penalty.

3. Decision / Agreement in Principle.

This is the first phase of the application process. This is when the credit searches and scoring is carried out to determine if a lender will accept you as a client and the amount they can lend.
Things that influence the credit score: credit conduct history, other outstanding loans and credit, electoral role, job, age.
There are some lenders who do not carry out credit searches and have a more flexible approach to underwriting. Your broker would be able to give further information.

Credit score

Factors that influence credit score and the DIP or AIP.

    1. Credit status – based on type of job (permanent), stability of address, conduct of
    existing mortgage, credit or credit history.
    2. Level of deposit – Again obvious.
    3. Ability to prove income or not.
    4. Existing debts – Many lenders now use affordability as a measure of level of credit
    available. Someone with higher income with corresponding higher levels of other
    debts (credit cards, personal loans) will have lower affordability than another with
    lower income, but also lower debts.
    5. Adverse credit – see below.
    6. Voter’s role – absent from voter’s role scores low on a credit profile. Even if you don’t vote, it is important you are registered on electoral role. It is also very important that you use the correct address for application.. Check address match royal mail address search: http://
    www.royalmail.com/
    7. Age.

Fast track and Self Certification

You will not be able to do any application on the basis of self certification with no proof of
income. All applicants must prove income before application. No income, no mortgage.

Fast track does not mean self certification. Although a lender may fast track an
application through their internal systems, you must provide valid documents for income and id which will be kept on file for compliance purposes. This is very important as some lenders can ask for documents up to six months after completion. See above for proofs of income acceptable.

Adverse credit.

What to do if you have a poor credit?
Such things as defaults, agreements to pay, CCJs, IVAs and bankruptcy will affect you ability to obtain a mortgage. There are some lenders who may be able to help, so talk to your broker for possible solutions.

Types of adverse credit

    a/ Arrears : when a payment on a credit agreement is missed and have fallen behind.
    b/ Default : notice placed on the credit file by a lender after several months (usually 8) of
    missed payments. Remains in the file as long as the outstanding debt.
    c/ CCJ: usually a result of failing to keep up with the contractual payments and is issued by
    the courts on behalf of the creditor if little or no attempt have been made by the client to
    come to an alternative agreement. Remains in the credit file for 6 years
    Before a CCJ a default notice will be issued.
    d/ IVA : IVA an alternative to bankruptcy and not a quick solution to get out of debt ( as
    advertised by many companies).
    Where the debts are frozen and the courts can agree to allow the client to repay the debt
    over number of years e.g. 5 yrs. Must have unsecured debts of approx £20k.
    You will keep certain assets e.g. house, car.
    e/ Bankruptcy – cannot obtain credit for 6 years. Bankrupts can be discharged now after
    one year.

Checking the credit file.
If in any doubt you should check your credit file and forward to the mortgage adviser before application. Following are two main credit search organisations used by lenders.
www.equifax.co.uk or www.experian.co.uk
Some lenders nowadays do “soft credit scores”, i.e. do not leave a footprint on credit file, but it is better to know exactly what the issues are, without going through the trouble of submitting an online DIP.

The DIP can give 3 results.

    1. Acceptance.
    2. Straight decline.
    3. Referred to a human to look at.

4. What is a Key Features Document?

Provides a detailed breakdown of the mortgage loan, including fees, charges and other relevant conditions. You should read this document and ensure that you have the mortgage you wanted.

5.Costs and Fees

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6. Types of valuations or surveys.

There are three types. The costs increase with each level. The survey is carried out by a lender appointed, but registered surveyor. If you are looking for a higher level survey, you can save money by asking for the same valuer as for the basic to carry out the additional work at the same time.

  1. Basic valuation- the simplest form required by the lender to establish that the property is valued at the purchase price.
  2. Homebuyer’s report- this is for the benefit of the buyer. Since March 2010 a new type of Homebuyer Report was introduced (licensed by RISC) with a traffic light system condition ratings to highlight potential defficiencies in the property. See our website for a sample and further information.
    • Condition Rating 1 (green) – No repair is currently needed. The property must be maintained in the normal way.
    • Condition Rating 2 (amber)- Defects that need repairing or replacing but are not considered to be either serious or urgent. The property must be maintained in the normal way.
    • Condition Rating 2 (amber)- Defects that need repairing or replacing but are not considered to be either serious or urgent. The property must be maintained in the normal way.
  3. Building or Structural Survey- A thorough and extensive survey of internal and external structure. Recommended for older property over 75 years old, or a property that hasn’t had a recent survey or you are looking to alter or renovate any of the structures.

7. Documents that you may need to provide to the lender.

  1. Identification
    • UK and EU
    • valid passport, photo card driving license, gun license.

    • Non-UK or EU citizens
    • additionally documents for right to reside or visa details.

  2. Proof of address – a recent (within last three months) utility bill, bank or credit card statement, council tax statement.
  3. Confirmation of income.
  4. If you are self-employed it is important to understand that the lender will only take net income declared in you accounts and not the gross profit or turnover.
    Some lenders will request confirmation of income declared in the form of SA302s from the HMRC.

    For the employed the proof of income will be in the form of either last 3 payslips and latest p60. Some lenders can ask for 3 month;s payslips as well.

    You may not need to provide all these documents. Talk to your mortgage adviser to find out what each lender requires.

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8. Methods of paying a mortgage.

Capital and interest mortgages

Advantages of Capital & Interest Mortgages

  1. Guaranteed to pay off the mortgage over the term.
  2. Debt to the lender is reduced with time. However, no significant reduction in the loan may be seen in the initial years.
  3. Total interest paid to the lender over the whole term will be lower.
  4. Problems with negative equity will be lesser.

Disadvantages

  1. In the event of loss of employment due to a long term illness or redundancy, the State support is restricted to repaying the interest part of the loan only. The borrower is responsible for paying the capital part.
  2. Temptation to extend loan term at each additional borrowing and/or house move to maintain monthly outgoing at lower level, thus maintaining a loan for a longer period.
  3. May require new life policy at each house move at a higher cost due to increased age and possible health problems.

Interest Only Mortgages

Where only interest is paid monthly and the capital borrowed is repaid at the end of the mortgage term. The mortgage capital is to be repaid by a separate repayment/saving plan such as an endowment, pension, ISA, etc.

Advantages

  1. Flexibility when moving house. The saving plan can be taken with the house move and topped up to achieve an increased target or even a different type of plan or repayment method can be set up to suit new circumstances.
  2. Flexibility in repayment method e.g. PEP/ISA, pension, endowment, etc.
  3. Possible attainment of the target before the term allowing the mortgage to be repaid early thus saving on interest payments in the latter years or higher than required returns at maturity.

Advantages specific to endowments
1. Waiver of premium benefit during long term illnesses on endowment will pay the premium of the plan thus ensuing that with the payment of interest by social security, no extra capital needed to maintain mortgage payments.
2. Cheap life cover & low cost critical illness protection.

Disadvantages

  1. The maturity value of the repayment vehicle may fall short of the required target. Requiring the customer to find the shortfall.
  2. No reduction in the debt to the lender over the term of the loan.
  3. Negative equity This can affect interest only mortgages more than repayment loans for the above reason.

It is your responsibility to arrange and maintain the repayment vehicle to the end of the loan term or until the target of the loan is achieved. Failing to maintain or arrange a repayment vehicle and subsequent inability to repay the loan at term may lead to the lender repossessing the property which would be sold to recover their loan.

Lender Panel
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