How does a mortgage work?
26 September 2022
What is a mortgage?
Put simply, a mortgage is a loan that helps you to buy a house.
To secure a mortgage, you will be required to put down a deposit relative to the cost of the purchase price of the property. The difference in value between your deposit and the cost of the property will be covered by the mortgage. The mortgage loan will be provided by either a bank or a building society, and you will repay this loan back every month for a set amount of years. This length of time is known as the mortgage term, and some may last up to a period of 40 years.
In addition to repaying the loan amount, you will also pay interest on the mortgage. The interest that you pay will depend on the total amount borrowed, the length of your mortgage term and the interest rate that you agreed to.
Different types of mortgage
There are many different types of mortgage, helping to serve a variety of purposes. The different types of mortgage include but are not limited to:
The Mortgage Application Process
Applying for a mortgage is a multifaceted process that involves many different agents, such as solicitors, surveyors, estate agents and mortgage advisors. Below is a typical step-by-step guide to walk you through the mortgage application process.
1) Understand your budget and financial situation
A mortgage is a significant financial commitment, so it is vital to have a clear understanding of your financial situation. There are a wide selection of resources available such as mortgage calculators to help you understand the current availability and affordability of mortgage products currently on the market. Having an idea of what you will be able to afford and will be eligible to borrow will help you start searching for properties.
2) Book an initial mortgage appointment
Whilst not essential, speaking to a specialist mortgage advisor might help you to discover better deals than you would find yourself, as well as receiving personalised advice designed to help you find the perfect mortgage for you and your property requirements.
3) Apply for a mortgage in principle
Again, a mortgage in principle is not essential, but can help you to understand what mortgage products you are likely to be eligible for, and it acts as a sign of intent to an estate agent, so it might make your property viewing process easier. A mortgage in principle is an indication from a lender of what you can provisionally afford and are eligible for. It is not a firm offer, and might involve a hard credit check, so make sure you fully understand what you are applying for before embarking on the application process.
4) Apply for a mortgage
If you have had an offer accepted on a property, it is time to apply for a mortgage. There is a large variety of mortgage products on the market, ranging from first time buyer mortgages specifically designed for those making their first steps on the property ladder right through to buy to let mortgages designed for landlords seeking to add to their portfolio.
Additionally, there are different types of mortgage based on the interest and repayment structures. These differences can be hugely financially significant, so again it is vital to fully understand what each of them is and how they would financially impact you. When you apply for a mortgage, the lender will run a hard credit check which will appear on your credit report.
After paying a deposit, you will pay a monthly instalment that repays both the capital plus the interest.
A lower payment compared to a repayment mortgage, however you will only pay the interest, not the capital. The capital will be repaid at the end of the mortgage term.
You will arrange a set time period with the lender for which the interest you pay will not change.
With a tracker mortgage, your interest rate will change depending on the Bank of England base rate. This is not to say that the interest rate will be equal to the BofE base rate, however the interest rate you are paying will go up and down at the same rate as the base rate.
An offset mortgage uses your savings to generally reduce the overall interest you pay.
5) Getting your new home valued
The lender will ensure that the house you are looking to purchase is worth what you are intending to pay for it by carrying out an independent property valuation. They will value the property as the house will act as security should you be unable to pay your mortgage.
6) Accepting the mortgage offer
If the earlier stages have all gone to plan and the house is valued at the price you are intending to pay, you should receive a mortgage offer from the lender. At this stage, you will work with all of the relevant third parties, such as the solicitor, conveyancer and estate agent to work toward a ‘completion date’. This stage will involve the conveyancer or solicitor ‘exchanging contracts’ with the selling party.
7) Moving in to your new home
Once the contracts have been exchanged, your conveyancer will invite you to sign the mortgage deed, which is the legal document officially transferring your new home into your name. The conveyancer acting on your behalf will apply for the funds from the lender to complete the purchase. On the completion day, your conveyancer will transfer this money across to the seller’s conveyancer.
Once this payment has arrived, the legal process is complete and you will be able to pick up the keys to your new home!
If you are ready to start your mortgage application, book an appointment to speak to one of our friendly and dedicated team of experts.