A mortgage doesn’t need to be as complicated as it seems. A mortgage is a loan from a lender (a bank or building society) that you (the borrower) take out to help buy a property. It is a secured loan, which means the lender has the right to take back and sell the property if you can’t keep up with your repayments.
Basic Requirements
Mortgage lenders adhere to specific procedures and guidelines when assessing eligibility for applicants applying for a mortgage. Each lender operates with unique criteria, which directly influences the amount a prospective buyer can secure towards the purchase of a property.
Here are some key factors considered by lenders in their decision-making process:
Affordability
It's tempting to assume you can comfortably afford the mortgage you require without thoroughly evaluating your financial situation. However, it's crucial to ask yourself whether you could sustain your mortgage payments in the event of rising interest rates and if you have the capacity to repay the loan amount in case of a decline in house prices.
Deposit
The lender needs reassurance that in the future if you are unable to make your monthly payments to pay back your mortgage, they can repossess your home and cover the loan by selling it. Less risk-taking means decreased loan-to-value (LTV) percentages, and personal deposits may need to be larger than in the past.
Saving for a deposit on your first home can feel like a scary task to do, but once you’ve started looking at your options and planned how you can reach your target, it can be achievable! We all have to start somewhere. You will typically need at least 5% as a first-time buyer and commonly up to 20% to access the most competitive interest rates on the market.
The source of the deposit may come from your current property, savings, inheritance or a gift.
Valuation
Before a lender approves your mortgage application, they will conduct a valuation to verify the property's worth matches its purchase price. The valuation fee varies depending on the lender and the property’s value.
The main objective of the valuation is to provide assurance to the lender that the property is suitable collateral for the mortgage. You may choose to complement this valuation with a survey to obtain a detailed report on the property's condition.
Older or poorly maintained properties often benefit from a full structural survey, which thoroughly evaluates the property's structural integrity and provides recommendations for required repairs.
To establish a valuation benchmark, it's helpful to gather comparable examples of properties in the same area.
Property type
The type of property that you are buying can be a key factor when it comes to whether you qualify for a mortgage and the type of mortgage lender that you will need. Certain properties such as studio flats, flats over commercial properties and ex-local authority premises may be perceived as having decreased future desirability. As a result, certain lenders might opt out of serving these markets, which could potentially restrict your borrowing choices.
Time frame
When you take out a mortgage, you will agree to a mortgage term with your lender. A mortgage term is the number of years and months you’ll make payments to the lender until your mortgage is paid off in full or, with an interest-only mortgage it is until you finish paying interest on the original loan and the money that you borrowed from the lender is due to be paid back.
Mortgage lenders will often have a maximum number of years in which they are willing to lend for. The most common mortgage term is 25 years, but some stretch to 40 years. It is important for you (the borrower) to understand what that mortgage term will mean for your finances over time.
