Residential Mortgage Explained – Rates, Loans, Deposit and Calculator

Homebuyers who don’t have money readily available, will in most circumstances opt for a Residential Mortgage to purchase a new home. For many homebuyers, knowing whether they are ready for their new home largely depend on whether they can afford to pay the monthly mortgage payments. After all, the purchase of a home is an important, and some would say, the most expensive one in an individual’s lifetime.

Mortgages have been around for a long time and are subject to property taxes . They are the oldest and the most common form of credit in the UK. Today, depending on where you live in the UK, the average cost of a home is between £180,000 -£200,000. In order to be able to afford to pay this sum of money, an individual will need to borrow a large sum of money. This is where a Residential Mortgage come into the picture. Mortgages make it possible for millions of people to afford to buy a home.

Considering the costs involved, and the fact that it may take you years or even decades to repay this debt, it’s important to read the fine print and understand what you’re buying into. For the uninitiated, the process of acquiring a Residential Mortgage can sometimes seem like a minefield. There are certain options like buying property through business that one should also check out. This article aims to make the whole process a breeze, explaining each element of Residential Mortgage in detail.

What is Residential Mortgage

A Residential Mortgage is a long-term loan taken by one or more individuals to buy a home. Whether you are buying a home for first time or simply re-mortgaging, you will have to consider opting for a Mortgage. There are primarily two types of Residential Mortgages than an individual can choose from – Fixed rate mortgages and Variable rate mortgages. The mortgage is secured against the value of the home until it’s finally paid off. If for any reason the repayments cannot be made the lender can then repossess the home and sell it to pay for the bad debt. This is also known as a foreclosure.

Residential Mortgage Calculator

Through the use of mortgage calculator you can check how much you can borrow and calculate the monthly calculators.

How Much can you Afford

There are three important considerations that you need to make before you buy a home.

• How much loan can I afford?
• How much is the mortgage going to cost once ancillary cost, rising interest and other bills are factored in?
• How can I save taxes while purchasing a higher priced home?

The Deposit

All Residential Mortgages require a deposit. The deposit is usually around 20%-30% of the total value of the house. For example, a home that is valued at £150,000, will require a deposit anywhere between £20,000 - £40,000.

Some mortgage lenders may offer schemes that allow individuals to pay a deposit which is less than 10%. In addition, the government assists with Help to Buy schemes which further reduce the deposit amount.

Calculating Loan to Value Ratio

The loan to value is the actual sum borrowed over the true value of the property. For instance, a home that has a total value of £200,000 requires a deposit of £40,000. The actual mortgage value would account to £160,000. This amount is 80% of the total value of the house. The 80% is known as the loan to value ratio. A loan to value of 80% would usually be on the lower side, compared to a 90% loan to value. The risk associated with a higher loan to value mortgage is generally higher and will result in higher interest rates . On the other hand, a loan to value of 60% will attract the lowest interest rates. The lowest loan to value for a mortgage is anywhere between 55%-60%. The highest loan to value is about 100%, however, this kind of mortgage is extremely rate and in some cases, requires a guarantor to be eligible.

What Interest Rate am I Paying

Interest is charged on the total amount of loan taken. The interest needs to be paid back to the lending company as a form of ‘service fee’. The interest is generally charged on a yearly percentage on the total amount of debt owned.

The amount of interest depends on the type of mortgage you are applying for. There are two types of mortgages:

1. Fixed-rate Interest mortgage

A fixed rate mortgage will require you to pay the same monthly payment for a specific period of time (up to 5 years). Your interest rate will stay stagnant even though the markets may be volatile. However, you may not get the benefits of falling interest rate and your payments will stay unchanged.

2. Variable rate Mortgage

In a variable rate mortgage, the interest rate can change depending on the discretion of the lender. This means that you monthly payment could be much higher for one month when compared to the interest paid initially. The hike in interest may be marginal, as it is regulated by the Bank of England as the base rate. The advantage of a variable interest rate is that when the base rate is lower payments can be lower than the initial rate.

Types of Borrowers

Depending on your financial circumstances and the type of residential property you opt to purchase you will be categorised under the following borrower type:

Re-mortgager

A person with a mortgage looking to refinance for a better rate of interest or looking to consolidate debts under one improved interest rate. This could be changing over from a fixed interest rate to a variable interest rate.

First time buyer

A person who has never owned a home before, and therefore, has never had a mortgage. For first time buyers there is new legislation that gives buyers freedom from Stamp Duty. There is also considerable assistance from the government for first time home buyers.

Home-owner

Individuals who owns their own home with or without a mortgage. For this type of borrower, his/her existing home can sometimes be used as collateral to reduce the risks on the lender.

Let to buy

Let to buy is slightly different than that of buy to let . This type of borrower chooses to let their property instead of selling their property when they move out. For this type of borrower, his/her existing home can sometimes be used as collateral as long as the rent from the to let property covers the mortgages payments for the home. This is to ensure that the individuals have enough capital to repay the new loan.

Lenders Fee

Every Residential Mortgage require a certain lenders fee attached to it, which is applied only once at the time of applying for the mortgage. This fee may vary from a few hundred pounds to over a thousand pounds. The fee usually falls under two categories:

• Booking fee: It is also commonly known as the Product Reservation Fee. This fee is charged by the lender for the services that were offered. Keep in mind that this fee is non-refundable and if for any reason your mortgage doesn’t go through as planned, this fee will not be returned.
• Arrangement fee: This fee is applicable at the end of the mortgage, after all the payments have been made. This fee will factor in the overall all costs for documentation and paperwork that the officials had to undertake. Unlike the booking fee, the arrangement fee wont apply if for any reason the mortgage doesn’t go through.

Note: Apart from the interest, it’s also important to factor in the fee associated with Residential Mortgage. Sometimes these fees can be negotiated with the lender, giving you much lower or no fees at all.

Tenure and Repayments of the Mortgage

Most repayment terms are generally for 25 years; however, shorter and longer repayment terms can also be made. Longer terms will have smaller repayment amounts, but the duration of the mortgage will be longer. It is therefore advisable to opt for the lowest terms as possible. Lenders generally have an upper age limit of 75 years until the mortgage is fully paid for. SO, a person who is 55 years old will normally have 20 years to complete his repayments.

Note: Borrowers get an option to either pay the full payment or pay just the interest on the loan. If you pay only the interest on the loan, then at the end of the term the borrower will have to either sell his home or re-mortgage to pay the lender.

Loan Secured Against the Property

Its mandatory to pay the monthly payment until the mortgage term is over. Because the mortgage is secured against the total value of the home to protect the lender, not meeting this repayment condition could end in losing your home and possible foreclosure.

Applying for a Mortgage

Once you understand the technicalities involved in a Residential Mortgage, applying for a mortgage can be a fairly straightforward process. This generally involves a two-stage process:

Stage 1

The lender will have a discussion/interview with the borrower to understand the borrower’s financial status and the borrower’s ability to repay the loan. At this point the lender will also present various Residential Mortgage products to help you familiarise with the products, fees and other details that apply.

Note: At this time the lender will understand your repayment capacity and the amount of loan that can be given to the borrower.

State 2

At the stage the application process will begin along with all the paperwork involved. The lender will conduct a complete background verification along with a calculation of the affordability of the mortgage. In order to substantiate evidence of income and other personal details, various documentation will be required that will need to state your income and residential status. In addition, the lender may also conduct interview to get a better understating of the current standing and or future plans that may impact your ability to repay the mortgage.

The entire takes anywhere between 7-10 days depending on your financial circumstances and the documentary evidence provided. Once the lender is confident he will provide a Binding Offer, that explains the details of the mortgage offer. He may also supply a Mortgage Illustration document that lays down all the mortgage terms in details. Its important to go through these documents carefully, because particular about reading the fine print.

Note: Your documentation plays a crucial role is the fast processing of Residential Mortgage application. Documentation that is clear and state information in a precise manner will take considerably less time. If any facilities are found, this could result in considerably longer wait periods or rejection of application.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.