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For many of us buying a property is the largest single purchase we will ever make. And unless we are paying cash for the property, we will need a mortgage.
Looking for a mortgage today?
What is a Residential Mortgage?
A residential mortgage is a loan granted to purchase a property, a property that will be owner-occupied. This means that the person getting the mortgage loan is going to live in the property.
The loan or mortgage, is secured against the property, this means that if the borrower or homeowner defaults on the loan, the lender can repossess the property.
If a borrower was in need of a loan/mortgage to buy a property they were not going to live in, but use for commercial purposes or to let out, they would need a commercial mortgage or a buy-to-let mortgage.
There are different types of residential mortgages, and also different terms. As most properties for sale are quite high in price, most mortgages are also for a large amount. This is why the terms for repayment for a mortgage are usually 10 years or longer. This helps in reducing the monthly payments.
What is Needed to Get a Mortgage?
When you apply for a residential mortgage, there are a few things you need to know, and also to do. The foundation of granting a mortgage is based on just a few factors:
* Deposit: This is the amount of money you will be using to buy the property and show/give to the mortgage lender to reduce the amount of money you need to borrow. Usually mortgage lenders require 10% as a minimum deposit, some require 20%, and some new schemes allow buyers to buy a property with just a 5% deposit.
An example may be you are looking to purchase a property valued at £150,000, a 10% deposit would be £15,000, making the mortgage loan you require to be £135,000.
The amount you are seeking to borrow against the value of the property is called the LTV or loan-to-value.
A 10% deposit gives you a 90% LTV.
It needs to be noted that the larger deposit you have to buy a property, the greater your chances of being approved for a mortgage.
* Credit: Credit history and credit scores are looked at in granting a residential mortgage. Each lender may have a different way of scoring a borrower, and it is not just about credit that a mortgage is granted. There also is stability, such as time on your job, landlord references, and more.
Again, a low credit score does not mean a mortgage will not be approved. The larger your deposit, the more you improve your chances of being approved if you have bad credit, in addition, the lender may ask for a guarantor.
* Affordability: Residential mortgage lenders look to see if you can afford to repay the loan. The look at two (2) ratios, your total debt-to-income ratio, and also your mortgage payment-to-income ratio.
If you have no other outstanding debts, a mortgage lender may allow a borrower to have a higher mortgage payment ratio, as they have nothing else to pay.
Types of Residential Mortgages
There are various types of residential mortgages, and these are usually defined by the interest rates and how they are repaid.
* Interest only: These are mortgages where the borrower only pays the interest on the loan each month. By just paying the interest, it helps to keep the monthly payments lower, which makes it more affordable to buy a property. It also makes it take longer for a borrower to own the property outright, and one the interest only period is over, the borrower must pay a balloon payment either by selling the property, or re-mortgaging.
* Fixed-rate: A fixed-rate mortgage has the interest rate fixed at a set amount the entire term of the mortgage.
* Variable or tracker rate: Tracker rate mortgages have interest rates that can vary. The interest rate is tied to the Bank of England’s base rate. An example may be the tracker rate is 2%, and the base rate of the BOE is .5%. The mortgage interest rate is then 2.5%.
If the BOE raises their base rate, the mortgage rate will rise as well.
Reasons for a Residential Mortgage
There are many reasons why someone may need a residential mortgage, and it can be more than just to buy a property.
* First Time Buyers: As a first time homebuyer looking to get on the property ladder, it is doubtful you have the full sale price of a property saved. As sale prices seem to increase, many first time homebuyers find themselves priced out of the property market.
There are more and more new property buying schemes, including government schemes, allowing first time homebuyers to get on the property ladder. And also low deposit mortgages as well.
* Re-mortgaging: Someone who already has a mortgage and a property may wish, or need to re-mortgage at some point.
If you have an interest only mortgage, you may need to re-mortgage at the end of the mortgage term.
Homeowners with equity in their properties may wish to re-mortgage to access some of that equity for repairs and improvements to the property, or to consolidate other accounts.
* Moving Up The Property Ladder: Someone may require a residential mortgage even if they are already on the property ladder as they are looking to move up. They can use their old property sale as a deposit, but may still require a mortgage on the new property.
Benefits of Getting Approved For a Mortgage Before The Sale
Buying a house and then looking to get a mortgage is like putting the cart before the horse.
Applying for a mortgage loan before you go looking for a property to buy is putting the horse before the cart, you need to know how much you will be approved for, then go to buy a property.
By applying for a mortgage, being approved, and then looking at properties you are in essence getting a Mortgage in Principle. The mortgage loan amount is approved, and it is conditioned on the sale price, and value of the property.
By getting approved for a mortgage prior to shopping for a property, you avoid disappointment.
You know exactly how much you are approved for and have to spend, so you look for properties in that price range. You also are buying just like a cash buyer, as your financing is already approved. This puts you in a stronger negotiating position.
Let Loanable find you the residential mortgage you need!
Be it your first mortgage, your second, or you just want to re-mortgage to get some cash. Loanable can find you the best deal and loan suited for you!
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it. The actual rate and fees will depend upon your circumstances. Ask for a personalised illustration.
If you are thinking of consolidating existing borrowing, you should be aware that you may be extending the terms of the debt and increasing the total amount you repay.
* The actual rate and fees charged will depend upon your circumstances. Ask for personalised illustration.