A deeper look at how mortgages work

To summarise the last section, a mortgage is a loan that is used to purchase property or land. The purchase is used as security to ensure the lender can get their money back if you are to fall behind on the repayments. The borrower enters into an agreement with the lender (usually a bank or building society) where the borrower receives cash upfront then makes payments over a set time span until they pay back the lender in full.

Once you’ve decided how you would like to pay back the capital and interest, you then need to think about the mortgage type. Mortgages come with various different options that are, fixed or variable interest rates. With a fixed-rate mortgage your repayments will be the same for a certain period of time. We have found that this is typically two to five years. Our research shows us that regardless of what interest rates are doing in the wider market. If you have a variable rate mortgage, the rate you pay could move up or down, in line with the Bank of England base rate. There are various types of variable rate mortgages. And you will need to talk to an adviser to get a better understanding of how the market is changing to make the best decision for your needs.

Before you start the process of the application you should prepare.

Before applying for a mortgage, we suggest that you contact the three reputable credit reference agencies and order your credit reports. Make sure there is no incorrect information about you. You can do this online either through a paid subscription service or one of the free online services currently available on the market. It is good for you to get a better understanding of your own credit score, as this will give you the knowledge of knowing how lenders will profile you as a potential client. This information will help you to prepper for what sort of deal you will be getting from potential provider.  The report should help you decide, on who you want to approach for your mortgage.

Once you have this information you will also be asked to supply the provider with a few other documents and information about your current financial situation.

Start collecting all the documents you will need for the mortgage application process. This might include:

• utility bills (No older than six months)
• proof of benefits received
• P60 form from your employer
• your last three months’ payslips
• passport or driving license (to prove your identity)
• bank statements of your current account for the last three to six months
• statement of two to three years’ accounts from an accountant if self-employed
• tax return form SA302 if you have earnings from more than one source or are self-employed
• self-employed people should look to provide information alongside their tax return, which supports what the SA302 says about their income, such as bank statements.

Be accurate, when working out the figures. Make sure the information you provide on the application form matches the documents you use to support your case. For example, don’t round up your salary if the amount on the payslips differ from this figure. Remember to provide details of the address of the property, the estate agent you’re using and your solicitor. These are the basics.

Some lenders might ask for more paperwork, bear in mind that some lenders might have different criteria around income and expenditure. Ask your lender or independent mortgage adviser what else you might need, to make sure you have all the appropriate paperwork with you and help make the prosses run as smoothly as possible. Please note, printouts of online statements of your current account and utility bills might not be acceptable. You will either need the originals or have copies certified by your solicitor, financial adviser, your bank or your utility provider.

It is also important to know that your lender may take into consideration how much you are borrowing on credit cards and other loans as this will be included when calculating how much you can borrow and have an impact on whether or not you will pass the affordability check that the provider will carry out.

As well as including your household bills such as:

• utility bills
• Council Tax
• insurance policies, and
• general living costs such as travel, childcare and entertainment

Once you have worked out what type of mortgage you are going to apply for, you will then need to start the prosses of applying for the mortgage itself.

Applying for a mortgage is often a two-stage process. The first stage usually involves a basic fact find to help you work out how much you can afford, and which type of mortgage you might need. The second stage is where the mortgage lender will conduct a more detailed affordability check, and if they haven’t already requested it, evidence of your income.

Stage 1

Generally, the lender or mortgage broker will ask you a series of questions to work out what kind of mortgage you want, and how long you want it for. They’ll also try to work out, without going into too much detail, your financial situation. This is generally used to provide an indication of how much a lender might be prepared to lend you. They should also give you key information about the product, their service and any fees or charges if applicable.

Stage 2

This is usually where you begin your application. The lender or mortgage broker will begin a full ‘fact find’ and a detailed affordability assessment, for which you’ll need to provide evidence of your income and specific expenditure, and ‘stress tests’ of your finances. This could involve some detailed questioning of your finances and future plans that could impact your future income.