How mortgages work - A step by step guide

Here’s a step-by-step guide on how mortgages work, particularly focusing on the UK property market:

Definition: A mortgage is a loan specifically used to purchase property or land. The property itself acts as security for the loan, meaning if you fail to repay, the lender can repossess and sell the property to recover the debt.
Types of Mortgages:
- Fixed-rate mortgage: The interest rate remains the same for a set period.
- Variable-rate mortgage: The interest rate can change based on the lender’s standard rate or external factors.
- Tracker mortgage: The interest rate tracks the Bank of England base rate.

Credit Score: Your credit history will affect your mortgage options. A higher score often leads to better terms.
Deposit: The amount of money you have for a deposit will impact the loan-to-value (LTV) ratio. A larger deposit generally means better mortgage deals.
Income and Expenses: Lenders will assess your income, debts, and living costs to determine how much they are willing to lend.

Mortgage Brokers: Consider using a broker who can provide expert advice and access to a wide range of mortgage products.
Comparison Sites: Use these to compare mortgage rates and deals from various lenders.
Interest Rates and Fees: Pay attention to the interest rate, arrangement fees, early repayment charges, and other costs associated with the mortgage.

What is an AIP? An AIP is a conditional offer from a lender stating how much they might be willing to lend based on your financial situation.
Why Get an AIP? Having an AIP can show sellers that you’re serious and financially prepared, which can be beneficial when making an offer on a property.

Offer Process: Once you find a property, you can make an offer to the seller. If accepted, the purchase process begins.
Survey and Valuation: Lenders will require a property valuation to ensure it’s worth the loan amount. You may also choose to get a more detailed survey to assess the property’s condition.

Documentation: You’ll need to provide proof of income, employment, bank statements, and other financial information.
Lender’s Assessment: The lender will assess your application, including credit checks and verifying your financial information.

Offer Letter: If approved, you’ll receive a formal mortgage offer outlining the terms, interest rate, and repayment schedule.
Acceptance: You’ll need to review and accept the mortgage offer. At this stage, you can also arrange your property insurance.

Conveyancer/Solicitor: You’ll need a conveyancer or solicitor to handle the legal aspects of transferring property ownership.
Searches: They will carry out various legal searches, including local authority searches, to ensure there are no issues with the property.

Legally Binding: Once all checks are complete, contracts are exchanged between you and the seller. At this point, the sale is legally binding.
Deposit Payment: You’ll typically pay a deposit (usually 10% of the property price) at this stage.

Completion Date: This is the date when the remaining balance is paid to the seller, and you take ownership of the property.
Moving In: Once completed, you can collect the keys and move into your new home.

Monthly Repayments: You’ll start making monthly mortgage payments based on the terms agreed with the lender.
Interest and Capital: Each payment will include interest and repayment of the capital. Over time, the capital portion increases while the interest portion decreases.

Reviewing Rates: Keep an eye on your mortgage deal, especially if you’re on a fixed or tracker rate. Consider remortgaging when your current deal ends to avoid moving to a lender’s standard variable rate.
Overpayments: If your mortgage allows, you may be able to make overpayments to reduce the loan balance faster.

This step-by-step guide should help you understand the mortgage process in the UK, from initial research to moving into your new home.

How mortgages work – A step by step guide