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How Does a Mortgage Actually Work?

You probably understand the basic idea of a mortgage; you go to a bank, they look at your finances, and then they agree (or don’t) to give you some money for a house – and you pay them dearly for the privilege. But how does a mortgage actually work? What’s the process of getting one, and how long does it take? We’ll answer all your burning mortgage questions below.

What is a mortgage?

Taken literally, it means ‘death contract’, and you’ll probably have one for most of your adult life. According to Helgi Library, “a mortgage loan is a loan secured by real property through the use of a mortgage note. The word mortgage is a French Law term meaning "death contract", meaning that the pledge ends (dies) when either the obligation is fulfilled, or the property is taken through foreclosure.” So, if you don’t keep up your payment terms, they will take possession of your property to repay the deal. (The banks really have great terms in these deals, don’t they?) Your job is to pay your principal (the amount you originally borrowed) plus interest (their fee for lending to you), taxes, and any insurance (PITI).

In order to get a mortgage, you need to have good credit and be able to afford the repayments. A good rule of thumb is that you can borrow up to 4.5x your household income. However, debts or other financial commitments will reduce this amount. It’s a good idea to pay off all debts and avoid taking out any new loans in the 6 months prior to applying for a mortgage or principal agreement. According to Which?, “an agreement in principle, also known as a 'decision in principle', a 'mortgage promise' or a 'mortgage in principle', is a certificate or statement from a lender to say that, ‘in principle’, they would lend you a certain amount.” Getting one of these can really help you with your house hunting, and make mortgage approval more likely when you’ve found a home you like.

What are the mortgage terms and how long for?

Most people get a 25-year mortgage, but you could get a much longer or shorter one depending on your circumstances. You may want a shorter one if you’ve put down a very large deposit and didn’t have a large LTV ratio. This will allow you to pay it off quicker and own your home outright faster. In terms of how much you’ll pay to borrow, Money Advice Service suggests “3.99% for a 2-year fixed-rate 95% loan to value (LTV) mortgage, 1.49% for a 2-year fixed-rate 75% LTV mortgage, 1.70% for a 3-year fixed-rate 75% LTV mortgage, and 4.33% for a Standard Variable Rate.” Remember that, no matter how long or short your mortgage term, your home can be repossessed by the bank if you miss your payments. It’s very important you get lending that you can afford in the long term, and that you take out insurance against worst-case scenarios so you don’t lose your home.

How long does it take to get a mortgage?

The time from application to decision varies from lender to lender. The best estimate is around a month. This is because there is a lot of documentation to review and factors to consider before the bank agrees to lend to you. Because it takes between 20-40 days, you’ll want to make sure every document you provide is exactly what the lender asked for. Any inaccurate or missing information can delay your offer. Oh, and getting a mortgage in principle is not a guarantee that you’ll get the full mortgage. However, it can speed up the process, as some of your checks will already be on file.

You will need:

  • 3 months of pay slips, bank statements, last P60 and/or self-assessment returns (if self-employed) to verify your earnings.
  • Details of your outgoings, including childcare costs, so the broker can assess your financial commitments.
  • Proof of ID and current address. Being on the electoral roll helps.
  • Proof of deposit (a gift from parents needs to be backed up with their bank statement and a letter confirming it is a gift).
  • Details of your solicitor who’ll carry out the transaction.
  • Details of the estate agent you are buying through.

How do you port a mortgage?

Some lenders may allow you to take your existing mortgage with you to a new property. While this is convenient, you need to be aware of the potential downsides.

  1. You’re reapplying, so if your circumstances or the lender’s criteria have changed, you may not be eligible anymore.
  2. If your new home is more valuable, you’ll need to borrow more. That might not be possible, or you could end up with 2 mortgages.
  3. You’re not shopping around, so you may end up with a higher interest rate.

If you decide not to port, make sure you won’t be on the hook for an exit fee or early repayment charge. Remember, your new loan will come with new valuation and prep charges that would have already been paid under your old mortgage. You may decide instead to re-mortgage for a better deal.

How do you re-mortgage?

Regardless of whether or not you’re moving, it’s a great idea to re-mortgage whenever your fixed term rates are due to end. This is to prevent you from paying over the odds and give you the opportunity to save if your home’s value has increased, your credit is better, or you’re making more money. To apply, do the following:

  1. Get all your paperwork together and review your current terms.
  2. Talk to a mortgage broker to get comparison quotes and give your current lender a chance to match them.
  3. Review all the terms (and any extra fees) to make sure they are more favourable.
  4. Apply for the mortgage with the best terms.
  5. Use our free conveyancer search to help you make the switch to a new provider.

And that’s it! Not too stressful when you make use of great online tools like virtual mortgage brokers and online conveyancing platforms.