Financing your purchase

Mortgage application

The specifics vary from lender to lender, but in general, to apply for a mortgage, you will need to prove your identity, your income and your typical monthly expenditure. This is so the lender can assess how much you can afford to borrow.

Most lenders will want to see three months of payslips and/or a P60 as evidence of your salary and typical bonuses, overtime and commission. If you are self-employed, expect to need to produce two years of evidence, including your SA302 self-assessed tax return forms.

In addition to your income from employment or self-employment, don’t forget other sources like pensions, state benefits, tax credits or income from fostering. You can prove these with a recent letter from the pension provider or relevant government department.

Most lenders will want to see three months of bank statements to assess your expenses and spending.

Some lenders will charge a fee to apply for a mortgage, whether you end up taking it out or not. Some will charge a fee when you take out the mortgage. You may also need to pay a fee to the broker who set up the mortgage, for a valuation survey, and for other administrative costs.

Mortgage redemption

A mortgage is “redeemed” when it is fully paid off, either when you naturally reach the end of the loan term, when you sell the house and use the proceeds of the sale to pay off the remaining loan, or because you have decided to remortgage with a different lender.

A lender may charge an exit fee when you redeem your mortgage, especially if you are repaying early because you are selling the property or remortgaging with another lender. The size of the fee is usually based on the amount of the loan outstanding when you redeem.

Negative equity is the situation where your property is worth less than the remaining amount of the mortgage. This can happen if the value of your property falls faster than the rate you are paying the mortgage off, and will make it difficult for you to sell the property or remortgage.

Buy to let

When you want to buy a property to rent it out to someone else, rather than living in it yourself, you need a special type of mortgage called a buy-to-let mortgage.

Affordability

A mortgage is a type of loan you can use to buy a home, without having all the cash upfront. The money will be loaned to you for a specified term (usually 25 years) and you will make a repayment each month. The loan is secured against the property, which means your can lose your home if you do not keep up repayments on the mortgage.

The amount you can borrow depends on the amount you have saved for your deposit, your income and your spending. As a rule of thumb, lenders will allow you to borrow between 4 and 5 times your annual gross income, i.e. your total income before tax.

If you apply for a joint mortgage, for example with your partner, the lender will take the sum of both of your incomes to make a decision on how much to lend. Generally this means you can borrow more than if either of you applied alone.

Each lender will specify their maximum loan-to-value ratio, or LTV, which is the maximum percentage of the property price they will lend. You need to pay the remainder as a cash deposit. So for example, if your lender’s maximum LTV is 90%, you need to save at least 10% of the property’s value, plus some extra to cover the costs associated with moving.

An agreement in principle, sometimes called a mortgage promise or a decision in principle, gives you an indication of how much you could borrow before you apply for a mortgage. It’s not legally binding, and the amount offered could change following a detailed assessment of your income and spending, credit rating and other factors.

Having an agreement in principle signals to estate agents and their sellers that you are a serious buyer.

When you agree a fixed interest rate with your mortgage lender, the interest rate (and thus the monthly payment) will stay the same for a period of time, regardless of what happens in the wider economy.

Most variable rate mortgages track the Bank of England base rate, which means your interest rate and the amount you pay each month will change (up or down) if the base rate changes.

With a capital repayment mortgage, your monthly payments will pay off part of the loan each month as well as paying the interest, which means the mortgage will be fully repaid by the end of the term if you keep up your repayments.

With an interest-only mortgage, your monthly payments only cover the interest on your loan, which means the loan itself isn’t repaid over time. You will need to find another way to repay the capital (the loan amount itself) in full by the end of the loan term.

Help to buy

“Help to Buy” is a government scheme that can help you to buy a new-build home without a large deposit. The government will loan you part of the deposit, and you take out a help-to-buy mortgage to cover the rest. The government loan is usually interest free for the first five years.

A guarantor is someone who agrees to cover your mortgage payments if you are unable to keep up with the payments yourself, but who will not own a share of the property. For example, this might allow your parents to help you buy a home, even if you have no deposit or if your financial circumstances would otherwise put lenders off.

The Right to Buy scheme offers council and housing association tenants a discount off the market price of their home, if they want to purchase the home from their landlord.

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