What is a Mortgage?
If you're considering purchasing a home, it's likely that you'll require a mortgage. While mortgages are a prevalent topic of discussion today, understanding the details can be quite complex. Mortgages involve various principles, stages, and technical jargon.
In this article, we aim to furnish you with all of the essential information you’ll need to navigate this crucial aspect of home ownership. We’ll cover
What’s a mortgage?
At its core, a mortgage is a specialised loan designed for the acquisition or maintenance of real estate, be it a home, plot of land, or other property. This financial arrangement involves an agreement wherein the borrower commits to repaying the lender over time, typically through a series of monthly repayments that encompass both principal and interest. Importantly, the property itself acts as collateral, securing the loan. Failing to adhere to the stipulated payments puts the borrower at risk of home repossession.
To get a mortgage, prospective borrowers must apply through their chosen lender, meeting various prerequisites, including minimum credit scores and an initial deposit. The mortgage application undergoes a meticulous underwriting process before advancing to the closing phase. Diverse mortgage options exist, ranging from conventional fixed-rate to variable-rate loans, each catering to the specific needs of the borrower. For an in-depth exploration on this subject, consult our comprehensive guide to mortgage types.
How does a mortgage work?
Individuals and businesses leverage mortgages to acquire real estate without the need for an upfront full purchase payment. As mentioned, the borrower gradually repays the loan along with interest over a designated number of years until full ownership of the property is achieved. Mortgages are traditionally fully-amortising, indicating a consistent payment amount throughout the loan term, with varying proportions of principal and interest in each payment. Mortgage terms can span anywhere from 6 months to 40 years, with the standard duration being between 15-25 years.
Mortgages are synonymous with liens against property or claims on property. This means that if the borrower defaults on mortgage payments, the lender has the option to foreclose on the property. For instance, in a residential setting, a homebuyer pledges their house to the lender, establishing a claim on the property. This protects the lender's interest in the property in the event of a buyer defaulting on their loan. In cases of foreclosure, the lender may proceed to evict residents, sell the property, and utilise the proceeds from the sale to settle the outstanding mortgage debt.
What are the steps of the mortgage process?
The mortgage process is complicated but can be broken down into a number of 6 steps:
Prospective borrowers begin by applying to one or more mortgage lenders.
Lenders request evidence of the borrower's financial capability, including bank statements, investment records, recent tax returns, and proof of employment.
A credit check is typically conducted.
Some borrowers may opt for a Agreement in Principle (AiP) at this point in order to get an estimate of the loan amount they could potentially secure based on their financial situation.
Homebuyers can apply for a mortgage after choosing a property or even while still in the shopping phase through pre-approval.
Pre-approval provides buyers with a competitive edge, signalling financial readiness to sellers.
If the application is approved, the lender offers a loan specifying the amount and interest rate.
Borrowers proceed to finalise their chosen loan, ensuring all necessary documentation is in order.
The lender evaluates the borrower's financial profile and the property's value, ensuring they meet the necessary criteria.
The buyer and seller, or their representatives, meet at the closing.
The borrower makes the mortgage deposit, and the seller transfers ownership in exchange for the agreed-upon sum.
Any remaining mortgage documents are signed.
The lender may charge fees at the closing.
It’s worth noting that credit checks leave a mark on your financial report, so if you want to know how healthy your credit score is before applying, then you can use our free credit check tool (£14.99 per month after the free 30-day trial). Using it will help you to spot possible mistakes and instances of fraudulent activity on your record so that you can address any problems as soon as possible. The trial and subscription can be cancelled at any time.
Why are mortgages needed?
The expense of purchasing a home frequently exceeds the savings held by most households. Consequently, a significant number of homebuyers rely on mortgages given that they enable individuals and families to obtain a property with a relatively modest deposit, usually around 15-20% of the total purchase price, while securing a loan for the remaining cost.
In some instances, it may be prudent to maintain a mortgage on a property even when possessing the means to pay it off. Investors, for instance, may choose to mortgage properties to unlock capital for alternative investments and profit from tax deductions.
How many mortgages can you have?
In theory, there is no strict limit on the number of mortgages you can take out, provided you choose mortgages that align with your financial needs, can manage the repayments for multiple loans, and possess the necessary equity and credit score for approval.
However, in practice, lenders typically prioritise issuing a primary mortgage before considering a second one. This secondary mortgage is often referred to as a home equity loan and it's worth noting that many lenders are hesitant to extend additional mortgages on the same property.
Can anyone get a mortgage?
Yes, obtaining a mortgage is open to everyone. Albeit, it's important to emphasise that mortgage lenders require approval through a comprehensive application and underwriting process. Home loans are granted to individuals with adequate assets and income in proportion to their debts, ensuring the practicality of sustaining homeownership over a long period of time.
Additionally, it’s worth reiterating that a person's credit score is a significant factor in the decision-making process for a mortgage offer. Generally, those who have excellent credit scores are eligible for the most competitive deals on the market, whereas riskier borrowers may be offered loans which have higher interest rates attached to them. Although, hiring the services of a mortgage broker will substantially improve your chances of securing a favourable arrangement.
Whether you have a great or poor credit score, we at The Mortgage Genie have an in-depth understanding on how to get a mortgage and are committed to helping people get loans of all types. We sincerely hope that this guide has answered all of your questions about the nature of mortgages and the process involved.
Every day we assist a growing number of people in finding housing happiness by helping them to get their ideal mortgage product and navigating them through each step of the way. If you’re in need of a team of expert mortgage brokers then don’t hesitate to call us at 01915809890 and we’ll get you started on down the journey towards becoming a homeowner! And why not see how much you could borrow up to today by using our mortgage calculator?
This information is a guide only and should not be relied on as a recommendation or advice that any particular mortgage is suitable for you. All mortgages are subject to the applicant(s) meeting the eligibility criteria of the specific lender. You should make an appointment to receive mortgage advice which will based on your needs and circumstances.