Step 5: Applying for a mortgage
One of the big mistakes first-time buyers make is setting their sights on a house before they've applied for a mortgage.
Let’s get serious for a minute. Take a break from your daydreams of living it up in your new house, because it’s time to talk money.
More specifically, it’s time to talk mortgages.
Why should I start the process before viewing houses?
Buying a house is a lengthy process, and the last thing you want is to fall in love with a house only to be delayed by red tape as your mortgage is being sorted.
In that time, a savvier buyer could snap up the property from under your nose.
Even if you’ve looked into what you can afford – see step 2 if not – you might find when you come to apply that your budget doesn’t stretch as far as you first thought.
That’s why it’s important to get an agreement in principle from the mortgage lender.
This gives you a better indication about what kind of mortgage rate you’ll be offered, and a more solid figure of what you can borrow.
The mortgage lender will run a credit check on you to see if, in principle, they’d lend you the money.
Having a mortgage in principle could give you an advantage over another buyer when it come to making an offer.
What kind of mortgages are available?
Don’t be confused by all the fancy names that mortgage lenders give their products. Mortgages boil down to two basic types – repayment and interest-only.
A repayment mortgage is where, you guessed it, you repay the mortgage.
Each monthly payment you make takes a little slice off your total debt.
It can be frustrating at first, because for the first few years you’re mostly paying off the interest.
But bit-by-bit you can see your debt decreasing until at last you own the house outright.
With an interest-only mortgage, your monthly payments only cover the interest. So if you owed £100,000 when you first bought the house, you’ll still owe £100,000 25 years later.
What’s the point in going this route, then?
When you set up an interest-only mortgage, you make a second monthly payment into an investment fund to cover the debt itself.
After the mortgage term, there should be enough money in the fund to pay off the debt.
Here’s the kicker – if savings rates have been good and the fund is worth more than what you owe, you get to keep the difference.
The reverse is also true. If the fund underperforms and there’s not enough money to cover the debt, you have to make up the shortfall out of your own pocket.
It’s a bit of a gamble and not something to be entered into lightly. Your mortgage advisor should be able to give you more advice on which option is best for you.
What types of mortgage rates are there?
Once you’ve decided on a repayment or interest-only mortgage, it’s time to have a think about what kind of mortgage rate you’ll go for.
Here are some of the more common types:
|Mortgage type||How it works||Advantages||Disadvantages|
|Standard variable rate (SVR)||Lender sets rate in relation to the Bank of England base rate (BOEBR)||Comparatively lower rates due to a low BOEBR||Lender can change the rate at any time|
|Fixed rate||Set rate for 2-10 years, then reverts to SVR||Dodge increases in interest. You know exactly how much is leaving your bank each month||Doesn't benefit from any drops in interest. Early repayment charges (ERC). Possible arrangement fees|
|Capped rate||Won't go above a certain level for 2-5 years, then reverts to SVR||Benefit from rate drops, and dodge increases in interest||Rates tend to be higher than other types from the outset. ERC and arrangement fees may apply.|
|Discount rate||Lender gives a discount to their SVR for a set time||Rates tend to be lower than the fixed rate||Rates will suddenly rise once discount period ends. ERC and arrangement fees may apply.|
|Tracker rate||Rate is set slightly above the BOEBR||Rates tend to be lower than the fixed rate||Uncertainty - rates could rise at any time. ERC and arrangement fees may apply.|
Your mortgage lender may offer you a combination of a few different options, or they might give you something unique to them.
Once you’ve agreed a mortgage in principle, you’re now in a better position to get in touch with the sellers and request viewings on the houses you like.
Next: Step 6 – The viewing