Mortgages explained

Whether you’re buying a property or just remortgaging, mortgage advice can be a great assistance. Taking independent advice can make the different between a successful mortgage application and being refused.

What is a mortgage?

A  mortgage is a loan that is provided to you to purchase a property.

What are the different types of mortgage?

There are two main types of mortgage. ‘Repayment Mortgages’ and ‘Interest-Only Mortgages’. Those are the main two types that we use here in the UK.

Most residential properties are bought using repayment mortgages, meaning that you pay back the interest and the capital(the amount that you have borrowed). However, rental properties usually are bought using an interest-only mortgage, meaning that throughout the mortgage, you only pay back the interest, but don’t make any payments towards the actual amount that you borrow.

What does Loan to Value mean?

‘Loan to Value’ (or LTV) is the ratio between the value of the property you’re trying to buy and the value of the mortgage you take out to buy it.

For example, if I have a house and my house is worth £100,000, and the mortgage is £70,000, the loan to value is 70%. My deposit of £30,000 would make up the remaining 30%.

Are mortgage rules different for first-time buyers versus existing homeowners?

The rules don’t differ per se, and there are favourable benefits you can get for being a first-time buyer. If you’re a first-time buyer, sometimes products from different providers may include your legal fees or cashback.

There may also be other benefits, such as a free home valuation. Even if you’re a first-time buyer, you can take advantage of ‘Stamp Duty’ allowance, which is a tax you have to pay when you buy a property in England or Northern Ireland. Rishi Sunk recently increased the Stamp Duty threshold to £500,000 until March 2021, meaning there is no stamp duty to pay on properties up to that amount, which is excellent for a first-time buyer.

Deposit size is also a factor. First-time buyers have historically been able to take out mortgages with an LTV of  95% (with a 5% deposit). If you’re buying a second property, much bigger deposits are typically required, and so you might be looking at 75% LTV mortgages and under.

What is the best way to go about finding a mortgage?

If you have good credit and a permanent income, then you can go straight to your bank, search the web or use a mortgage adviser. A good mortgage adviser can help you to research the best deals, and many of them will do this for free. Their payment comes in the form of a commission from the bank.

If you have credit issues, are self-employed, are on a low income, or are buying a non-standard property (for example a building over a certain height). You would be best off with a professional mortgage broker.

Do you consider a mortgage to be good or bad debt?

A mortgage is good debt, but it’s still a liability. So while you do have a property that will hopefully appreciate over time, you still have to make your mortgage payments. If you aren’t able to make the payments, the mortgage company can force you to sell your property to make sure that the debt is paid.

Now, if we’re talking about a property that you’re also renting out, not only is that good debt, but it’s also an asset because you’re using it to generate an income.

Could you talk a bit about equity release?

There are two forms of equity release. One is where you sell your property, release the equity (i.e. the percentage of the property you have paid off via the mortgage), use it to buy something smaller and then whatever cash is left is yours.

Some products allow you to remain in your property but take money out. Something I’m seeing a lot now is that people are doing this to give money to their grandchildren, so their grandchildren can purchase a property. This type of equity release is classed as debt on your estate.

Could you describe the different schemes set up to help first-time buyers on the housing ladder?

Shared Ownership

Well, there’s the ‘Shared Ownership‘ scheme. This is where you can buy a percentage of a property – it could be 25%, 50% – and then you take out a mortgage on the part that you own and pay rent on the part that you don’t.

As an illustration, if you bought 50% of property worth £100k, you would only need a £50,000 mortgage, which as you can imagine is a lot easier to get than a £100,000 mortgage. You’d own 50% of the property, and then you’d pay rent on the remaining 50%.

I don’t particularly like this scheme, because for me, this scheme makes you feel like you’re a homeowner without giving you all the benefits of homeownership. As someone participating in this scheme you’ll pay all the costs relating to the property, the service charge and so on – all of that will be on you. It will also be your responsibility; you have to pay the mortgage and the rent.

However, when you want to sell, it’ll be up to the housing association who owns the other half of the property to decide the price. If you’re going to make any changes to the house, you’ll again have to get permission from the housing association.

Lastly, because you’re only buying a proportion of the property, there is a tendency for buyers not to consider the actual price of the property properly. Let’s say you manage to take out a mortgage on 25% of an £800,000 property (£200,000). That’s still an £800,000 property that you’re buying. When you come to sell, how many people are going to be able to afford that? The buyer would also have to be able to qualify for the Shared Ownership scheme as well. These are all things to bear in mind.

 Help to Buy

The next scheme is ‘Help to Buy‘. The Help to Buy scheme allows you to put down a 5% deposit on a property, and then borrow a percentage of the property price from the government. This is called an ‘Equity Loan’ and is 20% if you’re outside of London, or 40% within London. You would then take out a mortgage on the remaining.

The government loan is interest-free for the first five years, and then after five years you begin to pay the interest, but not the capital. At this point you have a choice – you can either remortgage and repay the government loan, or you can sell the property, but you will have to pay either 20% or 40% back to the government to pay off the equity loan.

The benefit of Help to Buy is that because of the equity loan, the size of the mortgage you have to take out is much less. If you were buying outside of London, you would only need a 75% mortgage, and because of this, you would get much better rates. Your interest rate will be a lot lower, as will your monthly payments. And as I said, there’s nothing to pay on the equity loan for five years.

The strategy I advise my clients to take is to aim to sell or remortgage the property within the five years or save enough to pay off the equity loan and remortgage. Another route you could take is to sell the property after five years. Then after you have repaid the equity loan back to the government, hopefully house prices will have appreciated. You will then have a bigger deposit to put into your next property.

Tell us about the Lifetime ISA!

 The ‘Lifetime ISA’ (LISA) is a tax-free savings account that allows you to save up to £4,000 per tax year and the government will pay a 25% bonus (£1,000) on your contributions. It’s a great way to save as you get the bonus upfront – you can use that money for your deposit. With the predecessor to the LISA –  the Help to Buy ISA – you only got a bonus once you had completed your purchase. So the bonus was more appropriate for furniture or moving costs.

The only negative with the LISA is that there are withdrawal charges if you need to take your money out. So it would be best if you were sure that you want to purchase a property when you start to save into a LISA. Despite this, if you’re buying a house for the first time, the advantages of saving into a Lifetime ISA are significant.

Finally, how can The Eman Effect help people who are looking for a mortgage?

There are qualified mortgage advisors within my company, and I work with specialist brokers as well. I can help anyone to buy a house, and whether you’ve got good or bad credit, a big deposit or a small deposit, I can also help with financial plans.

Financial plans are super important, and I can help people put together a property plan years in advance while looking at how much they will need to save and borrow.

Do you need mortgage advice?

Whether you’re buying a property or just remortgaging, mortgage advice can be a great assistance. Taking independent advice can make the different between a successful mortgage application and being refused. It may also lead to a considerably better value deal, potentially saving you thousands of pounds over the mortgage term. At The Eman Effect UK, we discuss all things mortgages including:

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You don’t need to have excellent credit to get a mortgage as there are mortgage lenders that provide mortgages to people who have bad credit. However, having good or excellent credit can help with what mortgage providers will lend to you and the rate you will receive.

If you want to get a mortgage the traditional way you will need a minimum of 10% deposit but there are not many lenders providing 10% deposit mortgages. 15% is much more readily available, and interest rates vastly improve at 15% deposit. 5% deposit is available if you are prepared to use a government scheme.

The main costs are Broker fee, solicitors fee, conveyancing fee, mortgage product fee (If eligible, this fee can be added to your mortgage loan). It would help if you had £2,000 to £5,000 above your deposit to pay these fees.