What type of mortgage do you need?

Picture of row of new town houses

Before approaching anyone about your mortgage requirements it would be useful for you to be aware of what type of mortgage you need.

These can be categorised as shown below.

First time buyers

If you are a ‘first time buyer’ you will differ from other types of mortgage buyer in that you will not have any profit from a previous house sale.  Second time and subsequent buyers will have usually sold their previous property for a price in excess of the mortgage loan on it. 

This ‘profit’ (known as the equity) can be put towards the cost of buying their new home, thus reducing the amount needed for a mortgage loan on their new property.

If you are a first time buyer, therefore, you will usually have a need for a higher percentage mortgage loan (compared to the value of the property). 

Many lenders will have special mortgage schemes for first time buyers.  These lenders want to attract first time buyers because they are usually young and the potential for earnings growth in the future may be relatively high.  Many first time buyers will subsequently trade-up to more expensive properties requiring even higher lending requirements.

Those moving between mortgaged properties

If you are in this category you have a property to sell as well as one to buy.  This means that you may have money from the sale of your original house to put towards the purchase of a new one (after paying off your original mortgage).

Of course, the reverse may be the case; you might owe more on your mortgage than your home is worth.  Such a situation can cause significant problems but is, thankfully, not very common.

As far as the lender is concerned, you are in a different position from the first time buyer because you will have built up a credit record and profile with your existing lender.  Both your existing lender and any prospective lender will know how the payment of your previous loan has been conducted. 

If mortgage payments have been made satisfactorily the lender is likely to look favourably on granting a new mortgage on a new property.

Those improving a mortgaged property

You may be seeking to improve your home in some way and need to raise finance to do it. One of the most straightforward methods, and often the least expensive, it to take a further advance from your current lender.

When making further advances, the lender will have to be satisfied that there is sufficient equity in the property (i.e. that the value of the property when the work is completed will exceed the original mortgage plus the further advance).

You might be offered a second mortgage in such a situation.  This is riskier for the lender as the second lender has to take second priority to the first lender in the event of a forced sale of your property.  For this reason the interest rates on second mortgages tend to be higher.

Remortgages

You may be looking to remortgage your property.  This simply means going to a new lender for a mortgage which will repay your existing mortgage.

You may wish to do this because the interest rate and other terms (e.g. a cash incentive) to be charged by the new lender are more attractive and/or because you want to raise further capital on the security of your house.

A remortgage is exactly that – starting from scratch with a new lender.

Special circumstances

You may have a special mortgage requirement.  The more common are:

  • Buying a council house
  • Releasing equity from your home
  • Buying a property to let
  • Buying a holiday home
  • Buying an overseas property
  • Building your own house

Risk Factors

Your home may be repossessed if you do not keep up monthly repayments on your mortgage.

The Money Advice Service information sheet ‘You can afford your mortgage now, but what if …?’ will help you consider the risks.

You can obtain a free copy from https://moneyadviceservice.apsmos.com/ViewArticle.html?sp=Sengyoucanaffordamortgagenowbutwhatif-136


Links to more information

Important

This information does not constitute personal advice and should not be treated as a substitute for specific advice based on your circumstances.

Information given relating to tax legislation is based on my understanding of legislation and practice currently in force. Whilst I believe my interpretation of current law and practice to be correct in these areas, I cannot be responsible for the effects of any future legislation or any change in interpretation or treatment. In particular you are warned that levels of tax and tax reliefs are subject to alteration and, in any case, the value of such reliefs and benefits may depend on an individual’s circumstances.

If you are in any doubt as to whether any course of action is suitable for you, then you should discuss the matter with a suitably qualified independent financial adviser or other specialist.