Frequently asked questions
How much deposit do I need to get a mortgage?
Currently you’ll need a deposit of at least 5% of a property’s value to get a mortgage and a lender would then lend you 95% of the property’s value. So, if you wanted to buy a property valued at £140,000, you would need to save up at least £7,000 and borrow £133,000.
If you can manage to save 10% deposit the interest rates are usually better and you have a greater choice of lenders. If you have some minor blemishes on your credit file you are more likely to get accepted with a larger deposit too. Also, the less you borrow the lower the monthly payments will be so when the lender calculates affordability you are more likely to pass.
How much can I borrow?
The amount you can borrow depends on many factors. Most lenders look at basic salary plus overtime or bonus but some accept tax credits and benefits as income.
The multiples are normally between 3.5 and 5 times income, the greater the deposit or equity the higher the multiple.
Credit liabilities are annualised and deducted prior to the multiple calculations. For example, if you have an income of £25,000 and are paying £250 per month (£3,000 per year) for a loan, your available income would then be £22,000 x 3.5 to 5.
A low credit score can reduce the amount you can borrow to keep payments affordable and help reduce the risk to the lender.
I have poor credit, can I still get a mortgage?
There are many factors that would be taken into consideration. Generally the main factors would be the severity of the poor credit and how long ago this was. Some lenders are more sympathetic to past problems than others, for example small defaults over 3 years ago could be ignored if your finances have been conducted well since.
Your credit file contains your history for previous 6 years, so if you had problems more historic than this they shouldn’t be on it.
Someone who has been bankrupt can still get a mortgage. Bankruptcy will stay on your credit report for six years from the original date of the order, as long as it has been discharged by then. Bankruptcies that last longer than six years, will remain until they are discharged. After discharge, it’s sensible to check your credit report to make sure any debts that were included in the bankruptcy have also been updated. Once the bankruptcy drops off your report it will no longer be visible to lenders carrying out a credit check but bear in mind that some lenders ask you on the application form if you’ve been bankrupt in the past, so it might still come into play for some lenders’ decisions.
What is the difference between fixed and tracker rates?
- Tracker rate mortgages
These deals work in a similar way to variable rate mortgages. The difference is that the mortgage tracks the Bank of England (BOE) base rate rather than the lender's Standard Variable Rate (SVR).
The advantage is that you are guaranteed to benefit from the full effect of Bank of England interest rate cuts. Lenders frequently reduce their SVR by less than the BOE rate cuts, for example 0.2% when the Central Bank has cut by 0.25%t. If the rates rise these would normally but matched in full by the lenders.
The current BOE base rate is extremely low at 0.25%* and tracker rates are currently above this with the best deals on the market typically 1.25% or more above it. This may sound like a good rate but remember the base rate will inevitably rise in the future and your rate and monthly payments would increase along with it.
Tracker rates are a good idea if you feel that rates are going to drop or stay low. As rates are at a record low just now it unlikely that they will reduce further. With the uncertainty caused by Brexit and generally higher inflation figures, it’s more likely that rates will start to rise in the coming years.
With this in mind, now may be the best time to have a ………
*correct as at 7th April 2017
- Fixed-rate mortgage
If you are someone who likes the security of knowing your repayments won't change, then a fixed-rated deal is probably for you.
Two year fixed rates are currently the most popular with British homeowners, but increasing numbers of borrowers are turning to longer term fixed rates. These longer term deals give more security and cut down remortgaging costs, but the Early Repayment Charges will be much higher in the early years, so if your circumstances were to change it will cost you more to extract yourself from the deal.
Fixed rate mortgages are a great option just now as there is very little difference between interest rates on Trackers and Fixed rates currently. As the rates under a Tracker mortgage are likely to increase in the coming years, the rates and costs could potentially end up higher in the longer term.
I’ve split from my partner who is on our joint mortgage, can we split the mortgage?
Typically, there usually three options for couples with a mortgage;
- Sell up and move out
If both you and your partner want to move out of the property, then often the easiest way is to sell the house and pay off the mortgage. This can provide a clean break and be the least messy way of moving on after a separation. In these circumstances any equity left after the mortgage has been paid off will be considered a marital asset and split between the two of you. Who gets what from the residual funds can be open to dispute so often the quickest and easiest way is to have this agreed prior to the sale. Should the sale price differ from expectation, then a slight adjustment should be achievable and reach an amicable settlement.
If you cannot reach an agreement then the matter would need to be settled in the divorce court. This can be a more expensive and drawn out process, but if you can’t reach a satisfactory amicable agreement you should always seek legal advice.
- If you want to keep the property
If you or your partner intends to continue living in the property, then you will need to find a solution that transfers ownership to whoever wants to keep it. Transferring the mortgage into one name will involve one partner buying the others share in the property, including their share of any equity involved.
You will need to prove to the lender that the remaining partner will be able to afford the mortgage on their own - remember the existing lender is under no obligation to remove either of you or to transfer the mortgage to one name.
If you can satisfy your lender that the remaining partner can afford the mortgage then they may agree to them becoming the sole mortgage holder.
Sometimes, you need to remortgage to get a lender that will accept you under their own and different lending criteria. We would submit a mortgage application in the normal manner, providing income and liabilities to the new lender so they can assess affordability. If you need to borrow money to fund purchasing your partner's share, you will need to prove that you can afford the total borrowing.
Moving your joint mortgage into just one name can provide the same financial break as selling up, while keeping ownership of your existing home.
Often if children are involved the two parties can reach an amicable agreement to ensure the children have a safe and familiar environment to continue living in. If children are older, often protecting their inheritance can be a consideration.
- Continue to pay your existing mortgage
In some circumstances, you may decide to continue paying the existing mortgage, especially if you do not have long left and the divorce is on good terms. If you are considering this, the partner who moves out will need to consider if they can afford to contribute towards the mortgage and their own separate additional living costs.
This solution can be useful if your mortgage has high early repayment charges as it avoids handing over large amount of money to the lender unnecessarily.
Can I remortgage to consolidate credit card debts?
There are pro’s and con’s in this process, so both are outlined below:
By adding the unsecured debt to the mortgage and paying over a much longer period, the monthly payments will be reduced. This will allow you to function much easier and provide additional disposable income to spend on household essentials. If you were feeling under financial pressure to keep up with payments and on the verge of being unable to keep payments up this could provide a solution.
If you were only paying the minimum monthly payment on the credit cards, it could potentially take over 40 years to repay the outstanding balance. By remortgaging, you will repay over a shorter term and you will be able to see the balance reducing over time.
By adding your unsecured credit card debts to your mortgage you are changing them to a secured lending basis and your home may be at risk if you fail to keep up the repayments.
Although the monthly payments are reduced, the overall amount you will pay in mortgage interest will be increased due to the longer term.
- Some options
- You could move your credit cards to 0% for balance transfers;
- Get unsecured loan to repay credit cards;
- Overpay credit cards to see balance reduce quicker;
- Cut back on other expenditure to provide disposable income;
- If you remortgage, try to overpay it to reduce total term;
- If you remortgage to add debt, only do it once;
- You could get a secured loan and keep mortgage as is.
Whatever option you choose to take, keep up the monthly payments.
If you are uncertain about your options on any of these subjects, it’s best to seek independent mortgage advice. We are here to help, so give Cailean Mortgages a call on 0131 510 7071.
As a mortgage is secured against your home, your home may be at risk if you do not keep up repayments.