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Mortgage Basics

Applying for a mortgage and purchasing a new house or property is often considered to be one of the most complicated and stressful times of anyone’s life. It involves a huge amount of money and an incredibly long term financial commitment. However, being aware of just the basic steps of the mortgage process could ensure that your mortgage application goes all the more smoothly and will avoid unnecessary difficulties.

One of the most important steps to take in applying for a mortgage is to devote a considerable amount of time researching the mortgage lending market and select the mortgage company and scheme that will ultimately be the best for your individual situation. This will not only depend on the repayment scheme that the mortgage company is able to offer you, but also on the borrowing limit that they set on your mortgage contract. In the simplest terms, mortgage borrowing limits are set dependent on two main factors. Firstly the financial status of the borrower; for this reason it is common practice for all mortgage companies to carry out a survey of the customers financial history. This usually takes the form of a credit history check. In order for this to be completed, the customer must be in the position to provide evidence of their employment status, which could take the form of a recent pay slip or often a correspondence with the Inland Revenue. The mortgage company may also run a bankruptcy check, to determine the customer’s suitability for their mortgage scheme.

The second factor defining the borrowing limit for the mortgage amount is the actual value of the property itself. The mortgage company will usually send out an independent property surveyor, to examine the property, and based on a comprehensive structural survey, determine a potential price for that property. This will of course greatly impact on the amount that the mortgage company will deicide to lend. It is relatively uncommon for any mortgage company to offer a one hundred percent mortgage (i.e.) lend out enough money to cover the entire value of the property. Far more common nowadays is the ‘flexible mortgage’, which proves so attractive due to the customer’s ability to repay their mortgage loan early, using the concept of under or over payments, without risking early payment penalties. However, of course this type of mortgage is not suitable for every customer, and the mortgage company or perhaps the services of a mortgage broker should be consulted in order to determine the best mortgage scheme for an individual.

Once the borrowing limits and repayment scheme have been agreed, the customer will be asked to sign the official contract; this contract is based on the concept of ‘equity of redemption’, in which the mortgage company will only surrender all claims on the property once the customer has completed the repayment of their mortgage loan. At this stage the customer will also be required to make a deposit of between five and ten percent of the property’s total value. As further assurance for the mortgage company that they will receive complete repayment of this credit, it is a typical requirement of mortgage companies that the customer takes out a buildings insurance policy on their new property, to cover their repayments should the building suffer severe structural damage and thus require extensive and costly repairs.

The terms of the final mortgage contract must be considered very carefully since in principle, to violate these terms and fail to meet repayments could ultimately mean that the customer stands to lose their home. While this can happen, it is the last resort and the vast majority of mortgage holders have no trouble at all in meeting the repayments and enjoy the ownership of their own home.