Mortgage basics

 

 

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

Our mortgage basics guide covers what you will need to think about when looking for a home and applying for a mortgage;

  • Mortgage promise
  • Moving costs
  • Property types
  • Valuation schemes
  • Repayment methods
  • Mortgage products
  • Legal work

A Mortgage Promise will help you search for a property in your price range. It may also help you negotiate a better price with the seller because they know you can get a loan.

A Mortgage Promise, also known as a 'Decision in Principle' or 'Agreement in Principle', is useful if you haven’t found a property you want to buy but would like to know how much you could borrow.

All we need is a few personal details about you and anyone else who will be named on the mortgage. Then we will contact a credit reference agency for a credit search and give you a credit score. If you reach our pass mark, we will give you a certificate so that you can show the seller you can get a loan.

Other lenders will be able to see that we have made an enquiry about you, but this should not affect your ability to get a loan from them.

A promise is a promise. However, sometimes we may not be able to lend you as much as we first promised if:

  • Any of the details you give us change;
  • Anything about you has changed at the credit reference agency when we make a full loan application search at the time you apply; or
  • Following our discussion with you about your needs and circumstances, we find that we do not have a suitable mortgage for you.

We will base our Mortgage Promise on the maximum loan we think you can afford. It will not take into account the type of property you eventually buy.

Sometimes the amount we are prepared to lend may change depending on the property you choose. This is because we expect you to put down a bigger deposit on some types of properties.

Applying for a mortgage promise

Online

Start your application online and we'll confirm whether we’re able to give you a Mortgage Promise. Start online now

In branch

Use our online form to book an appointment with a mortgage adviser.

By phone

Talk with an expert and apply by phone. Call us on 0800 783 3534. Lines are open from 8am-8pm Monday to Friday and 9am-2pm on Saturdays. We’re closed on Sundays and Bank Holidays

Whether you are buying a new property, moving your current mortgage to us from another lender, or borrowing more money, it is important to know how much it is all going to cost.

We usually expect you to be able to provide a deposit but there will be other costs too, especially if you are moving home. You need to think about whether you can afford all these costs.

Deposit

We will only lend you a certain percentage of either the purchase price or the property valuation, whichever is lower. So you will need to use some of your own money to buy the property – a deposit.

We usually ask for at least a 5% deposit from your own money. However, if you can pay more, you can often get a cheaper mortgage product.

Other costs

There are other costs in buying a property and taking out a mortgage. Here are some typical ones that apply to most buyers.

Cost Summary
Valuation of property Your mortgage adviser will discuss valuation schemes and fees with you when you make your full application. The valuation fee depends on the property value and which type of valuation scheme you choose.
Conveyancing fees Charged by a conveyancer for doing the basic work connected with buying your property. Fees can vary and are often based on the purchase price plus other costs.
Stamp Duty Land Tax A government tax charged on land and property transactions in the UK. The tax is charged at different rates and has different limits for different types of property and values of transaction.

The tax rate and payment limits can also vary according to whether the property is used for residential or non-residential purposes, and whether it is freehold or leasehold. For the most up-to-date limits please visit www.hmrc.gov.uk/sdlt/intro/rates-thresholds.htm.

Stamp duty is an expensive extra cost that you should take into account when thinking about buying a property.
Land Registry fees The Land Registry will charge for any searches of the property register the conveyancer asks for. It also charges for registering you as the owner and us as the lender. You must pay both these costs.
Local authority search fees The local authority will charge for answering your conveyancer’s questions about the property you want to buy, such as whether the local authority maintains the roads adjoining the property or whether you will be responsible for this.
Other relevant property searches e.g. mining or environmental searches Sometimes your conveyancer will have to carry out other searches because of where your property is. These may be environmental searches to check if certain industrial processes are carried out in the area or if the property is built on land that may have been contaminated because of the way it has been used in the past. Mining searches ask for records of any mining work that may affect the property. The organisations that answer these questions will charge for this, and you will have to pay these costs.

There are often unexpected costs in buying a property, so it is a good idea to have a reserve fund to cover them.

Use our Homebuying costs form to help you keep track.

There could be other charges and standard costs which you may have to pay during the course of setting up your mortgage.

We will consider lending you money to buy different types of old and new property, purpose-built flats or conversions, or a property you are buying outright or under an approved shared ownership or shared equity scheme.

We will even consider an application to buy a property that you want to rent out to someone else. We may ask you to provide a bigger deposit on some types of property than others.

Any loan we make will be subject to a satisfactory property valuation by a surveyor of our choice.

Freehold

If the property is freehold, then you own the property and the land it is built on. We do not lend on freehold flats in England and Wales or Northern Ireland.

Leasehold

If the property is leasehold, then you own a temporary right to occupy the property and the land it is built on. The property and the land are owned by someone else and they lease them to you for a number of years. Leases can last for decades or centuries. There is usually an annual charge for the lease, called a ground rent.

We will only lend on leasehold properties with at least 70 years left on the lease when you apply. Before you buy, your conveyancer will check the lease terms to make sure they are acceptable.

In Scotland (except in rare cases where there is a form of long lease known as a 'tack') all properties are owned outright by the 'registered proprietor'.

New build or converted properties

A new property or a property that has been built or converted within the last ten years must be part of a building standards indemnity scheme. This gives a ten-year warranty against material defects. There are a number of acceptable schemes, but the main one is run by the National House-Building Council (NHBC).

We will consider lending on properties that are not part of one of these schemes if it was monitored by a suitably qualified professional consultant while being built. The consultant must have professional indemnity insurance cover and must give us, or be willing to give us, a professional consultant certificate.

Shared equity

This can take various forms. Usually you own 100% of the property but pay a reduced amount to the builder, for example 75% of the property value. You own 100% of the property so there is no rent to pay. The builder holds a 25% stake in the property and registers this interest in your property at the Land Registry.

At a later date, when you can afford to, you can buy the remaining 25% from the builder at a cost of 25% of the value of the property at that time. If you decide to sell the property, you must give the builder 25% of the sale proceeds.

Shared ownership

Shared ownership schemes are usually offered by registered social landlords or local authorities. With this type of purchase you buy a share of a property, say half, and pay a reduced rent for the rest to the registered social landlord or the local authority.

The share you first buy may be as little as 25%, but if you wish you can buy more shares later until you own the property outright.

Right to Buy

If you rent your home from your local authority or a registered social landlord, you may have the Right to Buy your home under certain conditions set out by your landlord. You may be able to buy your home at a discount to its market valuation. The discount is usually based on the property value and how long you have been a tenant.

Buy to let

A buy to let mortgage is a loan you can take out to buy a property that you intend to rent out to tenants. The most you can borrow is linked to the amount of rental income we think you could earn.

Taking out a mortgage is one of the many risks of investing in buy to let properties. So before you enter the market you should be an experienced house buyer and have fully researched investment properties.

These mortgages aren't available to first-time buyers.

If you are taking out a mortgage to buy your home, remortgage, raise capital or carry out home improvements or repairs, we will want a professional opinion of the property’s market value.

We choose the valuation surveyor, who will be employed by our surveying service or appointed from our panel of valuation and surveying firms.

If you are applying for a remortgage or additional borrowing, we will arrange for a property assessment or revaluation for our own use, you won’t need to do this yourself.

We choose how the valuation is done. We may arrange for someone to go and inspect the property, or we may use a database that analyses the values of comparable properties. You may be asked to pay the costs of this. When you apply for a new mortgage, we will ask you to choose from three levels of inspection and report.

Level 1. Valuation report

This is the most basic property valuation and the least expensive type of report. It enables us to decide whether we want to lend you the money to buy the property. It gives you limited information about the property. So if you choose this type of valuation, bear in mind that the report may not mention defects that may have affected your decision to buy.

Level 2. Survey and valuation

This is a survey for you and a basic valuation for us. The survey gives you guidance on the essential things you may need to know about the property, such as defects and problems that are serious or that may significantly affect the value.

The survey is arranged as a contract between you and the valuation surveyor. As part of the contract, the valuation surveyor will send you the terms of their work agreement with you, for you to read and sign before the inspection.

You will get a copy of the report, we do not. We receive a copy of the valuation and any significant observations that may affect our decision to lend you the money to buy the property.

Level 3. Building survey

This is the most comprehensive type of survey, and the most costly. Again, the survey is arranged as a contract between you and the surveyor. You will receive the terms of its agreement with you so that you can read and sign them before the inspection.

A building survey is a detailed report that can be tailored to fit your needs. The surveyor will discuss what kind of report you want beforehand.

Building surveys do not provide a valuation of the property, so you will need to take into account the extra cost of a level 1 valuation report.

There are three different ways of repaying your loan. These are repayment, interest-only, and a combination of repayment and interest-only.

Repayment

Every month, your payments go towards reducing the amount you owe as well as paying off the interest (see Figure 1). This means that each month you are paying off a small part of your loan. Your annual statement will show your loan getting smaller. However, in the early years your monthly payments will mainly go towards paying off the interest, so the amount you owe won’t go down much at the start.

Graph showing effect of monthly payments over mortgage term for repayment mortgage

Interest-only

Your monthly payment pays only the interest charges on your loan, you don't pay off any of the loan amount (see Figure 2). This means your monthly payments will be less than if you had a repayment mortgage. However, the total cost of an interest-only mortgage will be higher because you will be paying interest on the full loan amount throughout the mortgage term.

Graph showing effect of monthly payments over mortgage term for interest only mortgage

With an interest-only mortgage, you will need to know from the start how you are going to find a lump sum to repay the loan at the end of the mortgage term. When you apply, we will ask you to show us the repayment plan(s) that should provide enough money to repay everything you owe by the end of the mortgage term.

From time to time, we may ask you to show us that your repayment plan(s) remains on track to repay the mortgage. If we think your plan may not be enough to repay everything you owe by the end of the term, we will try to contact you to discuss other arrangements. These may include transferring part, or all, of your loan to a repayment mortgage.

You are responsible for regularly checking that your plan remains on track. If your plan does not give you enough money to repay your mortgage at the end of the term, you may have to sell your property.

Interest-only mortgages are only available when the amount of loan is less than 75% of our latest valuation of the property.

Acceptable repayment plans

The table below sets out the repayment plans we currently accept which may change in future.

Acceptable plan types Information you must give us Our assessment of acceptable values
Endowment policies (UK) Copy of latest projection statement dated within the last 12 months. Endowment companies will present three growth rates.

We allow up to 100% of the projected amount using the middle figure.
Stocks and shares (UK) Copy of share certificates, nominee account statement or confirmation from a recognised broker containing evidence of share holdings and their valuation. We will accept up to 80% of the latest valuation of the stocks and shares, ISA, OEIC or investment bond (if the latest value is greater than £50,000).
Stocks and shares ISA (UK) Copy of latest statement dated within the last 12 months. As above.
Unit trusts, open-ended investment companies (UK) Copy of latest statement dated within the last 12 months. As above.
Investment bonds (UK) Copy of latest statement dated within the last 12 months. As above.
Pension (UK) Copy of latest projection statement dated within the last 12 months. To back an interest-only mortgage, we can use a maximum of 25% of the latest value if this is greater than £1m.
Sale of second home (UK) Property details, confirmation of ownership, evidence of the amount of any mortgage debt. We will check the ownership of the property and assess its value. We will deduct any amount you owe that’s secured against the property and allow you to use up to 80% of the amount left over (if this is over £50,000).

Combination of repayment and interest-only mortgage

It is possible to split a mortgage between repayment and interest-only. This means that at the end of the mortgage term you will still have an amount of the mortgage to pay off, which you will need to do using a lump sum.

So, as with an interest-only mortgage, you will need to make sure you have a plan to repay this amount at the end of the term.

We have different types of mortgage products with different types of interest rates. These change from time to time and we will give you details of the current range when you apply.

Your mortgage adviser will discuss your needs and circumstances with you before recommending the most suitable mortgage for you. They will give you a Key Facts Illustration that sets out the loan’s total cost and gives essential information about the product(s) you're interested in.

The Key Facts Illustration includes an Annual Percentage Rate, usually called an ‘APR’. This figure is an illustration of the rate charged once all factors of the loan are included, such as whether you add fees to your loan. The APR is the best way to compare loans from lender to lender. You should read this carefully before applying and paying any fees.

Type of product How it works Early repayment charges What it means for you Is it right for you?
Fixed rate Your interest rate and your monthly payments are set at a certain level for an agreed period.

At the end of that period we switch you to another rate, usually one of our lender variable rates.
Early repayment charges usually apply during the fixed rate period. Sometimes they can apply after the fixed rate period too. Your monthly payments will stay the same during the fixed rate period, even if the Bank of England base rate or our lender variable rates change.

A fixed rate gives you the security of knowing your payments won’t change, so it will make it easier for you to budget.

You won't benefit if interest rates fall. The interest rate and your monthly payment will stay the same.
Ask yourself if being certain that your monthly payments won't rise is more important than the possibility of paying a lower interest rate.

If you choose a fixed rate, you won't benefit from any falls in the interest rate during the product rate period.
Tracker rate This is a variable rate loan with an interest rate that is above, below or the same as the Bank of England base rate or some other rate it tracks for an agreed period.

At the end of that period, you will switch to another rate, usually one of our lender variable rates.
Early repayment charges usually apply during the tracker rate period.

Sometimes they can apply after the tracker rate period too.
It can pay to choose a tracker if you can afford to pay more when interest rates rise so that you can benefit when they fall.

It may not be suitable if you live on a tight budget that won't stretch to higher monthly payments when rates rise.
Ask yourself if you're happy that you'll still be able to make your monthly repayments if interest rates rise.

Your Key Facts Illustration will show you how much your monthly payments will increase by if your interest rate rises by 1%.

Ask yourself if you can afford this, or even more than this amount.
Lender variable rates A variable rate we set. We decide when and how much to raise or reduce these rates.

We have more than one lender variable rate, and your Key Facts Illustration and offer letter will tell you which rate(s) applies to you.

These rates aren't usually available as a stand-alone product. They are usually a rate we switch you to at the end of your product rate period.
Early repayment charges don't usually apply, but check your Key Facts Illustration or offer letter to be sure. It can pay to stay on a lender variable rate if you can afford the monthly payments when interest rates rise so that you can benefit when they fall.

It may not be suitable if you live on a tight budget that won't stretch to higher monthly payments when rates rise.
Ask yourself if you're happy that you'll still be able to make your monthly repayments if interest rates rise.

Your Key Facts Illustration will show you how much your monthly payments will increase by if your interest rate rises by 1%.

Ask yourself if you can afford this, or even more than this amount.

Ask yourself if you're happy that we choose when and how much to change your interest rate by or whether you prefer your rate to track a rate set by someone else.

Understanding the role of the conveyancer and the Legal work will ensure there are fewer surprises along the way.

You will need a conveyancer to do the legal work for us, and you will have to pay their costs.

You can do your own legal work, but we advise you to employ a conveyancer to look after your interests and to explain and deal with complex paperwork. Buying a property is complicated, especially if it involves shared ownership/shared equity.

You can use different conveyancers to deal with our work and yours, but it is normally easier to use the same conveyancer to deal with both.

You must appoint a solicitor or licensed conveyancer (in Scotland they must have a practising certificate issued by the Law Society of Scotland) and the conveyancer doing our work must be a member of our approved panel.

The role of a conveyancer

The conveyancer will:

  • Give you legal advice on all aspects of buying a property.
  • Unless the property is in Scotland, get a purchase contract from the seller’s conveyancer with details of the property and its ownership.
  • In Scotland, exchange missives with the seller's solicitors and carry out a title check on the property.
  • Sort out all pre-contract enquiries (in Scotland, check that all the conditions of the missives have been met); get copies of existing guarantees and so on.
  • Get the seller’s fixtures and fittings list to see what they will be leaving in the property and check with you that this list includes all that you agreed would be included.
  • Check your offer letter when it arrives and explain any parts of it and the mortgage conditions that you don’t understand.
  • Except in Scotland, arrange for you to sign a copy of the contract, agree a completion date and exchange contracts with the seller’s conveyancer.
  • In Scotland, conclude missives with the seller's solicitor including an agreed date of settlement.
  • Ask you to pay your deposit and ask us to send them your loan money.
  • On completion day, pay the required amount to the seller’s conveyancer and arrange for you to collect the keys.
  • Register your ownership of the property and the mortgage at the Land Registry/Registers of Scotland and pay any Stamp Duty Land Tax to HM Revenue and Customs.

Selected remortgages may come with our Remortgages Service where we'll pay our own legal fees and won't charge you for the property assessment.

Legal contracts

When you agree to buy or sell a property, you enter into a contract with other people you have agreed to buy from or sell to.

Once the contract terms have been agreed, each party to it signs a copy and agrees a completion date, and the contracts are exchanged – in Scotland this is known as the conclusion of missives.

Your conveyancer will take care of this and check that all the legal conditions are met.

Before exchange of contracts

At any time before exchange of contracts the seller or the buyer can change their mind, normally without having to make a payment to the other:

  • The seller can accept a higher offer from somebody else – called gazumping.
  • The buyer can withdraw the original offer and make a lower one – called gazundering.


Before exchange of contracts the seller's conveyancer will usually:

  • Obtain details of the seller's legal title to the property.
  • Ask the seller to fill in a Property Information Form and a Fixtures and Fittings and Contents form. These forms collect information about the property and what is included in the purchase price.
  • Agree the content of the contract of sale with your conveyancer.
  • Answer any questions raised by your conveyancer.
  • Ask the seller to sign one of the contracts.


Before exchange of contracts, your conveyancer will usually:

  • Read the documents sent by the seller's conveyancer.
  • Make a local search and a drainage search. They may also do other searches depending on where the property is, for example environmental or mining searches – in Scotland this is done by the seller's conveyancer.
  • Ask the seller's conveyancer any necessary questions.
  • Receive a copy of your offer letter from us and any formal instructions about acting for us.
  • Report to you and ask you to sign a copy of the contract.

At exchange of contracts

On exchange of contracts you have to pay a deposit. Normally this is 10% of the purchase price, but your conveyancer may be able to negotiate a lower amount.

If a buyer or seller backs out of the sale after exchanging contracts, they are breaking a legally binding agreement. They will almost always have to pay the other person compensation.

You should contact your chosen buildings insurance provider and ask them to start cover as soon as you have exchanged contracts.

After exchange of contracts

Between exchange of contracts and the completion date, your conveyancer will usually do the following:

  • Make searches at the Land Registry to make sure nothing new has come to light since the seller’s conveyancer obtained the original copy of the property registry entries – in Scotland, the seller's conveyancer will do this.
  • Contact your current lender (if any) and ask how much is still owing on your existing mortgage.
  • Ask you to sign a transfer document, a land transaction return, the mortgage deed (Standard Security in Scotland) and any other documents we need you to sign.
  • Ask us to send the loan money ready for the conveyancer to send to the seller's conveyancer on the day of completion.
  • Ask you for any remaining money needed to buy the property.

When the mortgage starts

On the day of completion, your conveyancer will pay the seller's conveyancer the balance of the purchase price. Ownership of the property is transferred to you and you become entitled to have the keys and move in.

The seller's conveyancer will pay off the seller's mortgage and send your conveyancer the transfer document and any other relevant documents, for example property guarantees.

Your conveyancer will then register your ownership and the mortgage at the Land Registry/Registers of Scotland and pay any Stamp Duty Land Tax owing to HM Revenue and Customs.

If you have an existing loan that must be repaid, your conveyancer will send the money to your current lender and that loan will end.

Ownership of the property

When two people buy a property together they are normally registered at the Land Registry as co-owners. There are two main ways of co-owning property, and the legal terms for these are ‘joint tenants’ and ‘tenants in common’.

With joint tenants, the law regards the co-owners as owning the whole of the property between them. When one of them dies, the whole of the property passes to the other. Usually, the survivor only needs to provide a death certificate to prove their entitlement to full ownership. Joint tenancy is a much used form of ownership between married and civil partners.

However, family matters can be complex and you may not want complete ownership of the property to automatically pass to the other co-owner. If so, you may want to consider asking your conveyancer to register you as tenants in common.

If you own your property as tenants in common, each of you owns only a share in the home. This could be 50/50, but if one of you puts down a bigger proportion of the deposit, you may want to take unequal shares, for example 60/40. If you die, your share will pass into your estate and be dealt with in line with the terms of your will (or the rules of intestacy, if you don’t leave a will).

This way of holding the property may be useful if you are unmarried or have children from a previous relationship. It can also be used as part of estate planning (to try to pay less inheritance tax).

You should ask your conveyancer to explain more about the ways two or more people can own a property.

Occupation of the property

Except in Scotland, anyone over 17 years old who is not your son or daughter but who will be living at the property to be mortgaged will have to sign a consent to the mortgage form.

By signing this they agree not to claim tenancy rights if we take possession of your property because you do not keep up your monthly payments.

Understanding our mortgages

Mortgage features

Overview of key features to help you understand our mortgages.

Fees and charges

Our charges and standard costs.

Interest-only mortgages

Free and impartial advice on interest-only mortgages from the Money Advice Service

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    YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE