The Bank of England base rate has increased from 4.5% to 5%, the highest level we have seen since the 2008 financial crisis. This “Bank Rate” determines the interest rate paid to commercial banks and influences the rates those banks charge for borrowing. If the Bank Rate changes, then the banks normally change their interest rates on saving and borrowing.
The Bank Rate therefore affects what borrowers pay and what savers earn.
As a result of the increase in the Bank Rate, it is expected that hundreds of thousands of borrowers may now face difficulties in paying their mortgages. On 23 June 2023 the largest UK mortgage lenders have agreed to introduce new support measures for borrowers who are struggling, which include allowing homeowners to lower their monthly payments by increasing their mortgage term or switching to interest-only repayments temporarily without any impact on their credit rating. It has not yet been confirmed when the new measures will take effect.
It therefore seems to be an appropriate time to discuss mortgages generally and below we set out a number of mortgage FAQ’s which you may find useful.
What is a mortgage?
A mortgage is a legally binding agreement between a borrower and a mortgage lender for a loan to purchase a property which is secured against the title to the property.
The terms of the mortgage sets out how much is to be repaid by the borrower and when and what rate of interest the lender will charge the borrower for the loan. Different lenders have different conditions which need to be satisfied, and some lenders are more stringent than others. You can get residential lenders or commercial lenders depending on the nature of the borrower and/or the property.
The borrower will have to repay the amount of the loan originally borrowed before the end of the mortgage and will be required to pay interest to the lender over the term of the mortgage. The lender will have the power to take possession of the property and sell it in order to recover any losses it may have suffered if mortgage repayments are not made.
Common mortgage terms
Conveyancing: The legal work completed by a solicitor or conveyancer when buying or selling residential property.
Loan to Value (LTV): The ratio of a loan to the value of the property purchased. For example, a loan of £150,000 to purchase a property valued at £200,000 is 75% LTV with equity to the borrower of 25%.
Mortgage Broker: A specialist who finds a suitable mortgage product for a borrower according to their circumstances and requirements. Fees, rates and availability of products vary between brokers.
Mortgage Deed: The document executed by a borrower to confirm their agreement to use the property as security to protect the mortgage for the benefit of the lender and registered against the title to the property at the Land Registry.
Mortgage Offer: The document setting out the terms of the loan including repayments, interest rates, early redemption charges, duration of the loan, lenders fees and any other specific requirements of the lender.
Mortgage Term: The length of time agreed for the repayment of the mortgage.
Mortgagee / Lender: The lender, person or company who benefits from the mortgage security (usually a Bank or Building Society) and capable of enforcing the mortgage terms.
Mortgagor / Borrower: The property owner who enters into a mortgage deed in favour of a lender.
Remortgage: The process of swapping an existing mortgage for another mortgage with a different lender, secured on the same property.
How much can be borrowed?
Every lender has different eligibility criteria to be satisfied. The amount which can be borrowed is typically determined by the purchase price of the property, the level of deposit available by the borrower and the borrowers income and affordability. Ultimately, a lender needs to be satisfied that it has sufficient security which it can enforce against to recover its losses, with minimal exposure to financial risk.
The different types of mortgages
The main types of mortgages are as follows:
Fixed Rate – Interest is fixed for a set period of time, usually between 2 to 5 years, and monthly repayments do not change during this period.
Variable Rate – Interest changes during the term and monthly repayments vary in accordance with the interest rates as a Standard Variable Rate (based on the lenders normal mortgage rate) or a Tracker Rate (linked to a particular base rate, which it tracks up and down).
Capital and Interest – Monthly repayments are made which are allocated towards the outstanding loan amount (capital) and the interest applied. The amount of the outstanding loan reduces over the term of the mortgage and the remaining loan amount plus any outstanding interest will be payable at the end of the mortgage term.
Interest Only – Monthly repayments are made which are allocated towards the interest applied to the outstanding loan account only. The amount of the outstanding loan does not reduce over the term of the mortgage and the full loan plus any outstanding interest will be payable at the end of the mortgage term.
Why remortgage?
A borrower may want to consider remortgaging to secure an alternative mortgage deal, for example one that is interest only (where no capital repayments are made), interest rates are lower and/or for a different mortgage term. Different deals have different repayment terms and therefore monthly repayments may vary so a remortgage can be appropriate when a borrowers circumstances have changed and they want to increase or reduce borrowing.
Can you rent out a property subject to a mortgage?
Not all mortgage lenders are the same and therefore if looking to rent out a property it is recommended that a borrower checks the terms of the mortgage and if necessary, obtains the consent of the lender. To let a property out without the requisite consent may put a borrower in breach of their mortgage. A lender may charge a “consent” fee, or require you to obtain a different mortgage product such as a “buy to let” mortgage. Some mortgages contain restrictions on letting property out to family members.
It is also important to consider any buildings insurance policy on the property as this may need to be updated to ensure there is sufficient cover for the letting.
Is Buildings Insurance required?
As part of the terms of the mortgage, it will be a requirement that buildings insurance is in place in respect of the property to protect the lenders interest. Usually lenders will require their interest to be noted on the insurance policy, that the policy is for the full current value (usually by reference to the lenders valuation) of the property as a minimum and that buildings insurance is in place for the duration of the term. Different lenders may have additional and specific requirements which will be set out in the mortgage offer.
Is a survey required?
The lender will carry out a valuation of the property as part of the mortgage application process, however this is for the lenders use and may not always reveal matters which are of importance to a borrower. We cannot advise a borrower to rely on a lenders valuation report in deciding whether to proceed with a purchase and recommend that a borrower always obtains their own survey which will provide more detail on the condition and value of a property, based on a more comprehensive inspection.
Repaying a mortgage early
If a borrower is looking to repay a mortgage either in full or in part before a mortgage deal has finished, the lender may charge a “Early Redemption Charge”. This is usually applied when a mortgage deal has been offered on a discounted rate and is typically a percentage of the outstanding loan.
Moving a mortgage to another property
Some mortgage lenders offer the option of “porting” a mortgage from one property to another. This means that a borrower can take an existing mortgage and use a different property as security for the lender.
How we can help
Here at Bromleys, we regularly act on a variety of transactions including:
- advising individuals and limited companies on the purchase of property subject to the granting of a mortgage; including residential property, investment acquisitions and buy-to-let properties;
- providing independent legal advice to individuals and/or directors when granting charges on property to secure financing / further borrowing;
- securing complex financing for property portfolios.
Our expert knowledge enables us to advise on all aspects of property finance as required for your needs, ranging from personal to development or investment. To find out how we can assist, contact our property team on 0161 330 6821 for an initial telephone discussion. If you prefer, you can fill in our online form or alternatively, you can email us on bromleys@bromleys.co.uk.
For any further information on this article please contact Lisa Murgatroyd on email lmurgatroyd@bromleys.co.uk.