If you’re going to buy a home, or you’re looking to re-mortgage your current home, the first step is usually looking at a mortgage and understanding how much you can afford to borrow. Over the last twenty years, houses across the UK have increased in value by a huge 210%. As a consequence, as of September 2020, the average house price in the UK is £244,513.
In this blog post, we’re looking at the mortgage process, how long it takes, and what you can expect. Mortgages are what a lot property investors trade on, they borrow, expand or develop and try to make money by selling at a profit.
Affordability & Loan-to-Value
The first step in the mortgage process is to work out how much you can borrow. Remember, there is a big difference between how much you can borrow and how much you should borrow, but its great to know and will help you with your budgeting.
Generally mortgage companies use two themes to understand how much you can borrow, Affordability and Loan-to-Value (LTV).
- Affordability – Lenders want to know that you have the means to pay the mortgage back, including their interest payments. As result they will look at how much you earn versus how much you spend, while taking into account your debt, and try to work out realistically what mortgage level you can afford. Generally lender will allow you to borrow five times your total Gross income, but this also does depend on the LTV.
- Loan-to-Value (LTV) – is effectively a percentage ratio of how much equity is in your property. If you stop paying the mortgage and lender takes over the property, how much money can they likely recover. Its worked out by dividing the value of the mortgage you need to borrow, by the value of your property. I hope my house is worth more, however lets say its worth £400,000 and I have a £300,000 mortgage, my LTV is 75% (300K / 400K x 100=75%). Up to 80% LTV is very easy from a mortgage point of view, however it get more difficult the higher you go.
The second step in the mortgage process is a mortgage offer or an Agreement in Principle. In general, there is no difference between a Mortgage Offer and an Agreement In Principle. For both, you will need to complete an application form and provide details of your financial situation, but an agreement in principle is possibly quicker, given the document requirements are slightly less.
You get this once your application has been checked and approved. It does not mean that you’re loan is guaranteed to be accepted, but it’s a good indication. To get a mortgage offer, you need to provide a few documents to the lender to help them understand your financial situation. These documents usually include;
- Personal Finances – Incomes, Expenditures, Existing Loans, Credit Cards, Credit Score
- The Property – Valuation Report,
In general, the whole process from start to finish depends on a range of factors, including the property you’re buying, the lender you choose, and how quickly you provide it with the necessary information. That said, valuation to mortgage offer take a week and consists of;
- The Property Valuation Report take about five days to complete
- The bank will issue a mortgage offer within a couple of days of getting your valuation report
- What Happens Once Your Mortgage Offer is Issued? – Once you have a mortgage offer and have accepted the terms, you can sign, and your solicitor will finalise the purchase of your home and agree on a date to “exchange contracts”. The timescale from mortgage offer to contract finalised could be anything from one week to several months as it depends on what part of the property chain you’re in and when the seller of the property you want to buy, moves out.
- Is Possible to Increase Your Mortgage – As part of step one, you should have worked out what the maximum mortgage you’re allowed to take, based on your LTV and affordability. Once you have this figure, you can work out whether you will be allowed to increase your mortgage.
- Can You Get A Mortgage Without A Property – Sadly, this is not possible. The lender wants to know what your borrowing against and what its worth. That all said, this is where an “Agreement in Principle” can be a great option to have. With an agreement in principle, the amount that a lender will be agreed based on a few assumptions and as long as nothing changes, and while it’s not a guarantee, it’s a good idea of what lenders will lend you. It will be valid for three months and can help swing properties in your favor by the showing that you’re serious and ready to move.
- How Long Does A Mortgage Offer Last? A mortgage offer will last between three and six months, depending on the lender. It will say at the top of the mortgage offer.
In an ideal world, you should be able to complete the contract process in two weeks after you have exchanged property contracts.