Buying a home is the largest purchase you’re likely to make. Before you arrange your mortgage, make sure you know what you can afford to borrow. Find out where to get a mortgage, the different types and how the process works.
Let's start with the fact that to get a mortgage in the UK can be done for the purchase of both residential and commercial real estate; applications are considered by residents and non-residents and formalize a deal can be both a natural and a legal person.
UK banks typically divide mortgage products into 2 large groups depending on the borrower's goals:
- Residential mortgage (housing mortgage). Loans are issued for the purpose of buying housing for their own use. In this case, the bank will be only interested in the client's solvency. Providing confirmation of a clear UK loan history will be a huge advantage for the borrower. Usually, UK banks agree to provide this type of a loan up to four times the annual income. For example, if you earn £200,000 in a year, you will be eligible for an £800,000 mortgage.
- Investment mortgage (buy-to-let mortgage). These loans are intended for those who plan to buy property for renting purposes. In this case, the bank is not only interested in the initial capital of the borrower but also their potential income from renting of the selected property. Therefore, the bank will analyze the property more carefully to make sure that it can generate the necessary income. Estimated rental should exceed at least 125% of the monthly loan payment. For example, if the potential monthly loan payment is going to be £1,000, then the total earnings from this property should be a minimum of £1,250.
Besides, commercial loans are also very common in the UK. Those are usually taken for large sums to purchase commercial real estate. However, in this case, each application is considered individually, and it is difficult to presume what are general conditions. Requirements of banks and mortgage conditions
Of course, the requirements of the UK banks slightly differ from one another; however, it should be borne in mind that local banks view the borrowers who live in the countries of the former USSR as clients from "high-risk areas." This does not mean that mortgages in the UK are unavailable for the Russian speakers; however, it does mean that the applicant will have to undergo tougher requirements and checks. The mortgage rates can be twice higher for Non-UK residents, than for a British national or a foreigner with a UK residence permit.
The initial down payment for non-residents is usually about 40%, while the UK residents own funds can pay only 5-10% of the current market property valuation. For international investors, local banks are willing to offer lower interest rates in cases of higher downpayment. The paradox is that it is easier to receive a large mortgage for an international investor, rather than a smaller one. For example, obtaining a £5,000,000 mortgage from the UK bank rather than a £350,000 mortgage.
Average interest rates for mortgages in the United Kingdom (UK) from March 2014 to March 2019, by type of mortgage
When considering your mortgage application, the bank will be interested in summing up your annual income including monthly salary, bonuses, interest on bank deposits, alimony received, dividends on securities, income from property rental, other sources of passive income - anything that can be documented. Spouses or partners can also become joint borrowers on a mortgage, so the amount of their total income can be taken into consideration. Even people who are not relatives, for example, friends can pool their savings to buy a home with a mortgage loan, but in this case, their income will be calculated not by simple summation, but by a unique formula.
Repayment of the mortgage can be either interest only or the payment of interest and the loan amount itself. In the case of an interest-only mortgage, the loan is usually granted for a period of up to five years, and the loan is extinguished at the same time, as a rule, after the sale of the apartment, purchased on a mortgage. If the borrower is willing to pay the mortgage amount during the term of the loan (the term can be up to 35 years until a borrower is 65 years of age) this type of mortgage is called capital repayment mortgage. When selecting the type and term of the mortgage, it is worth remembering about possible early repayment penalties: depending on the bank and the loan period, the penalty may be about 1-3% of the repayment amount during the first two to three years of the duration of the mortgage agreement.
The average mortgage rate in the British bank varies between 2-5% per annum for non-residents and about 1.5-2.5 % for British residents.
The process of mortgage lending in the UK:
- Obtaining prior approval locally known as a Head of Terms. At this stage, the bank will consider the borrowers KYC documents, make their checks and calculations, discuss with them possible mortgage terms and downpayment.
- After confirming the mortgage terms, the borrower has to submit a complete package of documents.
- After receiving the documents, the bank and the credit committee will consider the application. At this stage, it is crucial for the bank to confirm its readiness to lend money and fund your property by granting a Mortgage in Principle.
- An assessment of real estate and preparation of the necessary paperwork between the bank's and client's solicitors.
- Completion of the transaction - the bank transfers the loan to the client's solicitors account, who are conducting the purchase of real estate on behalf of the client.
The whole process of getting a mortgage in the UK - the first call, and to obtain money for a lawyer to complete the transaction account - can take up to three months, depending on the bank.
The standard package of documents for obtaining a mortgage includes:
- A passport or identity document;
- Proof of current address;
- Bank statement for the last six months showing income and expenditure;
- Assets and Liabilities statement;
- Additional documents proving income;
- Mortgage Application form;
- In some cases, the bank will also want to see Borrower's CV clarifying their background and source of wealth.
There are a few costs that need to be checked when considering a mortgage offer:
- Professional property valuation and survey will cost you between £750 - £3,000 in London. The bank will nominate an independent evaluator from their panel.
- Building and content Insurance - the price will depend on the property rebuilding costs and the value of the insured contents.
- Bank administrative fee for processing the application and granting a mortgage loan – between £995 -1.5% of the mortgage amount.
- Legal services - between £3,000 - £5,600.
- A mortgage broker fee will be between 0.5 % - 1% of the mortgage amount.
Expert advice for those planning to take a mortgage in the UK
- Before you apply for a mortgage, make sure that you have a clear and transparent credit history.
- Prepare all the documents and acquire a maximum number of references on all sources of income.
- Use expert advice and guidance to help you succeed with your mortgage application.