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Getting a Mortgage

I am buying a house – what do I need to know about getting a mortgage?

I am buying a house – what do I need to know about getting a mortgage?

What is a mortgage?

Most people think that the word ‘mortgage’ refers to the loan taken out to help when buying a house or land. In legal terms a ‘mortgage’ actually refers to the interest in your property that you give to your lender in order that they will lend money to you. It is this interest that makes getting a mortgage an important legal consideration for anyone buying a house.

How does a mortgage work?

The traditional form of mortgage works in the following way: you take a loan (the amount that you borrow is called the ‘capital’) and the lender than charges you interest on that capital until it has been paid off in full. In order to protect itself from you failing to repay your mortgage your lender will take a legal charge over the property or land that you own or have just bought. This means that if you stop repaying your mortgage your lender could potentially sell your property, without your permission,  in order to claim back what is owed. The lender will also reserve the right to sell your property in other events too e.g. a breach of the mortgage conditions.

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What is a repayment mortgage and what is an interest-only mortgage?

With a repayment mortgage you pay off both interest and a part of the capital that you originally borrowed every month. At the end of the mortgage term (typically 25-35 years) you should have paid off your mortgage in full. Repayment mortgages are typically used when purchasing homes.

With an interest-only mortgage you pay only the interest on the loan and do not repay any of the capital. With mortgages of this type you will need to have a plan in place in order that you can repay the original capital at the end of the mortgage term. These types of mortgages are commonly used by buy to let investors.

There are also various mortgages that can offer a combination of both repayment and interest only. The types of mortgage that you will be eligible for will depend upon the property being purchased and your own circumstances. It is, therefore, important to speak to a mortgage or financial advisor as part of any plans to buy a house or land using mortgage finance, as early as possible.

Your lender’s requirements

The requirements of lenders, in relation to both the property being lent against, and the borrower, does vary.  However, the key first requirement for any lender will be affordability. That is, can you afford to make your mortgage payments every month whilst also paying any existing financial commitments together with any future ones? In order to assess this lenders will look at your income, employment history, financial commitments and current debts, any other assets that you might own and your credit history.

Another key requirement for your lender will be that you are obtaining a “good and marketable” title to the house or land that you are purchasing. This means that your lender will ask your solicitor to undertake work on their behalf in order to certify that there are no glaring problems with the house or land. As part of this process your solicitor will have to raise searches & enquiries. A lender will rarely forego this requirement so it is important that you plan mortgage finance in enough time to enable this to happen. Your lender may require another solicitor to represent them separately if your solicitor cannot act for both you and your lender. You would have to meet the costs of this additional solicitor.

Remember – your lender may be letting you borrow a large amount of money. For that reason, they will want to know as much about the property as you should as the buyer, in order that they can be sure their money is protected in as far as possible.

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What are the effects of a mortgage?

When you are getting a mortgage it is important to be aware of the effects and consequences of doing so. Perhaps the most important effect of a mortgage is that you will be giving your lender a right to sell the property if the loan or interest or other sums owed to the lender are not paid on time. Therefore, you could lose your home if the lender’s right to sell the property is triggered.

In addition, your ability to deal with the property will be restricted. You will not be able to simply sell, rent out or structurally alter the property or even grant a further mortgage to another lender – you will need your lender’s consent to do these things. You will also be under a contractual obligation to keep the property in good repair and condition and to keep the property insured in line with your lender’s specific requirements.

Why do I need to involve a solicitor when getting a mortgage?

Often, your lender will be agreeable to the solicitor acting on your purchase also acting for them on the mortgage.  However, even if they appoint another solicitor, it will invariably be a requirement of your lender that you still take legal advice from your own solicitor on the mortgage documents before you are able to take out the mortgage. Your lender will require a solicitor’s certificate stating that he or she has explained the legal effect and nature of the mortgage to you. This is important so that the lender can be sure you understand what is involved in getting a mortgage, and what the legal effect of that will be for you and your home.

If you are purchasing a property with somebody else then your lender will want you to both take separate legal advice. You can see the same solicitor but would need to do so at separate times

Our dedicated team of solicitors, based in Witney, Oxfordshire, would be happy to answer your questions.

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