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For most people one of the largest purchases they will make in the course of their life is their home. While everyone would hope to buy their home without the need to secure additional finances from a bank, this is not always possible. As a result, many will have to approach a bank to lend them a sum of money to be repaid over a period of time, in order to buy their home i.e. secure a mortgage. However a significant number of people are unfamiliar with how mortgage facilities work.
In this guide, we tell you everything that you need to know about mortgages in Scotland: what they are; the process for getting one; and how they work.
Unless you have substantial savings which you can use to buy your home, you will in all likelihood have to approach a bank (or other lender) for money. This money will be loaned to you to allow you to purchase the property in question i.e. pay the asking price, and then be paid back to the lender over a period of time e.g. 25 years. However in exchange for loaning you the money, the bank will normally require that you sign a document that gives the bank the right to sell your property should you fail to keep up with your monthly repayments. In essence this is what a mortgage is.
It is important to understand that technically, in Scotland there is no such thing as a 'mortgage'. The name given to a 'mortgage' in Scots law is a 'standard security'. The difference in name, is in large part, to reflect the fact that the law concerning property in Scotland are distinct from that in the rest of the UK.
In considering applying for a mortgage, you need to think about a number of things:
1. How much money do you want to borrow?
The amount of money that a lender will be prepared to lend will depend on how many people will be borrowing from them:
The important point to keep in mind is that while your being able to borrow many times over your salary may look like an exciting prospect, allowing you to buy your dream home, you need to consider whether or not you will be able to meet the repayments every month.
Another practical point to remember is that in terms of mortgage repayments, these can be reduced if you are able to pay some money as a deposit on the property that you are interested in. Your payment of a deposit e.g. from savings will reduce the amount of money that you need to borrow from the bank. Therefor the total repayments that you need to make will be less.
2. What kind of mortgage repayment plan are you interested in?
Assuming that you have a clear idea of how much you want to borrow and are satisfied that you can meet the monthly repayments, the next thing to consider is what kind of repayment option you would like. Most lenders offer two options:
a. Repayment mortgage
These operate in such a way that you will borrow money from a lender to buy your home, and then repay this and interest charged to the loan.
b. Interest only mortgage
These mortgages allow you to borrow the money from the lender, and then repay the interest but not the capital sum. You will however pay into a savings plan as part of this mortgage facility so that when your mortgage term comes to an end, you should have saved up enough money to repay the outstanding capital.
Keep in mind that whatever mortgage repayment plan you are interested in you will need to decide how much time you want to spend making the repayments. Most mortgages can run for 25 years i.e. you will have 25 years to repay the sum of money you borrowed. It may be possible to arrange for a shorter mortgage, but this will increase the monthly repayments that you will need to make.
Most of the relevant information that you will need to know regarding a mortgage should be provided by the lender in question, or by a mortgage broker. It is important to keep in mind that when you get in touch with an advisor about mortgages, you must be given an independent disclosure document that stipulates:
Whether a lender is providing you with information or advice alone in respects of a mortgage is important. If you are being sold a mortgage on an 'information only' basis, then you would normally already know the kind of mortgage that you are interested in. If you opt for a particular kind of mortgage on this basis, and later find that it is not suitable, then you will need to complain to the Financial Ombudsman Service.
Alternatively if you are offered a mortgage on an 'advice based' sale, the lender or broker in question is obliged to offer you a mortgage that most accurately reflects your needs. Again, if you find that the arrangement arrived at is not suitable, you will be able to complain to the Financial Ombudsman.
Any information that you are given concerning specific kinds of mortgages must be given in a 'key facts document' which should be clear and easy to understand, as well as designed in such a way that you can compare the costs with other mortgages relative to the one which you have been offered.
When you have decided on how much money you want to borrow, and how long you think you will need to repay the loan, you can begin the process of applying for a mortgage.
The process of applying for a mortgage is relatively straightforward:
Step 1: Contact your lender to arrange an appointment with them to apply for the mortgage that you have decided on.
You should ensure that you take the following pieces of information to your meeting:
Step 2 Complete the mortgage application form.
The form will normally ask for details regarding your level of income, and savings that you have, any outgoings that you have, your employer and any previous landlord or mortgage that you have had. The lender will also, as a matter of good practice, run a series of checks with credit reference agencies – this is to highlight any bad debt that you have had in the past.
Step 3 Get a mortgage certificate.
After you have completed the mortgage application form, send this to your lender. They will consider this and may decide to give you a mortgage certificate. This document is important in that it provides, in principle, how much you will be able to borrow.
Please note however, it is not a guarantee that you will be given the mortgage.
Step 4 Find a property and have it valued.
When you find a property that interests you, you will need to have it valued. In most cases a seller will have arranged for a report to be done on their property to give to you. However some lenders may only accept reports/ valuations from pre-approved providers. If this is the case, you may need to commission your own valuation – the cost that you incur will in most cases be refunded to you if your mortgage application is approved.
Step 5 Come up with a deposit for the property.
If you find a property you like, and have it valued, this will accelerate matters.
If the value of the property is lower than what you need to pay for it (the asking price) you will need to decide whether (i) you will be able to find the extra money: or (ii) if the seller is amenable to a lower offer for their property.
When you are sure that you want to buy a property, you can then proceed to make an offer.
Step 6 Apply for your mortgage
Having made an offer on a property that the seller accepts, you can then apply for the mortgage from your lender. In recent times, lenders have been very reluctant to allow you to borrow all of the value of a property – this is why it is better, if possible, to have as much savings set aside as possible to make a larger discount.
Keep in mind that the 'value' of the property will be what the lender's valuer deems it to be, and this may be less than what you need to pay for the property.
If your lender approves your mortgage application, you will be given a formal mortgage offer. It is important that you study this document as it may impose certain conditions on you regarding the property if accepted.
The whole idea of a lender giving you a mortgage for your property is that you will be able to pay it back over time. If you find that you are struggling to keep up with repayments (or think you may struggle in the future), then you need to take action quickly.
In the first instance you should speak to your lender about your concerns. If you are unsure about what action you are going to take, tell them that you are going to take specialist advice. The action that you take will depend on your particular circumstances. In most cases people will want to stay in their property. In order to do so, you will need to keep up with your future mortgage repayments to prevent your arrears from rising. You could consider doing different things:
If you are unable to meet your repayments and miss one or more, your lender may serve you with a notice of default. This legal document will outline that you have missed a payment, and that you have one month to make payment on the missing instalment. If you do receive a notice of default, you still have some options to save your property. You could:
Where you are unable to repay the money owed within the month, your lender is entitled to approach the courts to repossess your property. In order to do so, they must take certain steps. They must:
Nothing in this guide is intended to constitute legal advice and you are strongly advised to seek independent legal advice on matters that affect you.