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Buying a property is one of the biggest purchases that most people will ever make. While most of the niceties of searching for the ideal property are well known to most, there is often a lacking in understanding when it comes to securing the mortgage for a property.
In this guide we tell you everything that you need to know about mortgages: what they are; how they operate; and how they affect you and your property.
Relatively few people will be able to buy their home with their own personal savings. If you do not fall into this category, then you will likely need to look elsewhere to secure the funds to make an offer to buy a property. In most cases, this involves people approaching lenders (in most, but not all cases, this will be a bank), and asking for a loan of money in order to buy a property. If a lender decides to grant you the money then you will be able to buy the property, however, the bank will hold a legal right of security over the building until you have completely repaid the loan. This exchange of money for a right in security is what a 'mortgage' is.
You will need to repay the money that a lender has given you within an agreed time frame. If you fail to honour your repayment obligations that will be set down in your mortgage/ loan agreement, the lender in question will be able to take legal possession of your property and sell it, in order to recoup some (if not all) of the money it originally loaned to you to buy the property.
There is a great deal of planning that is needed before you get down to the business of putting pen to paper, and applying for a mortgage. Some important things to think about include:
You should also be aware that a mortgage may be either a 'fixed interest' or 'variable interest' rate mortgage. Whether the loan you take from a lender falls into one category or another could have implications for the interest that you pay on the loan.
Mortgages are very complicated, and will likely be one of the most important financial decisions that you will ever make. On that basis, it is advisable to take advice either from a mortgage advisor or from a lender, about what mortgages are available and what would be suitable for your needs. Most lenders, in practice, do offer advice in respect of mortgages: they will offer a mortgage that reflects your financial situation. Furthermore, by taking advice, should you find that the mortgage is not suitable later on you will have more legal rights in terms of complaining to a lender that their advice was not appropriate/ correct.
It is also wise to do some research on your own about mortgages, and perhaps raise your findings with your lender. There is however a consequence to finding a mortgage option, and applying for it without taking advice on it – this is known as an "execution-only" mortgage application. If you later find that the mortgage is not working out for you, you will ultimately have less legal protection than if you did take advice. Furthermore your lender may decide to reject you for your failing to fully understand the risks/ consequences of applying for a particular mortgage.
It would be inaccurate to say that all mortgage applicants must take advice on mortgages. However it is advisable that you do so.
Applying for a mortgage involves you arranging a meeting with your lender, and discussing your needs with them. You will need to take certain things with you, for your lender to see. These include:
A lender will take all of this information, along with details on the deposit you will be able to put down on a property, in considering your application. If it deems you application to be favourable, it should issue you with a 'Decision in Principle' – this is sometimes known as an 'Agreement in Principle'. This document is an indication from the lender that in principle – it is not a guarantee – it is prepared to give you a mortgage.
When you have the Decision in Principle, you may then approach the seller of the property you are interested in buying, and make an offer to purchase it. After having made your offer, you will then need to finalise your mortgage application to your lender. They will review your entire application again, including details of the property you have made a purchase offer on. If they are happy with your application, they will then approve it. You will then be able to progress to finalising the purchase of the property.
It is important to be very aware of the fact that taking on a mortgage for a property – essentially a loan – is a legal relationship. You will have signed a mortgage/ loan agreement with your lender, and this document will set down all of your rights and responsibilities for the duration of the mortgage. The most important of these will be :
Most people are acutely aware of the legal consequences of having a mortgage, which is why they are most anxious to discharge it as soon as possible. If you find that you are not able to meet your legal obligations under your mortgage agreement i.e. you cannot keep up with repayments, you would be well advised to contact your lender as soon as possible.
As a matter of law, lenders are under an obligation to make a reasonable attempt to reach an agreement with you on how you are to keep up with your mortgage repayments – this includes considering the level of your repayments, and when you make them. It should be noted that what is 'reasonable' will depend on your circumstances. If your situation worsens and you fall into arrears, your lender will be required to take action. Within 15 days of you falling into arrears they must:
Repossession is an option that is available to your lender, if you are unable to honour the repayment obligations you owe to them. However they are only allowed to pursue this course of action after they have taken steps to help you in meeting your financial obligations.
If you tell your lender that you cannot meet your monthly repayments, and it is considering repossession, it must follow a set of rules called a 'pre-action protocol'. This protocol outlines what your lender must do, before they can approach a court to take possession of your home. The steps are as follows:
If your lender does decide to pursue court action to repossess your property, they must give you the details of the hearing and notify your local authority within five days of being notified of the court hearing date. You should however be aware that even if your lender commences court action, you could still come to some agreement with your lender. However you will still need to attend court, and give this information to the court on the date of the hearing.
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.