10 February 2019

Mortgaging a property - jargon explained! (Part 4)

In the world of mortgaging there is a lot of terminology or what I call jargon that in my opinion is overly used and abused. Personally I've found most of it to be confusing rather than helpful hence why I thought it would be a good idea to explain some of those often used phrases that you are likely to come across. But first let us do a quick recap of some of the principles and the journey thus far in regards to this whole mortgaging property series that I've been sharing here on the blog:

In PART 1 I shared five principles to begin with:
  • KNOW YOUR WHY - 'your why is what will sustain and determine your longevity'.
  • SACRIFICE LUXURIES - 'it creates breathing space in your finances and allows you to save more'. 
  • STAY IN YOUR LANE - 'don't let the greener grass on the other side waiver you, honour your journey'.
  • GET INSPIRED - 'you may not know what you really want until you see it'.
  • IN ALL THINGS PRAY - 'if you don't do anything else, pray and have faith'.
In PART 2 of sharing my journey I spoke about:
  • DOING A CREDIT CHECK - 'in order to understand, manage and reconcile your credit'.
  • FINDING A MORTGAGE ADVISOR - 'an expert to walk you through the whole process'.
  • AN AGREEMENT IN PRINCIPLE - 'confirms how much the lender is prepared to lend you'.
  • RESERVE / MAKE AN OFFER ON YOUR DREAM HOME - 'and so the process begins...'
PART 3: 
  • APPLY FOR A MORTGAGE - involves financial background checks including income & personal details.
  • TYPES OF MORTGAGES - to which I opted for a fixed product. 
  • REPAYMENT OPTIONS - such as monthly capital and interest payments.
In more detail I shared the advantages of each mortgage product, buying a house at an early age, what options I picked and once again I hammered in on the importance of a mortgage advisor and the role they crucially play and to what extent. In addition, I also made what I think are some valuable points:
  • student loans are not taken into consideration when applying for a mortgage. 
  • how you manage your finances is key and the less financial commitments you have, the better.
  • often times than not having too much credit to your name isn't a good thing because it may actually affect how much the lender is prepared to loan you.
  • how you handle 'little' is a reflection of how you will handle 'much'.
  • how much you earn may define to some extent how much you can borrow but ultimately your outgoings versus your incomings determines if you can actually afford the mortgage.
I hope so far you have found this information resourceful and if any of it is going to be of any good use to you then I would encourage you read the whole mortgaging series in context and order.
Now, as I mentioned at the start, in this post my hopes are to iron out some language, terms and questions that I've had in the past and have lately been asked. I mean lets start by addressing this one;
1. What is leasehold & freehold?
Around the time when I was buying my house there was a lot of press coverage that was surfing the internet particularly on this subject; freehold and leasehold. Reports said that many new home owners in the U.K had not been correctly informed as to whether they owned the land on which their property was built on outright [freehold] or not [leasehold]. As a result, it became apparent that some developers [builders] were somewhat "immorally cheating and trapping" their customers. Now, I'm not here to argue for or against the accusations and statements made but please feel free to read one of newspaper articles in detail here and make up your own conclusions as you so wish. Instead, my aim is to explain the difference between the two, tell you what I got from my experience and hopefully this will help you make informed decisions should you find yourself in this dilemma.

  • A freeholder of a property owns it outright, including the land it is built on.
  • Most houses are freehold but some might be leasehold - usually through shared-ownership schemes and please note this does not include the Help to Buy scheme.
  • With a leasehold, the person owns the property for the length of their lease agreement with the freeholder.
  • Leaseholders have to pay their freeholders ground rent and other fees in order to make changes to their homes.
  • When the lease ends, ownership returns to the freeholder unless the person can extend the lease.

  • Let's be honest, half the times as an individual who is out to buy a property if the property is either or, its a take it or leave it kind of deal but there is things that I would say make yourself aware of because those are definitely important in the long-run. For example, the length of the term is worth finding out. If my memory serves me well, my term is for 90 years and that's actually good because other terms are for 120 or sometimes 999 years so important to ask. Also, find how much are your yearly costs are going to be and if they fluctuate with inflation. Again, I believe I'm not affected by inflation rates (so they say) and I pay just under £150 per year.
    *Bonus points
    1.  your monthly mortgage repayments are dependent on the length of your mortgage, I believe. So for example, provided both are buying a house of equal value e.g. £200 000 - a 25 year old is automatically eligible for a longer mortgage term in comparison to a 35 year old. As a result, the 25 year old will pay less in monthly instalments compared to the 35 year old. Hence why you've probably heard it said, "its always best to buy a house at a young age". Also important to note, the longer the mortgage term, the higher the interest rates but as this is a variable factor I would recommend seeking expert advice at the point of interest.
    2. I think it's important for first time buyers to really think through where they are going to put their money. I remember speaking to my cousin during the time when I was buying my house and she shared this tale with me, "when my husband and I bought our first house we were so optimistic that this wasn't going to be our forever home but so far we've been here for over 12 years and counting" and her subtle message to me was simply this, "make sure you settle for what you can live with forever just in case". In sharing this I am in no way saying be faithless towards what the future may hold or be pessimistic but instead all I'm saying is, "always aim for the best the first time round and don't ever settle for second best".
    3. a developer has no say as to how much you should earn before you buy a house from them. There is absolutely no need to disclose this information with them because your Agreement in Principle does all the talking for you. This is why I would encourage acquiring one from your mortgage consultant because once you know how much the lender is prepared to lend you this in my experience helps you realistically narrow down your property search. It goes without saying you will know what you can afford.
    4. I've shared on doing a credit check, recommended websites and steps to take to reconcile any non-conformances you might have before approaching the mortgage lender. However, I'm mindful that this may not have been in depth and maybe in the future I might consider having an expert join me on this platform to give us professional advice and help us all. For now though can I encourage you to not attach yourself to the stigma "I have bad credit" because that mindset is the first enemy of all progress. Face it, make necessary changes and trust me, a good six months (approx.) of consistent upkeep of your finances is all you need to show for when applying for a mortgage. It is not as brutal of a process as people have made it out to be plus with God on your side (for believers) what can stand against you?  
    5. Last but not least, I read this quote a month after I bought my house in a book that has revolutionised my thinking and I'm just going to leave it here and allow you to take what you take from it: "a house is a liability and should never be your largest investment, if you can lose it, you never had it". Don't forget that your house is reliant on you faithfully paying your monthly mortgage repayments so if you lose your source of income, you lose your house too and therefore it's not an asset unless otherwise. On the contrary, I believe buying your first house and getting on the property ladder is in itself an investment that is worth doing. It is  generational and is not just about you but about those that come after you! That said, that statement touched me and I kind of the truth in it.
    But hey, that's all I have to share in this post because I didn't want to make this too long. In my next post, I am going to address the most FAQ: what is the Help to Buy scheme. Who is it for and is it a good option? Until then, thank you for reading and I hope you visit the site for the next post.
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