What is Mortgage Loan?
A loan extended to a borrower by entitling the lender to a lien on the borrower’s property refers to the mortgage loan. Thereby, the borrower’s property is kept as security. If the borrower defaults on the loan or fails to abide by the loan terms, the lender is authorised to take possession of the mortgaged property and even sell it to get the loan repaid. The repayment of the mortgage loan includes interest and other costs.
A borrower can avail the mortgage loan against any of his owned property, such as industrial property, any land owned by him, apartment, house, residential properties, office, hotel, or other commercial property. A mortgage loan can be availed by either a purchaser of a property, who tends to take financial support from a bank or any different lender, or by someone else who already owns a property and is attempting to raise funds for personal purposes.
Major features included in a mortgage loan are:
- Size of the loan
- Maturity of the loan
- Interest rates
- Method of paying off
In a mortgage loan, the lender’s lien on the borrowers’ property is considered before the borrower’s other creditors. In cases where the borrower gets bankrupt or insolvent, his other creditors will only receive the repayment of their credits after the mortgage loan’s lender gets repaid in full from the property’s sale kept in security.
What are the Types of Mortgage Loan?
While mortgage loans are of several forms in different countries, the two basic types of loans are fixed-rate (FRM) or Adjustable Rate Mortgage (ARM).
Fixed-rate mortgage: In a fixed-rate mortgage or traditional mortgage, the borrower’s rate of interest remains the same for the entire life span of the loan, and the monthly principal and interest remain the same as the first payment till the end. In the fixed-rate mortgage, the periodic payment amount remains the same until the end if there is an annuity repayment scheme. The periodic payment decreases subsequently if it is a linear payback.
The fixed-rate mortgage is also called the traditional mortgage because the borrower’s payment remains the same if market rates rise. On the other hand, if the market rates drop, the borrower gets an option to secure the low rates by refinancing the mortgage.
Adjustable-rate mortgage: In an adjustable-rate interest, the loan’s interest rate remains the same for a certain period. After that, it fluctuates periodically – monthly, annually or others – depending on the market interest rates. The mortgage loan is more affordable with an adjustable interest rate in the short term but less affordable in the long time. The initial interest rate is often below the market rates, and if the interest rate increases later, a borrower might fail to make high monthly payments.
An adjustable-rate mortgage, while the monthly payments can vary subsequently after the initial term, the lender’s risk on up and down of the interest rate gets shared with the borrower. In such cases, the initial interest rate is usually lower than the fixed rate for a specified term.
Factors Defining the Characteristics of the Mortgage:
- Interest: A mortgage loan’s interest can vary from fixed for the loan’s entire lifespan or vary after specific periods. Similarly, the rates of interest can also go up or down.
- Term: Mostly mortgage loan specifies a maximum term – the number of years within which the entire loan will be repaid. However, in some cases, there is no amortization or repayment of the balance amount of the loan at a specific date; or there can also be negative amortization. The mortgage loan term can vary from as short as five years to as long as over 40 years, though the most popular mortgages are 30 years fixed or 15 years fixed.
- The payment amount and frequency: The amount to be paid in each period may vary in some instances, and the borrower might also get a chance to increase or decrease the payment amount.
- Prepayment: While in some cases, the borrower gets to opt whether to prepay the loan amount or not, in many other cases, the lender might restrict or limit prepayment. Lenders can even ask for an extra amount as a penalty if they intend to repay the loan amount.
Who Can Get a Mortgage in the UK?
There are no specific legal restrictions in the UK regarding availing a mortgage. People can take mortgages regardless of the resident or non-resident criteria, although the exact terms and conditions can vary as per individual lenders. Every bank and finance provider has its standards and a predefined set of requirements. Below depicted are certain must factors which are considered while providing mortgage:
Age: Usually, mortgages are home loans, and the borrowers pay it off in a long time. Thus, for senior citizens, it is quite challenging to take out a mortgage. Most of the lenders refuse to provide mortgages to older applicants. Also, they can ask for a considerable amount as an initial deposit and limit the repay time.
Income and Job Security: Loan providers seek on-time payment from the borrowers, and to ensure this, they perform checks on income proof and job security. While considering this factor, the self-employed workers and freelance workers get a disadvantage. The borrower is supposed to show earning evidence that will decide the amount of mortgage.
Credit Score: It is an essential factor to decide whether you will get a mortgage or not. Credit providers go through the borrower’s credit history to determine if they can provide a mortgage or not. Bad credit scores may lead to denial of the mortgage. We will say you can spend a few months fixing your credit scores.
What Are the Documents Required for Mortgage?
To apply for a mortgage, you will require specific documents. These documents will decide whether you will get a mortgage or not. You must ensure that you have the following documents to apply for a mortgage:
Payslips of at least the last three months
Residency Proof (if applicable)
A P60 from the employer (annual tax summary)
Bank statements of at least 3-6 months
Evidence of insurance benefits
In the case of self-employment, you will need verified accounts of two-three years
Income Tax returns (last two years)
Current bills of utility
Passport for the identification or other ID proof
Cash flow statements
With these documents, it will require 18–40 days for the lender to process the mortgage application.
Advantages of Mortgage Loan With LoanDesire:
- Buying capacity: Even during the financial crisis, since a borrower can still purchase a new property by putting mortgage his/her previously owned property, a mortgage loan indeed increases the buying capacity.
- Cost-effectiveness: The interest rate of a mortgage loan is relatively lower since the lender already has a borrower’s property to get back the loan amount in case the borrower fails to.
- Easy repayment: Since the borrower receives an option to repay the total amount of the loan (which can be a considerable amount) in several instalments, repayment of a mortgage loan is considerably more manageable.
- Good Credit Score: If a borrower is paying the correct amount of instalments properly, the credit score gets better, thereby making the borrower liable to take other loans, if required.
- Tax Benefits: A person availing of a mortgage loan gets a considerable amount of tax benefits, as the amount paid in interest for the mortgage loan might get excluded from the tax paid to the government.