Mortgage Agreement in Principle

If you are currently going through a mortgage process, you will have come across lots of different phrases and terminology. One of those phrases you will hear from lenders or mortgage advisors is a mortgage agreement in principle. A mortgage in principle gives you an indication of how much you can afford to borrow on a mortgage. It’s a useful tool to have when you are looking for a new home. Not only does it give you a budget for your new property, but it shows the estate agent that any offer you make is more likely to go through to completion.

Here Friends Capital explain further about a mortgage in principle and how you can use one when buying a new house.

A mortgage agreement in principle – what is it?

A mortgage in principle is sometimes called an agreement in principle (AIP) or decision in principle (DIP). If you go to a lender, they may offer you a mortgage in principle. It is a written estimate from a mortgage provider stating how much they may lend you. It’s not a guarantee that the lender will give you a mortgage, but it can be useful information. An agreement in principle gives you a good indication of what a financial institution is willing to lend you for a mortgage.

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Should I apply for a mortgage in principle?

The house buying process can feel confusing, and you may be wondering if you should apply for a mortgage in principle. The method of applying for a mortgage in principle is quicker and easier than a full mortgage application. You can usually get an answer quickly, from within an hour or a couple of days. Mortgage applications can take much longer to process. Getting a mortgage in principle amount allows you to narrow down the search for a new house and gives you a realistic budget.

You don’t have to get a mortgage in principle, but various reasons make it a good idea:

1. You get a good idea of what you can afford to borrow. It helps to narrow down your house-hunting search ruling out properties above your budget or opening up homes you may have believed to be out of your price bracket.
2. Estate agents and sellers will take your offer seriously. Sometimes you may not be offered a viewing unless you have a mortgage in principle.
3. With a realistic idea of what a lender will give you on a mortgage, there is less risk of applying for a bigger mortgage that gets rejected. A mortgage rejection impacts your credit file negatively and can make it more challenging to get the mortgage you want.

When will I need to apply for a mortgage in principle?

If you have made the decision to move and you are serious about looking for a new home, apply for a mortgage in principle. Knowing what you can afford makes the task of finding and buying a new home much more straightforward. 

It can also be a big confidence boost to know which houses are in your budget. A mortgage in principle can also save you time in the buying completion process. It can help with getting your offer accepted and may even make the mortgage application process quicker.

Does a mortgage in principle affect my credit rating?

A mortgage in principle does require a credit check. The application process will involve either a soft or a hard search on your credit file. The type of search done during the application process will depend on the lender.

A soft search checks your credit report without leaving a ‘footprint.’ It isn’t visible to other lenders, so it shouldn’t affect your credit file.

A hard search does show on your file as a credit application. A hard search shouldn’t affect your overall credit rating. Still, if a lot of hard searches go through in a short space of time, lenders may reject any future credit applications. It is worth checking which type of search will be done by your chosen lender before completing the process.

Good news – FriendsCapital has partnered up with UK Credit Ratings, check your credit report here. 

How long is an offer valid?

A mortgage in principle may last between 60 and 90 days, depending on the lender. If you don’t find a property during that period, you may have to apply for another. Renewal should be straightforward unless circumstances have significantly changed.

You should note that if any of the details you give on your application change, such as a new job, you should check that your mortgage in principle is still valid. You may have to renew the application in certain circumstances.

How to apply for a mortgage in principle

To get a mortgage in principle, you can choose to go:

• directly from a mortgage lender (bank or building society)
• through a mortgage broker

As a rule, it’s usually better to use a mortgage broker. Brokers have access to a variety of mortgage options, many that you won’t be able to get through a high street bank. A mortgage broker also saves you time as they can identify which lenders are better for you based on your circumstances. You will be able to call the broker when an offer is accepted and complete the full application.

Guide to Shared Ownership

It can be frustrating if you cannot afford to buy a home outright, but there is a solution. You can buy a portion of your home and get your foot on the property ladder, through the Government’s Help to Buy: Shared Ownership Scheme. 

So, who can take advantage of shared ownership schemes and how do they work?

Who can apply for shared ownership?

You do not need to be a first-time buyer to be eligible for shared ownership. However, you must not still own property, meaning you would have to sell your existing home before you can apply. Also, your household must earn less than a combined £80,000 per year, or £90,000 per year in London.

What is shared ownership?

If you cannot get a mortgage for the full value/asking price of a property, then some homes are available as shared ownership. You buy part of the house, and you rent the remainder from the government. You can buy between 25% and 75%, and you will pay rent to the co-housing association for the rest,

A secondary benefit to shared ownership, which is particularly attractive to first-time buyers, is that you will only need to save a small deposit, typically around 5%.

There are advantages to buying a 40% share or more. When you do this, you have the right to staircase. Staircasing lets you buy more shares in your home at increments of 10% or buy the whole property at a later time.

Shared ownership schemes vary between England, Scotland, Wales, and Northern Ireland, so be sure to check the fine print. In England, shared ownership properties are leasehold. You only own your portion of the home for a fixed time, and you do not own the land.

Right to Shared Ownership

The government announced a new scheme in October 2019. Under this scheme, tenants of housing associations can buy 10% of the home they live in and pay a subsidised rent on the remainder. They can purchase further shares in increments of 1% or more, up to 100%.

Stamp Duty on shared ownership schemes

Stamp Duty Land Tax (SDLT) is a tax on homes costing more than £500,000. With an approved shared ownership scheme, you can pay this tax in instalments or as a one-off.

If you pay a one-off fee, this is based on a percentage of the property value at the time you buy. You will not pay more stamp duty, even if you staircase and buy all or a more significant share of the property.

If you pay in instalments, HMRC calculates your stamp duty as a premium on the amount you paid for the grant of the lease. You will spend less today, but you may have to make more payments if you staircase.

Selling a shared ownership property.

You can sell your shared ownership property at any time, although you must notify the housing association first. The housing association has a right to find a buyer before you go to the open market. Their exclusive period is for eight-weeks, and afterwards, you are free to sell your share of the property, if they have not secured a buyer.

The amount you receive is balanced on the share you own and the market value of the property.

Pros and cons to shared ownership

As with all things, there are cons to balance against the pros we have mentioned above. It would be best if you considered these before joining a shared ownership scheme.

Maintenance: In addition to paying charges for ground rent, care-taking charges may be added for the maintenance of communal areas. The housing association pays for structural maintenance, but you may have to pay a share of major repair expenses. Before you enter shared ownership, check to see if any major works are planned.

Subletting: Subletting is usually not allowed.

Mortgages: Not all mortgage lenders will provide a loan for shared ownership properties.

Availability: You will have a limited choice of properties.

It is essential to know that you may have to pay individual additional costs every time that you staircase. These can mount up, so if you are considering staircasing, you might want to consider only doing so when you can afford to purchase a significant share.

Staircasing fees might include:

• Stamp duty
• Valuation fee
• Legal expenses
• Mortgage arrangement fee
• Any arrears

If you want to get on the property ladder, you should now be better prepared to decide whether shared ownership is right for you. For more information contact the Friends Capital team.

Ultimate Guide – First-Time Buyer Mortgages

The thought of buying your first home will probably have you feeling excited. However, you may feel overwhelmed or daunted by the prospect of the complexity of buying a house or flat.

Buying a home is likely the most expensive purchase you will make in your entire life. You will need to save a deposit, arrange a mortgage, and prepare for expenses that are often out-of-mind.

With our guide to first-time buyers, you can prepare for your search for a home and mortgage. You might even realise that it’s not as complicated or daunting as you first thought.

Saving a deposit

It can take years to save a deposit for a house, so it is best to plan well ahead and start saving as soon as possible. The best approach is to put money away each month. The larger the deposit you can save, the lower your monthly payments will be, and better interest rates may be available to you.

In general, a few mortgage lenders will accept a 5% deposit, but 10% is the standard. If you can put down a deposit of 25%, you will get access to the best deals and interest rates.

For more helpful advice, please read our guide to saving a deposit.

Arranging a mortgage

A mortgage is a loan from a bank, building society, or specialist lender, and you will pay back the loan and interest. In addition to paying back the mortgage, you may have to pay a valuation fee and arrangement fee.

You can speak to a mortgage broker to find the most competitive deals. There are whole of market mortgage brokers, as well as brokers that will only recommend mortgages from select lenders. An estate agent’s mortgage broker will give you restricted advice and a bank or building society mortgage advisor, will only recommend their products.

The amount you can borrow used to be based on a multiplication of your annual salary. However, since 2008, stringent affordability tests have been introduced to ensure you can afford the mortgage and the effects of changing interest rates.

To apply for a mortgage, you will need:

• Proof of income (payslip)
• Bank statements
• Outgoings (household utility bills)

Although it isn’t a mortgage guarantee, an agreement in principle may be given by the lender, so that you have proof to estate agents and home sellers that you are serious.

You have a better chance of approval when you make a mortgage application if you:

• Save a more significant deposit
• Have a steady job
• Register on the electoral roll
• Build a good credit history
• Close unused credit card accounts

If you are self-employed, you should prepare three years of accounts and have copies of your tax returns.

What are the different mortgage types

Below we discuss the various types of mortgages offered to first-time buyers:

Fixed-rate mortgage: Interest is fixed for a period of time, after which you will pay interest based on the lender’s standard variable rate (SVR). These mortgages are popular because you have the same monthly payment, which makes financial planning easier. Interest rate chargers by the Bank of England or your lender will not affect you, and your payments will stay the same.

Discount mortgage: These track the lender’s SVR but at a lower rate. The bigger the discount, the shorter the discount period will last.

Tracker mortgage: These track the Bank of England’s benchmark interest rate. Once the deal ends, you will typically move onto the lender’s SVR.

Offset mortgage: These link your savings and current accounts to your mortgage, so you only pay interest based on the net balance.

Standard variable rate mortgage: Payments can go up and down with these, and there are no particular benefits. Rates follow the Bank of England Bank Rate, but the lender can make changes to their SVR independently. As soon as you can, it would help if you looked to move to a better deal.

Guarantor mortgage: Help from parents or relatives, who take on the lending risks, can help you get a mortgage. However, they will have to cover payments if you can’t make them.

Questions to ask your lender include:

• Can I overpay?
• Can I borrow back if I overpay?
• Are payment holidays available?
• Can I move to a different lender once the mortgage deal ends?
• What happens if I want to move house?

First-time buyer schemes

Government home ownership schemes are on offer in England, Wales, Scotland, and Northern Ireland, although they may vary across each.

Help to Buy: These help people buy a home when they only have a deposit of 5%. These apply to newly-built homes in England of up to £600,000. The equity loan from the government will be 20% or 40% if you are inside London.

Right to Buy: Council tenants in England, Wales, and Northern Ireland can buy their home at a discounted rate, as long as they have lived in the property for three years.

Shared ownership schemes: You can own part of the home, and usually, the housing association owns the other part. You will buy between 25% and 75% and pay rent on the part you don’t own. You can buy the remainder later if you can afford to. To be eligible, you must earn less than £80,000 per year or £90,000 in London. Please read our guide to shared ownership. 

Stamp duty

Stamp Duty Land Tax (SDLT) is a tax you must pay in England, Wales, and Northern Ireland when you buy a home or land over a specific value. First-time buyers pay no fee on the first £300,000, on homes worth up to £500,000.

You will pay a 5% tax on the portion of the home between £300,001 to £500,000.

Please read our guide to Stamp Duty for more advice.

Other mortgage expenses

Other expenses to remember include:

• · Mortgage arrangement fee
• · Valuation fee (an assessment of the property value)
• · Survey fee (an evaluation of if the property is structurally sound)
• · Property solicitor fees (conveyancer)

The property solicitor handles parts of the sale, such as the Land Registry fees, Stamp Duty charges, and contract creation. 

Making an offer 

Before making an offer, you should ask these questions to assess if the home is right for you:

• Why are you selling?
• How long has the house been on the market?
• What does the sale include?
• Have other offers been made?
• Have you found a new property?

It would help if you made your offer through the estate agent. First-time buyers may be asked to show their mortgage agreement in principle.

Exchanging contracts and completion

To begin the buying process, you will instruct your solicitor to start the legal work. They will agree on the terms of the sale, the purchase price, and the date of completion. The mortgage lender will likely ask you to insure the property as part of the process.

 Your solicitor will transfer the money to the seller. On completion day, you can pick up your keys, once the money arrives in the seller’s bank account.

Top tips for first-time buyers

• Start saving your deposit as soon as possible
• Work out your budget, including income and outgoings
• Get your paperwork ready, including identification, banks statements, and bills
• Don’t take out cash on a credit card
• Don’t make lots of credit applications in a short period
• Speak to a mortgage broker
• Research the area you want to live