Mortgages
A mortgage is a long term secured loan used to finance the purchase of a property. With over 10 million households in the UK currently holding a mortgage, it's one of the most significant financial commitments made across the UK.
The world of mortgages can be complex, with different mortgage types, repayment methods, eligibility criteria and interest rates to consider.
Let's take a look at the ins and outs of mortgages, the different types of available mortgages, how to choose one, the steps involved in the mortgage process, and how to keep your costs low.
Whether you're a first-time buyer or considering refinancing your current mortgage, we can help you make an informed decision about your mortgage.
Mortgages - Key Takeaways
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A mortgage is a loan to buy a property, most commonly used by people buying their own home
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A typical mortgage term is 25-30 years
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Mortgages have different repayment methods, interest options and terms to consider when comparing the products available
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Seeking professional mortgage advice is recommended to anyone looking to take out a mortgage to ensure they get the best possible mortgage for their personal circumstances
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Plan long term and investigate your options with overpayments and remortgaging at the end of a fixed mortgage term.
How Do Mortgages Work?
Mortgages are typically used for property purchases. They allow you to borrow a large sum of money from a lender and repay the loan over a long period of time.
Usually, mortgages have strict eligibility criteria, as the size of the loan and length of the mortgage terms present a certain level of risk to the lender.
To offset some of this risk, mortgages are secured against the property you are buying. This means that if you fail to keep up with your mortgage payments, the lender has the right to repossess the property.
When taking out a mortgage you will typically require anywhere from 5-25% of the property value as a deposit.
The higher the deposit you have the better interest rates and mortgage deals will usually be available to you.
Occasionally there are a limited amount of zero deposit mortgages (also known as 100% mortgages) available on the market, but these do come with stricter criteria and may have higher interest rates.
Seeking professional advice from a mortgage broker can provide valuable insights and guidance tailored to your specific circumstances. .
Mortgage Types
There are several types of mortgages available in the UK, each with their own features, benefits and factors to consider.
Understanding the differences between these mortgage types will help you find the right mortgage product for you, as well as finding the best mortgage deal.
Residential mortgage
A residential mortgage is a mortgage you’ll be using as your home or a place to visit. It’s important for lenders to know this before you apply because residential and buy to let mortgage eligibility is calculated differently.
If you’re applying for a residential mortgage, you’re telling a lender that you won’t be renting out your property, and you’l ltherefore be repaying your mortgage out of your own pocket.
Therefore, your affordability will be assessed based on your income and employment.
Buy to let mortgage
Buy to let mortgages are tailored to landlords looking to rent out their property. This type of mortgage has less emphasis on your earnings, and instead will put weight on the value of the property and how much rent you can charge your tenants.
Tracker Mortgage
Tracker mortgages (also known as Variable Rate Mortgages) have an interest rate that can change during the mortgage term, usually in line with the Bank of England's base rate or the lender's standard variable rate (SVR). This means that your monthly repayments may increase or decrease as interest rates fluctuate.
The advantage of a tracker mortgage is that when the Bank of England base rate is low, you may have very low mortgage interest rates, however these rates may spike if the Bank of England base rates increase during your term.
Fixed rate mortgage
A fixed-rate mortgage offers a set interest rate throughout your mortgage term which is usually between 2 - 5 years.
Your monthly repayments will remain constant during this fixed-rate period, making it easier to budget and plan your finances.
Interest rates for fixed-rate mortgages can start out higher than tracker mortgages, but it means your rates will stay the same throughout your mortgage term, granting you stability that you don’t have with a tracker mortgage.
If the Bank of England base rate is low when you arrange your mortgage terms, you could secure cheaper interest rates overall, as your rates will stay the same if the Bank of England base rates rise drastically.
However, if rates go down during your mortgage term, you may end up paying more overall than if you were using a tracker mortgage.
Offset mortgage
An offset mortgage links your mortgage to your savings account, effectively reducing the amount of interest you pay on your mortgage by offsetting the balance of your savings against the mortgage amount.
This can help you pay off your mortgage faster or reduce your monthly repayments if your savings or mortgage debt is large enough.
Interest-only mortgage
An interest-only mortgage is a type of home loan where the borrower is required to make monthly payments that cover only the interest accrued on the loan for a specified period.
Unlike a traditional mortgage where payments include both the principal (the amount borrowed) and the interest, the principal amount borrowed remains unchanged, and the balance of the loan remains the same.
These mortgages are usually repaid when the property or another asset is sold but can also be repaid fully using an inheritance or pension.
How to Choose the Right Mortgage
There are several factors to consider when choosing a mortgage, and understanding these factors will help you make an informed decision that best suits your needs and financial situation.
It’s advisable to seek advice from a mortgage broker when looking for a mortgage or to make any large financial commitments.
Factors to Consider When Choosing a Mortgage
Interest rates
Interest rates have a significant impact on the overall cost of your mortgage.Lower interest rates result in lower monthly repayments, while higher rates lead to higher repayments.
It's essential to compare the interest rates offered by different lenders and consider both fixed-rate and variable-rate options to determine which type of mortgage best suits your financial circumstances and risk tolerance.
For example, a lower interest rate may seem attractive but if it is a tracker rate mortgage this may result in dramatic increases in interest rates and monthly repayments if the Bank of England raises the interest rate.
Mortgage term
The mortgage term is the length of time you have to repay the loan. Longer mortgage terms result in lower monthly repayments but a higher overall cost due to the extended period of interest payments.
Shorter mortgage terms lead to higher monthly repayments but a lower overall cost. Consider your long-term financial goals and ability to meet monthly repayments when deciding on a suitable mortgage term.
Mortgage fees and charges
Mortgages often come with various fees and charges, such as arrangement fees, valuation fees, and early repayment charges.
These costs can impact your overall mortgage costs,so it's essential to factor them into your cost comparison process.
Compare the fees and charges associated with different mortgage products to ensure you're getting the best deal.
Flexibility
Some mortgages offer features that provide flexibility in managing your repayments, such as overpayments and payment holidays.
Consider whether these features are important to you and whether they're worth any additional costs that may be associated with them.
How to Get a Mortgage
It’s advisable to be as prepared as you can be before you apply for a mortgage.
From researching lenders and getting your finances in order to make sure you have the correct documents for your application, it’s important to have a clear idea of what will be needed from you in each step.
This helps ensure the application process is smooth on your end. Mortgage applications differ depending on your situation, the lender you’re applying with and what type of mortgage you’re applying for, but we’ll take you through some of the key stages of a standard mortgage application below.
If you're unsure how to approach researching lenders or you’d like access to the best deals on the market, an experienced mortgage broker can guide you through the process.
A mortgage broker can complete your application on your behalf, present it in the best light for the lender you have chosen, and use their industry knowledge to find the best deals for you.
Mortgage Application Steps
Preparing your finances
Before applying for a mortgage, it's essential to review your financial situation and ensure that you can afford the monthly repayments.
This includes assessing your income, expenses, debts, and credit rating, and improving where possible.
You can get a mortgage in principle which will give you an approximate idea of what a bank or building society would consider affordable for you.
The mortgage application
Once you've chosen a mortgage product from comparing the market or seeking advice from a professional mortgage advisor, you'll need to complete a mortgage application.
This typically involves providing personal and financial information, as well as details about the property you're purchasing. Be prepared to provide documentation to support your application, such as 3 months of payslips, bank statements, and proof of identity.
Mortgage valuation and survey
After submitting your application, the lender will conduct a mortgage valuation to determine the property's value and ensure it meets their requirements.
You may also choose to have a more detailed survey conducted, such as a homebuyer's report or a full structural survey, to identify any potential issues with the property prior to purchase.
Getting a mortgage offer
If your application is successful, the lender will issue a mortgage offer outlining the terms and conditions of the mortgage.
Review the offer carefully to make sure you are clear on the terms of the agreement before you accept.
Exchanging contracts and completing the purchase
Once you're satisfied with the mortgage offer and any other conditions have been met, you'll exchange contracts with the seller, making the purchase legally binding.
You'll then pay your deposit and arrange for the remaining funds to be transferred to the seller on the completion date, at which point you'll become the legal owner of the property.
Mortgage applications are assessed on affordability and your credit history, to improve your chances of being accepted you should:
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Improve or maintain your credit score, reduce outstanding debts, have a low credit utilisation score, ensure your details are up to date and don’t miss any payments
Managing Your Mortgage
Once you have your mortgage and have moved into your home, managing and optimising your mortgage can have an impact on your long term financial situation, reducing the overall cost or term of your mortgage.
The two main strategies for this are mortgage overpayments and remortgaging
Mortgage overpayments
A mortgage overpayment is paying more than your normal monthly repayment amount, either as a one-off payment or by increasing your regular payments.
Even small overpayments can help you reduce the outstanding balance on your mortgage, which can lead to significant savings on interest payments and potentially shorten your mortgage term.
Before making overpayments, it can be beneficial to:
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Check your mortgage agreement for any restrictions or penalties associated with overpayments. Some lenders may charge a fee or limit the amount you can overpay each year.
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Ensure you have sufficient emergency savings and are meeting other financial priorities, such as paying off high-interest debt or saving for retirement, before committing to overpayments.
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Consider whether you would benefit more from using the extra funds to invest or save in a higher interest savings account.
Remortgaging
Remortgaging involves switching your current mortgage to a new deal, either with your existing lender or a different one.
This can be an effective strategy for securing a lower interest rate, reducing your monthly repayments, or accessing additional funds for home improvements or other purposes.
Once your mortgage is coming up to the end of its current fixed term it is also advised to compare the options on the market, especially as you have built up equity in your home and may now be able to get a much cheaper deal than the standard variable rate your lender may transfer you to.
When considering remortgaging, it's important to:
It can be beneficial to consult with a mortgage advisor or financial planner to determine whether remortgaging is the best option for your circumstances.
Mortgage FAQs
What types of mortgages are available?
There are various types of mortgages, including fixed rate, variable rate, tracker, and offset mortgages. Each type has its own features, benefits, and drawbacks, so it's essential to research and compare options before making a decision.
How much deposit do I need for a mortgage?
The deposit amount depends on the property value and the mortgage lender's requirements. Generally, a larger deposit results in better mortgage rates and terms.
A minimum deposit of 5% is often required but aiming for a 10% to 20% deposit is recommended for better mortgage options.
How much can I borrow for a mortgage?
The amount you can borrow depends on your income, credit history, and financial circumstances.
The rule of thumb is that you can generally borrow 4.5x your income, but there are some cases where you can borrow more than this.
What is a mortgage term?
A mortgage term is the length of time over which you repay the mortgage. Common terms range from 15 to 30 years, with shorter terms resulting in higher monthly payments but lower overall interest costs, and longer terms leading to lower monthly payments but higher total interest costs.
What is a mortgage interest rate?
A mortgage interest rate is the cost of borrowing money, expressed as a percentage of the loan amount.
Interest rates can be fixed or variable and are influenced by factors such as the Bank of England base rate, loan to value, and your credit score.
What are mortgage fees?
Mortgage fees are charges associated with obtaining and managing a mortgage, including arrangement fees, valuation fees, legal fees, and early repayment charges.
It's essential to consider these fees when comparing mortgage options, as they can significantly impact the overall cost of your mortgage.