What is a Mortgage?
A mortgage is a long-term property loan that you can repay in chunks every month. It’s a convenient option for many, because it allows borrowers to put money they would ordinarily be spending on rent towards building equity in their own property.
This article has everything you need to know about:
What is a Mortgage?
A mortgage is a secured loan provided with the property as collateral. It’s usually a large loan based on the condition that your provider may repossess the property if you can’t make repayments.
Security is important because it lowers the risk that the bank takes when lending a large amount to a borrower.
To add to this, mortgage agreements (and the subsequent loans) are built around the idea that you live in, or rent out, the property. This makes them more stable than other loans.
Mortgages can also be used to buy commercial property, which could be a warehouse, a factory, or a shop. Business profits are expected to contribute to repayments, which provides the same stability mentioned above.
Types Of Mortgages and Repayments
There are 3 main categories of mortgage: fixed-rate, variable-rate, and capped-rate mortgages. These describe the different ways that your mortgage repayments may change over time:
Fixed rate mortgages use a constant interest rate across a specific part of the loan period, typically 2-10 years. During this time, interest rates will not change on your loan.
Variable rate mortgages’ interest rates change across the loan period, based on the bank of England’s base rate. Your mortgage repayments will go up or down within a range your provider decides on. This can lead to higher or lower repayments than base rate.
Capped-rate mortgages are variable mortgages with a ‘cap’ on your repayments. This lets you access lower variable rates without worrying about excessively high rateslater down the line if the base rate rises.
Each type of mortgage comes with its own pros and cons, depending on your situation and lender. Fixed rates offer a more predictable experience, but you may pay above the market rate. Variable rates can be cheaper or more expensive, depending on what the market does.
For capped-rate mortgages, the fees make up the difference. This may be preferable depending on the deal you get – especially as fees will not compound, unlike interest.
How do I Get a Mortgage?
You get a mortgage by applying to a bank or other mortgage provider with an appropriate credit score, deposit, and proof of income.
Deposit: an upfront sum used as a form of assurance that you’ll pay. If not, they already have some money to cover costs.
Income: proof that you’re earning enough to reliably pay the mortgage fees, month to month. A longer record of income is usually better,and you can typically borrow 4.5 times your salary.
Credit: your credit score is a basic “trust” score that you get by repaying your debts. Lenders use it to decide if they want to loan you money.
Mortgages are usually determined on a case-by-case basis, depending on your income, assets, and the amount you intend to borrow.
Getting a mortgage is a serious commitment and comes with a lot of legal paperwork. Many People choose to hire a solicitor to handle the legal ‘small print’.
You can use a mortgage calculator to work out roughly how much you can afford to borrow based on your income and deposit amount.
Later, you can get a mortgage in principle – where the bank tells you what they’re willing to lend you – this is also used to demonstrate to a seller that you can afford to buy their property.
The more you can do to improve the bank’s trust in you, and reduce their risk, the better rates you’re likely to get on a mortgage:
Your Mortgage Application: A Step by Step Guide
This step by step outline can provide you with a ‘pathway’ through the complex world of mortgages – but it’s not a complete guide.
There are always smaller steps along the way, and it helps to have a mortgage advisor who can explain the process to you more clearly.
Establish how much you can borrow (usually 4.5 times your income)
Your provider reviews your credit score, deposit, and income suitability
Get a mortgage in principle (‘agreement in principle’, or AIP, lasting 1-3 months)
Find the right property for your budget
Prepare your deposit for transfer to your provider
Put in an offer with the seller to confirm
Hire a chartered surveyor to check the seller’s property
Official mortgage application and offer are confirmed with your provider
Exchange; pay your deposit and begin the process!
Exchange contracts and get your completion statement, confirming the sale
Sign the transfer deed to confirm the finalising of the sale
Your solicitor completes the fund transfer and pays the seller’s solicitor
Completion; you get the title deeds – you now own the property
This is a lengthy process and can take anywhere from 1-6 months. Proper communication is key. Using a trusted mortgage broker can speed things up, letting you get your property sooner.
How Much Do I Need to Earn for a Mortgage?
Your income is what you’re going to use to repay your first mortgage, so the bank takes it seriously.
They will typically lend around 4-5 times your annual salary for a mortgage. So, a household earning £50,000 per year can usually qualify for a £200-250,000 mortgage.
Providers also prefer a consistent and stable income source. Avoid moving jobs too much prior to getting a mortgage. Working in one position helps provide stability, though this isn't always necessary.
Some providers have alternative mortgages for the self-employed, for example.
Your provider’s main concern is knowing that you will keep paying your mortgage. A recent promotion is great, but it's arguably less stable than a slightly lower paying role for longer.
Get your mortgage during a position of job security with a good wage –it might not be the time to take side-steps in your career.
How Much Deposit Do I Need for a Mortgage?
You typically need 15-20% of the property value in cash for your deposit. However, each provider is different, and their policies change often – both depending on the market and their trust in you.
As a first time buyer, you could be eligible for a mortgage with a 5%, or even a 0% deposit from some lenders.
The deposit minimises risk for the bank and increases trust in your ability to pay. If you can raise the cash, they’re less likely to get stung if you can’t afford repayments. And lower risk cases will usually have a lower interest rate.
Consider offering as much deposit as possible to your mortgage provider because it could shorten the term of your mortgage,helping you save money in the long-term,or just qualify you for a lower interest rate.
Remember: you do not pay any interest on the deposit money you’ve already paid. This adds up over time! Paying 5% more deposit on a £200,000 mortgage could reduce your repayment time by 8-9 years and potentially save you thousands of pounds in total.
What Credit Score Do I Need for a Mortgage?
Banks use your credit score to calculate whether you’re a good “bet” for lending money or not. There is no specific score required for a mortgage, but a higher score gets a better deal.
The same ideas discussed apply here: the more the bank trusts you, the more they’ll give you. Higher credit scores show you’re trustworthy with debt and will honour your payments.
For that reason, a higher credit score makes banks happier with a higher ratio of loan to income. It also helps you negotiate a lower deposit if you need to.
How does a mortgage work?
A mortgage works as a legal contract between yourself and the provider to set conditions on a large loan. This is secured against the property, to ensure that you can’t just run off with the bank’s money.
Mortgages are generally the largest amount most people can borrow. This is because the purchased property is collateral. You pay into the equity of the house and slowly remove the provider’s interest, until you’re the only person with any interest in the property.
How long do you have to work to get a mortgage?
You usually need a few years of consistent employment, ideally in a single and well-paying role. However, some mortgage providers account for other working situations. The self-employed and newly promoted may be able to seek different terms from a provider.
The vast majority of the best mortgage rates and deals come from a reliable, stable income. Again, this reduces the risk a provider is taking by lending to you.
Just like before, this is the best way to get better deals. Focus on building your deposit and income history, and you get a better deal.
It may feel difficult building your deposit and credit while paying rent. However, the long-term benefits of a stronger starting position pay you back over time.
Does the bank own your house in a mortgage?
No – your bank does not own your house in a mortgage unless you miss payments. The whole point of a mortgage is the agreement that the bank only repossesses the property if you don’t keep up with repayments.
The bank has a contract with you to repossess your property, but it does not own the property. It basically says that it is the ‘inheritor’ of your property when you fail to meet your obligations.
Think of a mortgage as a series of conditions around the loan you’re getting from your provider. The banks own an interest in your property, not the property itself.
How long does it take to pay off your mortgage?
Most mortgages are 30-year contracts, when paying the minimum monthly payment. Paying more, regularly, will reduce the amount you pay in total and the length of the mortgage.
Keep in mind that some mortgage contracts come with early repayment, or over repayment charges, that fine you for paying back too much too quickly.
This covers them for the interest they'd miss out on by repaying early.
Paying off a mortgage – just like getting a mortgage deal – changes depending on what you give and get. Providers reduce their risk when you pay them back sooner. This frees up your future money while also saving you on your total repayment.
Why use a mortgage broker?
A mortgage is a huge financial commitment and it can be hard to know where to start. A mortgage broker can guide you through your mortgage application and advise you on the best options for your circumstances.
Fair Mortgages offers mortgage clarity by comparing offers on the market in plain terms. If you're already planning to buy a property or you're just looking around, we can get you a quote.