Whether you’re thinking about buying your first home, moving to a different one, or entering into property investment, there’s a good chance that you’ll need a mortgage to do it.
According to 2022 figures from the Office For National Statistics (ONS), of the 24.7million dwellings in England, 64% are owner-occupied. And of those, 28% are owned with an outstanding mortgage. Here’s a guide on how mortgages work, and what you’ll need to do to get one.
What is a mortgage?
A mortgage is a loan taken out usually to buy a property, but it could also be land.
The loan is secured against the value of the property until it is paid off. This means the lender can repossess it if you fail to keep up with your contracted repayments.
Mortgage terms last a lot longer than other kinds of borrowing. The standard mortgage term is between 25 and 30 years, although it can be shorter or longer.
What types of mortgages are available?
There are plenty of different types of mortgages. Here’s an outline:
- Variable rate. The interest rate – and therefore how much you repay each month – fluctuates in line with the Bank of England Bank rate and/or the lender’s own central rate, known as the Standard Variable Rate or SVR (more on this below). You’ll benefit if your interest rate drops but you’ll need to pay more if it rises.
- Fixed rate. The interest rate is fixed for a set period of time, typically one to five years. Fixed rate deals make it easy to budget as you know exactly what you’ll pay each month. You’re also protected if interest rates rise.
- Standard Variable Rate (SVR). The bog-standard interest rate your lender will charge if your deal comes to an end and you don’t sign up to another one. SVRs costs vary between lenders but are expensive compared to remortgaging to a different deal.
- Tracker. These are a form of variable rate mortgage where your lender links the amount you pay to another interest rate, usually the Bank of England’s base rate. This offers some certainty around what you’ll pay but your monthly repayments can fluctuate.
- Discounted. Another variable rate mortgage, these guarantee that your interest rate will be a set amount below the lender’s SVR.
- Capped. These are also variable but a cap on the interest rate means you know your monthly repayments will never exceed a set amount.
- Offset. These link your savings pot/s to your mortgage, reducing the outstanding balance by the sum held in these accounts. Although you’ll stop earning interest on your savings, you can save by paying less interest on your mortgage debt.
Repayment and interest-only: what’s the difference?
Whichever type of mortgage you go for, you’ll need to decide whether you want a repayment or interest-only mortgage. With the exception of mortgages for buy-to-let, the majority of homeowners have repayment mortgages.
With these, you pay the interest on the outstanding debt each month alongside a proportion of the capital debt. As you chip away at the debt, the amount of interest you pay will reduce, and after a set number of years, the mortgage is cleared.
With an interest-only mortgage, you only pay the interest on the loan. This means your monthly mortgage payments will be lower than on a repayment mortgage but you’ll still have the debt to clear at the end of the term.
Lenders will want to see evidence of a repayment strategy, such as a savings or investment plan or a pension with any interest-only mortgage.
Some lenders will let you combine the two, so you clear some of the debt over the course of the mortgage.
Where do you get a mortgage from?
There are around 340 regulated mortgage lenders in the UK made up of banks, building societies and online lenders.
They offer their deals in branches, online and through intermediaries such as mortgage brokers and independent financial advisors (IFAs). Using a mortgage broker that searches all the major lenders and doesn’t charge the customer a fee, is a good place to start. More on this below.
Will I be offered a mortgage?
You will need a sufficient annual income, a deposit and a good credit score if you want to apply for a mortgage.
Before agreeing to lend you a penny, a mortgage lender will assess what you can afford to borrow. This used to be a simple matter of taking your annual income and multiplying it by anything from three to five (sometimes more) to get a maximum loan.
But since lending rules became stricter back in 2014 under what’s known as the Mortgage Market Review, banks now factor in all of your outgoings as well as your income before making a decision.
You can use an online affordability calculator to help you crunch the numbers. These give an indication (but not a guarantee) of how much a lender might offer you.
How much deposit do you need?
Your deposit will also affect the mortgage deal you are offered. At a very minimum, you’ll need at least 5% of the cost of the property you’re buying – £12,500 on a £250,000 home for example – but if you can afford to put down more, ideally 20% plus, you’ll unlock cheaper deals.
When you’re weighing up the size of your deposit, you’ll come across a snappy bit of jargon – the LTV. This stands for loan to value and is basically the amount you borrow as a percentage of the property’s value.
If you’re buying a property, LTV is a bit like the deposit in reverse. For instance, in the 5% deposit example above, the mortgage required would be £237,500 (£250,000 minus the £12,500 deposit). This would give you an LTV of 95% (£237,500 divided by £250,000 multiplied by 100).
And, just like deposits, size is important, with lower LTVs providing access to better mortgage deals. The very cheapest deals are available at LTVs of 60% or below.
Which lender is right for you?
Your choice of lender will usually come down to two factors: the deals it offers and its lending criteria. While the cheapest interest rate will always look attractive, make sure you look at the deal in the round, taking any upfront fees into account too. Often, the cheaper the rate the higher the fee.
The lender’s criteria will play an important part. If it’s particularly strict you may not qualify for the deal.
A good mortgage broker will be familiar with lenders’ criteria and will be able to navigate in the right direction for your circumstances.
How do you improve your chances of getting a mortgage?
Having a larger deposit will provide access to better deals but there are other ways to boost your chances of getting a mortgage.
For example, make sure all of your paperwork is gathered and up-to-date ahead of time. You’ll need evidence of your income (such as payslips and a P60), or three years of tax returns if you’re self-employed. You will also need the last three months’ bank statements, photo ID and proof of address.
Having this to hand will make the application process quicker and more efficient.
It’s also very worthwhile checking your credit score before starting an application as lenders will often factor this in. You can do this easily online at a credit reference agency such as Experian, Equifax or TransUnion.
Your score is affected by the way you have handled credit in the past, but mistakes can creep in and contacting the agency to get them fixed can improve your score.
Even just making sure you’re on the electoral roll at your home address can help.
Should I use a mortgage broker?
Using a mortgage broker gives you access to their expertise but often also to a broader range of lenders and mortgage deals.
A broker will assess which mortgages are right for you, based on your own circumstances and preferences, and find the best deals in terms of interest rate, fees and flexibility of payments.
Brokers also often consider factors that you may not be aware of but are important to your plans. If you are self-employed, or in unusual circumstances, a broker can be particularly helpful.
Check that the mortgage broker searches the vast majority of the mortgage market, rather than being tied to a specific panel of lenders. Some are also free for the customer to use, as their fee is earned solely from the lender for introducing your business.
What fees are payable?
You’ll face a variety of charges when you take out a mortgage including the lender’s arrangement fees, booking fees and valuation fees.
As a rule of thumb, the lower the interest rate, the higher the fees and vice-versa. All charges have to be declared upfront.
Some lenders will offer free valuations, legal services and cashback, especially if you are remortgaging from another lender. Check, though, as fees vary.
You can usually add any fees to your mortgage debt, although make sure it doesn’t affect any LTV-related deals. This also effectively means paying it off over the longer term of the mortgage.
Alongside lender fees, there’ll also be property-buying charges such as legal costs and stamp duty. There may also be a cost for using a mortgage broker.
There are other costs to consider too once your mortgage is up-and-running, so check your terms and conditions. Early repayment charges, which can be up to 5% of the outstanding loan, will kick in if you make a large overpayment or redeem (pay off) a mortgage during any tie-in period.
What if I can’t pay my mortgage?
Lenders do everything they can to check you’ll be able to afford the mortgage, but sometimes the unexpected happens and it gets difficult to keep up with your monthly repayments.
As your loan is secured against your home, it’s important to speak to your lender as soon as possible. It may be able to help you by reducing payments on a temporary basis or extending the mortgage term, which will result in lower monthly payments.
Insurance such as mortgage payment protection is available to cover you if you’re ill, had an accident or, in some cases, been made redundant.
If you don’t have this in place, it may be possible to get government or charity help, depending on your circumstances.
If these steps don’t address the problem, you may need to sell the property or, in extreme situations, your lender could take steps to repossess it.
What is remortgaging?
Remortgaging is when you switch from your current mortgage to another, usually better, deal. This might be because your current deal expired and you got dumped onto the SVR or it simply became uncompetitive.
Remortgaging is relatively easy to do and can save a significant amount of money. But it can take time, especially if you’re moving to another lender as it will want to run through all the same processes as when you first took out a mortgage.
You’ll also need to engage a solicitor to cover the legal paperwork. Also ensure that you’re not going to be hit with any early redemption charges. These can take the financial shine off of remortgaging and in many cases make it not worthwhile.
How do you find the best mortgage?
Your home is likely to be one of the most expensive purchases of your life so it’s important to get a good deal when you’re looking for a mortgage. You can make a start with our mortgage tables, below, by entering the right figures and preferences.
When it comes to the crunch though, you might prefer a good broker to do the legwork for you. You can then compare its findings with a comparison website to ensure you’re heading for the best deal.
