Money for a house

MORTGAGES GUIDE

When buying a property, in most cases you will need a mortgage to cover the overall costs. This guide explores everything you need to know about mortgages, including how to find a mortgage that works for you.

BE AWARE: If you fail to keep up with your mortgage repayments you may lose your home.

What is a mortgage?

A mortgage is a loan of money that is used to pay for a property. You then pay the loan back to whoever lent it to you over a certain period, with an amount of interest which is calculated based on the rate agreed with the lender. The amount you pay back will be slightly larger than the amount you borrowed because of the interest added to the loan. With a mortgage, the property you buy with the loan is considered collateral, which means if you can’t repay the loan, the lender can take your property and sell it to make back the money owed.

Do I need a mortgage?

Unless you have the full amount of money needed to buy a property, then yes, you will need a mortgage. Since property is so expensive, most of us will need a mortgage to cover the cost.

How much money do I need to get a mortgage?

Before you can get a mortgage, you will usually need a deposit. The deposit will be a percentage of the price of the property. You can see how much you need for certain mortgages with our Deposit guide, but the higher your deposit, the more mortgages you are likely to be accepted for.

How do I qualify for a mortgage?

To get the best possible mortgage with the lowest interest rates, consider doing the following:

  • Save up for a bigger deposit
  • Make sure any debts you have are paid off (credit card, pay day loan, bills, overdraft)
  • Don’t go into an unauthorised overdraft (spending more money in your bank account that you have, without agreeing on an overdraft with your bank)
  • Keep up with any monthly payments you currently owe
  • Sign up to the electoral roll
  • Check your credit score – better credit scores can get better mortgages

Lenders want to make sure you can afford to repay, which is why they look at your spending habits. Too many outgoings might worry a lender, so make sure you’re repaying everything on time.

What about student loans?

If you’re paying back a student loan, only the monthly repayments will affect the mortgage you can get, not the debt itself. Since student loans don’t appear on credit checks, the lender will only look at how much money is going out of your account each month to pay back a student loan. This amount is usually a small percentage based on your yearly wage; although it will affect your affordability from the bank’s perspective, it won’t affect it to a serious degree.

What are the different kinds of mortgages?

Repayment mortgage

Also known as capital and interest mortgages. This is the common type of mortgage, where you pay back the amount you owe, plus any interest, each month for the time agreed on the mortgage. When that time is up, you will have paid off all the money you owe.

Interest-only mortgage

For this mortgage, you only pay the interest made on the loan, not the loan itself. This means that your monthly payments are usually lower than a repayment mortgage. You will still have to pay the loan back in full once the mortgage term is over, usually by selling the property you bought. This mortgage is harder to get nowadays but is more common for buy to let investors.

Fixed-rate mortgage

A mortgage where the monthly repayments stay at the same rate of interest for the mortgages ’fixed’ period (usually two – five years). This means you can be confident in how much you will be spending per month for a few years, making budgeting easier. After the fixed period, the interest rate changes to the lender’s Standard Variable Rate (SVR), which tends to be higher than the fixed rate you had.

Variable rate mortgages

These are mortgages where the interest rate can go up or down depending on several factors. The following mortgages fall under this category:

Discount mortgage

A mortgage that applies a percentage discount to your lender’s Standard Variable Rate (SVR), usually for around two to three years. These initial payments will be cheaper, but the rate may rise and fall, as your lender can change their SVR, which means some months you may pay more or less.

Tracker mortgage

This type of mortgage uses an interest rate external to your lender’s, usually the Bank of England’s interest rate. The interest will be the base rate (aka the Bank of England’s rate) plus a fixed percentage decided by your lender.

If your lender gives a fixed percentage of 2% interest, and the Bank of England’s base rate is at 1%, you will have a total of 3% interest to pay back.

Since the Bank of England’s base rate can go up or down, this also means your interest can increase or decrease as well.

This mortgage can last anywhere from two years to 10 years, depending on who the lender is.

Capped rate mortgage

These last between two to five years and puts a limit, or cap, on how much interest you can be charged on your monthly payments. The interest rate can still go up or down based on your lender’s SVR, meaning you may end up paying more or less each month. But importantly, the payments will never go above a certain percentage or amount, because the cap will be in place.

Offset mortgage

This mortgage allows you to pay less interest on the mortgage overall, by having savings in a linked bank account, such as a savings account. Let’s say you have £10,000 in a separate bank account and a mortgage worth £250,000; with an offset mortgage those savings would mean you only pay interest on £240,000 of the mortgage. This kind of mortgage can mean you save more on interest payments in the long run, but if you take any money out of the savings account, you will have to pay interest based on the amount you took out.

If you took out £5000, you would have to pay interest on £245,000 of the mortgage.

Standard Variable Rate (SVR) mortgage

Once the mortgage deal you have ends, you are usually transferred onto an SVR mortgage. This means the interest on your repayments will match the SVR set by your lender. This can go up or down at your lender’s will, so you may pay more or less each month. The benefit of this mortgage is that it makes things easier if you want to move to a new house or remortgage. You usually don’t have to pay an early repayment charge to do either of these, so you can pay off the rest of your mortgage, e.g. by selling your home, or find a better mortgage deal.

Help To Buy mortgage

If you’re planning on using the Government’s Help To Buy Equity loan scheme, you’ll need a deposit of at least 5% on a new build home. The Government then adds 20% to your deposit, which goes towards your mortgage. Only certain lenders offer mortgages for this scheme, so make sure to do your research and find a Help To Buy agent.

Shared Ownership mortgage

For those who wish to buy a property through a Shared Ownership scheme, you will need a mortgage that covers the share of the property you are purchasing, not the entire cost of the property. The lender is usually a building society and you’ll only need at least a 5% deposit for the share of the property you’re buying.

Remortgage

Remortgaging is when you find another mortgage for the same property. When the deal on your current mortgage ends and you go on to the SVR mortgage, you may want to remortgage to find another, better deal with lower interest rates. Remortgaging can also be used to pay back more on your mortgage or to release equity on your home, which means you get money to pay back another debt, renovate your property or even open a business. You can remortgage with your current lender or a different one.

Should I use a mortgage adviser?

Sometimes known as mortgage brokers; mortgage advisers are individuals who are experts when it comes to mortgages and which will be most suitable to you. They sometimes have access to deals than you can’t find by going directly to a lender. They discuss your financial situation and which mortgage you should apply for. Some do have fees involved but some are paid via a commission from your chosen lender instead.

Since mortgages can be complicated, don’t feel put off about using a mortgage adviser. If you feel like you can’t do the research yourself or find the process too confusing, mortgage advisers can help every step of the way.

How much are mortgage fees?

Be aware of the fees you may be charged throughout the process of getting a mortgage.

  • Booking Fee – also known as application or reservation fee. A fee for securing a certain deal on a mortgage. Approx. £100.
  • Arrangement Fee – The admin costs for the lender setting up your mortgage. Paid either upfront or added to the mortgage (with interest). Approx. £1000.
  • Valuation Fee – Paid so that the lender can value the property separately and match the cost of the property to what they’re lending. Approx. £250.
  • Legal Fees – paid to your solicitor or conveyancer. Sometimes this cost can be covered by your lender. This fee pays for the work your conveyancer undertakes to sort the legal parts of buying the property and the paperwork. Approx. £1500.
  • Broker/Adviser fees – if you used a mortgage adviser, they will need to be paid for their work. Sometimes this can be through a commission instead of an upfront cost. Approx. £500.

Fees for a mortgage can seem unreasonable. If you feel like fees are too high, but the interest rates are low, you may find it a better alternative to find a mortgage with lower fees but higher interest rates. It all depends on what you can afford and what you’re willing to pay. Paying more upfront may mean less to pay in future and vice versa.

 

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