What is a mortgage?
Asking what a mortgage is might seem a basic question, but it’s a question that’s worth asking. It’s not always easy to understand exactly what goes into a mortgage, especially if you have never applied for one before.
There are many different options and a range of lenders to choose from, which means there’s a lot of information out there to look through. We have put together some of the key facts about mortgages, to help you better understand what you are agreeing to before you apply.
Basically, a mortgage is a legal agreement made between yourself and a lender (most often a bank or building society).
You request to borrow a certain amount and if approved you will repay this money either in the form of monthly repayments (capital and repayment) or at the end of the agreed mortgage term (an interest only).
Capital and repayment mortgages:
- You repay both the loan and interest every month
- Can also be referred to as a ‘capital and interest’ mortgage
- You will own more value in the property as time goes on, as you repay more and more of the money you have borrowed
- Widely available from most lenders
Interest only mortgages:
- You repay only the interest every month, making your monthly payments lower than capital and repayment mortgages
- You repay the full amount borrowed at the end of your mortgage
- You will need an acceptable repayment plan in place to be approved by a lender
- A popular choice for landlords looking to keep costs low
Part interest or ‘part and part’ mortgages:
- You can have part of your term be capital and repayment, followed by interest only (or the other way around)
- Not as widely available and can be harder to find without expert advice
What is a mortgage term?
Lenders will often refer to a mortgage ‘term’ but you might not be 100% sure what this means. Simply put, the term is the length of time your mortgage is in place for (how long you have to repay the money borrowed).
Here we have some key facts:
- You can choose how long your term will be (though lenders generally will want your term to last at least 5 years at minimum).
- On average, the longest term you can get is 40 years. This would mean lower monthly repayments as you have longer to repay the loan amount, but you would pay far more in interest overall.
Types of mortgages
There are many different types of mortgages available, which gives you a lot of options when buying a home or remortgaging. The mortgages you can get will vary slightly, depending on the lender you choose.
Some of the main options are:
|A standard mortgage will be available with most lenders, allowing you to borrow the money needed to buy a property.
|A remortgage is when you switch to a new lender or a new deal with the same lender.
|Buy to Let mortgage
|Buy to let products are designed for people wanting to buy and rent out a property for profit. There will be slightly different lending rules applied to buy to let mortgages, including needing a larger deposit amount. There are also more specialised versions of these mortgages such as bridge to let mortgages.
|First time buyer mortgage
|Many lenders have mortgages specifically designed for people buying their first home. Sometimes you will be able to get benefits from this including being able to borrow with a lower deposit amount (5%).
|It can be harder to get a mortgage when self-employed, due to having income that is less predictable. Certain lenders will be better than others for lending to self-employed people.
|You can apply alone or with another person, which is known as a joint mortgage. Most mortgage lenders will allow joint applications with 2 people – some will even allow you to borrow as a group of 3 or 4!
|Shared ownership mortgage
|Shared ownership allows you to buy a percentage of a property and pay rent on the rest. This can be a good option for buyers with a more limited budget.
|Having a guarantor can help people who would struggle to get an application approved if they applied alone. Another person (often a parent or guardian) will support yourapplication, taking responsibility for the mortgage if you can’t pay at any point.
|New build mortgages
|New build mortgages are used to buy a recently built property. This will usually be for a property that has never been owned before and was built within the last year.
|Poor credit mortgages
|Some lenders are better than others for lending to people with a history of debt or poor credit.
Types of mortgage interest rate
After deciding on the type of mortgage you want the next important step is choosing the type of interest rate you want.
There are 4 main types to choose from which are:
Fixed rate – The amount of interest you pay every month will stay the same for a set amount of time (commonly 2, 5 or 10 years)
Variable rate – The amount of interest you pay every month can change (increase or decrease over time). Usually refers to the lender’s standard variable rate (SVR) of interest and so can be called a Standard Variable Rate mortgage.
Tracker rate – A type of variable rate. The amount of interest you pay every month can change (increase or decrease over time). This will follow any changes in the Bank of England’s base rate of interest. Can be called a tracker or tracker rate mortgage.
Where can I get a mortgage in the UK?
There are many different providers in the UK. This gives you a good range of options and each one will have their own pros and cons.
It is definitely worth comparing the available rates across several providers, to make sure you are getting the best possible deal.
Currently UK lenders include:
- Accord Mortgages
- BM Solutions
- Chorley Building Society
- Legal and General
- Newcastle Building Society
- And many more…
Are mortgages the same across different lenders?
You would assume that a buy to let mortgage for example would be the same no matter what lender you choose. This is not the case, and the terms and interest rates you could get can vary depending on the lender.
If you choose to go to your current bank, you may be able to access a better interest rate as you are an existing customer. This is not guaranteed though and not all banks and building societies will offer this type of deal.
Every lender will have slightly different rules and processes that will affect the rates available to you and how much you can borrow.
How much mortgage can I get?
A key question for anyone looking for a mortgage will be about how much they can borrow. Truthfully, this really depends on the lender you choose and if you get the right advice before you apply.
There are many factors that will affect how much a lender will allow you to borrow, such as:
- The amount of deposit (£s) you have saved (known as Loan to Value or LTV)
- The equity (amount of value) you hold in your current property (if you are remortgaging)
- The type of property you are buying
- Your annual income and occupation
- Your income vs how much you spend each month on bills etc
- Your credit history/score and any debts
Lenders will also use what is known as an income multiple when assessing your affordability and how much they are willing to let you borrow.
This simply means they will multiply your annual income by a set amount. How much they will multiply your income by will be affected by:
- How much you earn
- The type of mortgage you are applying for
- The lender you choose (some will offer higher multiples than others)
What is a remortgage?
The terms mortgage and remortgage often go hand in hand – but what is the difference?
A remortgage is when you already have a mortgage deal in place but choose to move to another lender (or take a different deal with the same lender).
This process can allow you to access additional funds using the equity (value) you have built up in your property over the years.
Remortgaging can be very useful and common reasons to remortgage include:
- Consolidating debts
- Funding home improvements or renovations
- Switching to a deal with a better interest rate
- Moving to a better deal with a new lender
- Changing the interest rate type (e.g. switching from a variable interest rate to a fixed interest rate)
RECOMMENDATION: There are pros and cons to think about when remortgaging your property. You should consider your options carefully and it can be good to get some advice from an expert before arranging a remortgage.
What is a good mortgage rate?
A mortgage rate refers to the interest rate charged on your mortgage repayments each month.
Each person’s idea of a ‘good’ rate is probably slightly different. It is likely though that most people will think the lower the rate the better.
This makes sense as a lower interest rate will mean less to pay each month. As of February 2023, the lowest possible interest rate is 3.99% with HSBC and Lloyd’s Bank.
Note: Interest rates change frequently so it is possible that other lenders will offer lower rates or that HSBC and Lloyd’s Bank will have increased their rates at the time of reading this article.
Do I need a mortgage broker?
Whether you use a broker is down to personal choice. If you are certain of what you want, you can apply directly with a lender if you would prefer this.
There are a few different ways you can apply:
- You can contact the lender and apply directly
- You can apply using an online mortgage broker
- By speaking to an independent broker for mortgage advice
You should choose the option that works best for you. In some circumstances, it can be fine to simply apply online but this can be confusing if you don’t know what you’re looking for. A broker can:
- Help you compare available rates to find the best deal
- Advise you about any possible issues in your application and help you to fix them
- Can sometimes get you exclusive rates due to having pre-existing relationships with lenders
- Can chase up estate agents, solicitors and more on your behalf