How does a Mortgage Work
When you take out a mortgage, the property serves as collateral. This means that, in the worst-case scenario, if you're unable to repay the mortgage, the lender has the right to repossess the property and sell it to recover the outstanding debt.
Getting a Mortgage
When applying for a mortgage, you typically need a deposit. This deposit is a percentage of the property's price that you must pay upfront. The larger the deposit, the better your position will be, giving you access to more mortgage options. While some mortgages require no deposit, a common figure is 10%. This means you pay 10% of the property’s value, and the lender covers the remaining 90%.
Deposits Explained
A deposit is the initial amount you pay towards the full cost of a property. This guide will help you understand your options based on your savings.
Mortgage Tips
To secure the best mortgage with the lowest interest rates, consider these tips:
Save for a larger deposit.
- Pay off existing debts (credit cards, payday loans, bills, overdrafts, etc.).
- Avoid overdrawing your accounts.
- Make timely monthly payments.
- Register on the electoral roll.
- Maintain job stability, as lenders prefer steady employment.
- Check your credit score; higher scores often result in better mortgage offers.
- Remember, the more you pay upfront, the less you'll need to borrow and repay with interest. Lenders will also examine your spending habits, so minimise unnecessary outgoings and ensure all payments are timely.
Impact of Job Changes
Notify your lender if you change jobs during the application process. Even if your salary increases, some lenders prefer borrowers with longer job tenure.
Student Loans and Mortgages
If you're repaying a student loan, only the monthly repayments affect your mortgage eligibility—not the total debt. Since student loans don’t appear on credit checks, lenders will consider the monthly outflow, which is usually minimal relative to your income and won’t significantly impact your mortgage prospects.
Setting the Mortgage Term
The mortgage term is the duration over which you'll repay the loan. A standard term is 25 years, meaning a mortgage taken in 2020 would be fully repaid by 2045. The term length affects your monthly payments:
longer terms mean lower payments but higher total interest, while shorter terms mean higher monthly payments but lower overall interest. Choose a term that balances affordability with total interest paid.
Different Mortgage Types
Repayment Mortgage: You repay both the loan amount and interest monthly over the agreed term. By the end, you will have fully paid off the loan.
Fixed-Rate Mortgage: The interest rate remains constant for a fixed period (usually 2-5 years), allowing predictable monthly payments. After the fixed period, the rate switches to the lender’s Standard Variable Rate (SVR), which is typically higher.
Interest-Only Mortgage: Common among buy-to-let investors, you only pay the interest monthly, not the loan itself. At the end of the term, you must repay the full loan amount, often by selling the property.
Variable-Rate Mortgages: The interest rate can fluctuate based on various factors. These include:
Discount Mortgage: Offers a discount on the lender’s SVR for 2-3 years. Payments may vary as the SVR changes.
Tracker Mortgage: The interest rate is tied to an external rate, usually the Bank of England’s rate, plus a fixed percentage.
Capped Rate Mortgage: Limits how much the interest can rise over an introductory period (2-5 years). Payments won’t exceed a certain amount due to this cap.
Offset Mortgage: Links your savings to the mortgage, reducing the interest you pay. For example, £10,000 in savings against a £250,000 mortgage means you only pay interest on £240,000.
Standard Variable Rate (SVR) Mortgage: After the introductory deal, you switch to an SVR mortgage where the interest matches the lender’s SVR, which can change at their discretion. This type offers flexibility for moving or remortgaging without early repayment charges.
Should I Use a Mortgage Adviser?
Mortgage advisers, or brokers, can help you find the best mortgage deals. They have access to exclusive offers and can guide you through the process. While some advisers charge fees, others are paid via commission from lenders. Using an adviser can simplify the complex mortgage process.
What is Remortgaging?
Remortgaging involves switching to a new mortgage for the same property, either with your current lender or a new one. This can secure better interest rates or release equity for other financial needs, such as paying off debts, renovating, or starting a business.
Mortgage Fees
Be aware of potential fees during the mortgage process. While low-interest rates can be attractive, high fees might offset the savings. Assess what you can afford and consider the trade-off between upfront fees and long-term interest costs.
Booking Fee: Also known as an application or reservation fee, this secures a mortgage deal (approx. £100).
Arrangement Fee: Covers the lender’s administration costs, paid upfront or added to the mortgage (approx. £1,000).
Valuation Fee: For the lender to independently assess the property’s value (approx. £250).
Adviser/Broker Fee: Payment for the mortgage adviser’s services. Some are commission-based, while others charge a fee (approx. £500).
