Mortgages Guide

What is a Mortgage?

A mortgage is, simply put, a loan that you get to buy a property.  Most people don’t have the whole amount of the asking price in cash.  So they pay a deposit (usually at least 10% of the asking price) and then apply to a mortgage lender (like a bank or building society) for the rest.  The mortgage is “secured” on your property.  So if you don’t make the monthly payments, the lender will be able to repossess your property and sell it.  No one wants that so there are lots of regulatory rules around mortgages.  Sometimes it can seem that the system’s designed to stop you buying, but it’s intended to protect you.   

How does a mortgage work?

A mortgage is a large loan on your property, which you pay off on a monthly basis. The mortgage lender will work out an appropriate repayment amount each month, and this will include the interest that they’ll charge you on the loan.

Most mortgages have a repayment term of about 25 years (but you can get them for shorter or longer periods).  This means that the total amount of the mortgage, including the interest, is split over the years it will take to repay it, and that’s how much you pay every month.

The amount you borrow on a mortgage, as a percentage of the purchase price, is known as the Loan to Value (LTV).  And the lower the LTV, the larger the number of mortgage deals available.  

How much can I borrow on a mortgage?

Your mortgage offers will depend on a number of things, but namely:

1.     the size of your deposit

2.     your income

3.     and the price of the property

Lenders are, after all, taking a chance on you, and giving you a huge amount of money, so they need to trust you’re likely to pay it back.  As such they do mortgage “affordability” tests.

Please note:

Your home maybe repossessed if you do not keep up repayments on your mortgage.

Deposits

Whilst a minimum deposit is usually 10% (unless you’re using a Help to Buy scheme, or certain mortgages where 5% is accepted), having a deposit that’s a bigger percentage of your property price will put you in a better position. This is because the lenders will have to give you less, and it will be easier for you to pay it back.  It's also often the case that having a bigger deposit will give you access to better offers, saving you money.

Income

Mortgage lenders normally work to the x4.5 rule – they’ll only lend you 4.5 times your annual income.  You just need to keep it in mind when considering properties.  This can make it harder to buy on your own, compared to buying in a couple or with a family member/friend.  If you are buying with someone else, and your combined income is say £50,000 a year, you could apply for a mortgage of £225,000.  If you had a 10% deposit, that would be £22,500. So the properties you should consider buying would be priced around £247,500.

The people who consider your mortgage application are called Mortgage Underwriters.  They might examine the last 6 months of your accounts to assess whether they have any concerns.  So in the 6 months leading up make sure your accounts look nice and healthy, with no overdraft charges, wild big spends, etc.

Repayment vs Interest-only mortgages

There are two repayment methods available when you take out a mortgage:

1.     Repayment mortgage (AKA capital & interest mortgage)

This is where every monthly payment includes both capital (the property value) and the interest you owe, reducing the amount outstanding on the mortgage over time. Which means at the end of the term, you own the property and you’ve paid the interest off in full.

2.     Interest-only mortgage

An interest only mortgage is just that – you only pay the interest.  You don’t put any equity into your property, and at the end of the loan term you still don’t own the property and owe the lender the full amount.  (These are mainly only available for buy to let properties).  

At the moment, interest-only mortgages are quite rare, as most lenders just offer repayment mortgages.  

Mortgage types

Fixed 

The interest rate charged is fixed for a number of years, typically 2-5.  People like them because it feels safer knowing what your mortgage payment is going to be.  But after the fixed-rate deal expires, the interest rate charged will be the lender’s Standard Variable Rate (SVR).    

Variable

The interest rate is charged at the lender’s SVR and will change every time the lender changes its SVR.  This means your monthly mortgage payments will vary over time.  It will go up or down depending on what happens to the economy. 

Tracker

The interest rate charged tracks an independent interest rate, normally the Bank of England base rate, and changes in line with the changes to the tracked interest rate.

Discounted

A “discounted rate” mortgage is where the lender charges you a set amount less than their SVR for a period, usually 1 or 2 years.  After this time, the interest rate will revert to the lender’s SVR.  So you might be quoted “3% less than our SVR, which is 4.6%, for 2 years” – at 1.6% that would be a cheap mortgage at the beginning but it might go up a bit over the 2 years.

Capped

The interest rate charged is variable, but the rate is capped.  This sets a ceiling above which the interest rate can’t rise, however, it’s typically only for an introductory period.

Offset

The interest is typically variable and the mortgage is linked to a savings or investment account.  The balance on your savings/investment account reduces the outstanding balance on the mortgage and thereby reduces the monthly mortgage repayments. 

How to work out your mortgage 

Here's an example of a repayment mortgage:

If you are buying a property worth £200,000, you’ll likely need a deposit of at least £20,000.  So that means you’ll need a mortgage of £180,000.  If you had a deal with 2% interest, the interest would be £48,922.  So the total to repay would be £228,922.  And if your mortgage term is 25 years, the monthly repayment amount would be £763.  
 
(Mortgage calculations are pretty complicated, but roughly speaking, the interest is worked out based on the percentage on the remaining amount you owe each year for the full length of the mortgage).  You can use a mortgage calculator (like ours!) to work out how much your monthly repayments might be.  As interest is cumulative, paying more of it off sooner, often means you pay less interest.  If you can afford a higher monthly mortgage repayment, you’ll pay a lower total amount.

Going back to the above example, if you paid the £180,000 mortgage, plus 2% interest back over 15 years, rather than 25, you’d pay £1158 a month, but your total repayment would be £208,497.  That’s a saving of £20,385.  

It all comes down to what you can afford.  Even if you can’t afford a more expensive monthly amount, most lenders will allow you to overpay a certain amount without any charges (usually 1% of the total) over a year, so you can bring down your mortgage.

Where to get a mortgage

There are a wide variety of deals out there, in terms of interest and how long the mortgage will be fixed (which means you’d pay the same set amount each month), so you need to shop around for the best deal – we can help you with this.

Using a mortgage broker
We can act as your qualified mortgage broker - someone who considers all the different offers available on the market that would work best for you.  As specialists we tend to have access to better deals than what’s available to the public via things like price comparison websites.  Usually a mortgage broker is paid on commission from the lender that you choose to go with, but there may be a fee as well, so be sure to check.  (F+T work purely on commission, so there won’t be any fees). We’ll take you step by step through our costs and terms and conditions.  All the different types of mortgages can be difficult to understand, but we can give you clear guidance and peace of mind.

Apply directly with the lender

Applying directly with a lender is an option, but you’ll be limited to the range of mortgage products provided by the lender.

A mortgage in principle

Whether you are using a mortgage broker like us, or applying directly with a lender, it’s generally worth getting ‘a mortgage in principle’ (or mortgage in agreement).  A mortgage in principle is where a lender takes some information from you regarding your occupation, income and mortgage required, then confirms the amount they would lend on a mortgage, subject to the survey and final credit checks being approved.  You get one in advance of viewing properties.  It proves that a lender is willing to give you the mortgage, which shows the seller you’re serious about moving forward, and could actually afford to buy the property.  You’re not though obligated to get your mortgage with the lender who offered you the agreement in principle. 

How to apply for a mortgage

Applying for a mortgage should be pretty straightforward, but you will need some details and documents in preparation, such as:

• proof of name and address – a driver’s licence/passport, utility bill

• proof of income – your last 3 months payslips, a P60 from your employer, or SA302 tax return if you are self-employed or have income from more than one source.  And bank statements for the last 3-6 months will help with this

• proof of deposit – bank statement

We’ll go through the application with you, and will need information about the property, like what the sale price is, and some information about your outgoings.

We’ll have comprehensive conversations about the mortgage, answer any questions you might have, and make sure you’re clear on the total repayable amount, the rules about overpaying, and any charges or fees.

Once you’ve filled out the application, the lender will perform a credit check, review the information, and arrange a valuation of the property.  This is to make sure that the property you want to buy is worth the amount you are asking for.

Processing a mortgage application generally takes between 18-40 days, but can take longer. 

Mortgage charges and costs 

Arrangement fee

This set up fee varies depending on which mortgage product and lender you’ve chosen, but can be as much as £2,000.  You might be able to add this fee to the loan, but this will increase the amount you owe, and the interest you’ll pay on it.

On the other hand, some mortgages come with cashback deals, or waive the fee if you’re an existing banking customer.  You need to balance out the extra costs, with how much your mortgage is costing.  Some mortgage products have a low headline interest rate, but a high arrangement fee that disguises the true overall cost.  Say you’ve got a great deal on a fixed rate for 4 years, but the arrangement fee is £250, that could still be a better option than one with no fee, but a higher rate.  We can help you source a mortgage to suit your needs and keep you straight when it comes to monthly repayments, lenders fees, and the real total cost.  

Booking fee

This fee may be charged to secure the mortgage if there are limited funds available for a certain product.  It’s paid at the time of application and is usually non-refundable if the mortgage application is stopped for any reason.  It might form part of the arrangement fee and is normally around £200-£300.  

Mortgage admin fee

Some lenders charge an administration fee to open a new mortgage account, which is usually in the region of £100-£300.

Survey

A lender will require a survey of the property to be undertaken to confirm that the price being paid, matches the true value of the property.  A HomeBuyer Report is the typical survey requested by a lender and it will only highlight any issues that might affect the value of the property if not resolved.  The fee for this survey is normally £400-£500 but varies depending on the value of the property.  If you’re purchasing a property that needs repairing or upgrading, then you might need a more detailed survey.  A full structural survey could cost £1,000 or more.  It would reassure you that you fully understand the condition of the property, but you might have to pay for this as well as the HomeBuyer Report required by the lender.

Mortgage broker fee

If you use the services of a mortgage broker (like us!) you’ll probably be charged a fee for their services (which could be as much as £500) – but we don’t charge a fee.  See our Simple fee structure section.   

Legal fees

To buy a property you’ll need to use the services of a solicitor or conveyancer to complete the necessary legal work.  The cost of this, including local searches, could be between £1,000-£1,500.

Stamp Duty

Stamp Duty is the land tax owed on a property once the purchase is complete.  

Remortgaging

When your mortgage fixed rate term ends (normally around 1-5 years, depending on which mortgage product you chose) you’ll be placed on the Standard Variable Rate (SVR).  This is often more expensive, and your lender can change their SVR at any time.  But the good news is that you can remortgage at this point.  

Remortgaging just means you’re transferring your mortgage to a new deal.  Bear in mind lenders often benefit from people not wanting to go through the process of remortgaging and finding another deal every few years.  We can help you find the best remortgage deal for you.

This could be with the same mortgage lender, or a new one. If you are staying with the same lender, but just signing up to a new deal, you won’t need to pay for conveyancing.  (Conveyancing is essentially the legal transfer of a property from one owner to another, involving the title deeds).  

If you’re remortgaging with a new lender, you will need to pay solicitor fees.  The new lender will pay off the old lender, and you will have an agreement with them instead.  The mortgage on your property should be lower by now as you will have paid off a portion during your fixed rate term.  Make sure you know when your fixed rate ends so you can look for a good deal – we can keep you straight on this.  

What happens to my mortgage when I want to move?

When you sell your property, the remaining amount left on the mortgage is paid off by the sale, transferred to the mortgage lender, and then you have whatever’s left from the sale after it’s paid.

Ideally, if you’ve paid off a chunk of your mortgage and your property’s increased in value during the time you’ve lived there, you’ll have enough from the sale for a deposit on a new property.

But if you haven’t paid off much, and your property hasn’t increased in value, you might find yourself in negative equity.  This is when your property is worth less than you bought it for.  If that’s the case, you might still owe the mortgage lender after selling, or you might not have enough for a deposit on a new property.  You should reconsider whether you need to sell at that time, or whether you could make improvements to the property that could help increase its value.