A complete guide to mortgages
Mortgages are a big part of owning a home for the majority of homeowners, however they can be confusing and many people don’t really know how they work. In this guide we’ll take you through all the basics of mortgages to explain what they are, how they work and the different types available.
What is a mortgage?
A mortgage is a type of loan that is secured against your property which you can get from an authorised lender, such as your bank or building society. In the UK, you can get a mortgage on your own or take out a joint mortgage with one or more people. In order to get the loan, you must sign a legal agreement, also known as the mortgage contract.
The mortgage contract lists all the details of your loan, including how much money you can borrow from your lender, how long it will take for you to repay all of that money (your repayment period), and whether or not there are any special conditions like prepayment penalties if you choose to pay off your loan early. The amount you can borrow is usually based on the value of your property and how much money you / you and your partner earn as a combined household income.
How do mortgages work?
Once you’ve secured your mortgage, it’s then your job to pay back the amount you have borrowed, plus however much interest is required, in monthly instalments over a set period of time. The mortgage period can be short term, less than 20 years, or long term, more than 30 years, however the latter may depend on your age and how long you’re eligible to carry on working before retirement.
The mortgage is then secured against your property until it has been paid off in full.
How do mortgage deposits work?
A mortgage deposit is the amount of money you pay as a down payment on your home. It’s a percentage of the property value, and it helps you qualify for a mortgage loan. The more you can put down as a deposit, the less you’ll need to borrow as a mortgage and the better the mortgage rate you’ll be offered.
Mortgage deposits are usually calculated as a percentage of the property value: for example, 5% or 10%. So if you’re buying a house worth £250,000, your deposit will be £25,000 (10%), then your mortgage provider lends you the rest of the money, also known as the Loan-to-Value.
You could also choose to buy a house that costs more than this amount – in which case, your lender will ask for an additional deposit to make up the difference between what they consider affordable and what they think is available in order to fund your future repayments over time.
Where can you find a mortgage?
You have a few options when it comes to where you can obtain a mortgage. You should always start by checking with your bank or credit union, as they may be able to offer you the best rates and terms.
If that doesn’t work out for you, consider using a mortgage broker. Mortgage brokers act as intermediaries between borrowers and lenders, negotiating rates on behalf of clients who don’t have enough equity in their homes for banks to want to lend them money, therefore making up for what’s known as “credit risk.”
Mortgage brokers may also be able to help you find other types of mortgages that aren’t available through traditional banks, like “shared equity” or “self-directed” mortgages. If there’s any chance you’ll be selling your house before paying off your entire home loan balance, these kinds of loans allow borrowers more flexibility than traditional mortgages do, however they come with higher interest rates because they carry greater risks than conventional loans do.
What type of mortgage do I need?
There are a variety of different types of mortgages on offer depending on your circumstances, for example some are designed for first-time buyers, whilst others are for remortgaging purposes only.
If you’re a first-time buyer then you may still be able to afford to buy a new home with a small deposit, and there are specific mortgages and schemes available aimed at helping first-time buyers get their foot on the property ladder.
These include Help to Buy mortgages which includes help from the government and only a small deposit required, the Right to Buy scheme which lets you buy a council house at a discounted price, and guarantor mortgages which could help you buy a property with a small deposit if you have a friend or relative willing to be named on the mortgage and step in if you miss any repayments.
What other types of mortgages are there?
Some examples of other mortgages include:
Self-employed mortgages are for those who run their own business or have an income that is hard to prove to lenders.
Commercial mortgages let you buy property for your business or as an investment.
Mortgages for older borrowers – it’s still possible to get a mortgage even if you are over the maximum age specified by most lenders; here is how to find one.
Buy to let mortgages let you purchase a property you intend to rent out to someone else.
Second mortgages let you purchase a property other than your main residence, like holiday homes or investment properties
Lifetime and equity release mortgages give you cash in return for equity in your home, which is paid back when your home is sold
Commercial mortgages let you purchase property used by businesses.
What’s the difference between variable and fixed rate mortgages?
- Variable rate mortgages: These mortgages usually have lower initial interest rates, but the interest rate can go up or down over time roughly in line with the Bank of England base rate
- Fixed rate mortgages: These mortgages have set interest rates for a period of time, usually between one and five years.
In general if you’re planning on staying in your home for at least five years or longer, then it’s probably wise for you to choose a fixed rate. This is because over time and with inflation, this type of loan becomes more affordable than its variable counterpart.
You can also get an offset mortgage if you want to pay off your home loan sooner by combining it with a bank account that earns interest at a higher level than your current home loan. This means that when you pay off your home loan with an offset account, some money will still be left over from what’s been saved using this method (which we call “offsetting”). With regular savings accounts and term deposits, this wouldn’t happen because they offer higher returns than most standard home loans do; however, when combined together they make one big payment instead!
How much do mortgages cost?
The amount you have to pay each month and in total over the life of your mortgage depends on the deal you get, plus the cost of your property, and there are two parts to the cost of a mortgage: interest and mortgage fees.
The interest rate is how much you pay for borrowing money—in other words, it’s how much your lender is charging you to cover the costs of providing you with credit.
For example, if you took out a £200,000 mortgage with an interest of 4% over 25 years, you could pay interest of £116,702 and repay a total of £316,702.
The mortgage in the above example could cost around:
- £1,056 per month with an interest rate of 4%
- £1,289 per month at 5%
You can work out how much interest would cost on a mortgage for the amount you need. HSBC’s interest calculator shows the amount you would have to pay each month, the total interest amount and an illustration of how much of the balance you would pay off each year.
The mortgage fee, on the other hand, is a one-off payment that goes towards setting up your mortgage account. It covers things like administration work and arranging insurance policies.
What happens if you miss mortgage repayments?
If you are unable to make your mortgage repayments, it’s likely you’ll be charged a late payment fee by your lender, plus the missed payment(s) will be reported to the credit reference agencies which may have a negative effect on your credit score.
It’s vital that you speak to your lender if you’re worried about missing a payment or you already have done so, so they can try and work with you to find a solution. In the worst case scenario the lender may sell your mortgage to a third party in order to recover their money back from you (this is known as repossession). Usually this happens after several missed monthly payments but it’s best not to let it get that far if possible!
What are the steps to getting a mortgage?
- Find a lender
- Find out what your options are – you can use an online calculator as a quick and simple way to work out how much you may be able to borrow – Use our mortgage affordability calculator | MoneyHelper
- Get a mortgage broker to help you if needed
- Get pre-approved (if possible) and get a home loan application form from the lender
- Fill out the application form and send it back to the lender
Will you be accepted for a mortgage?
There’s a few different factors which lenders will take into account when deciding on whether you’re eligible for a mortgage and how much they are will to lend you, these include:
- The value of your property
- The amount of deposit you have
- Your age
- The length of the mortgage term
- Your credit record
- Your income
- If you are applying solely or jointly
So whether you’re a first-time buyer or looking to refinance, mortgages are an important part of the home-buying process. Knowing what you need before you start hunting for a mortgage will make things go much smoother. If you have any questions about loans or anything else related to buying a home, drop us a line Contact Us – YouConvey – The UK’s first collaborative conveyancing service (you-convey.co.uk)