Unless you have the full amount needed to buy the property then you will need a mortgage, and a lender will only lend you as much money as they deem you can afford.
Getting a mortgage
You will usually need a deposit before you will be granted a mortgage. The deposit will be a percentage of the property's price for which you are expected to put down upfront. The more money you have to put down as a deposit, the better the position you'll be in and the more mortgages you will have access to.
There are mortgages out there that do not require a deposit at all; however, a figure you'll hear a lot is ten per cent. This means that the mortgage lender would expect you to pay ten per cent of the property's value, whilst they contribute the remaining 90 per cent in the form of a mortgage.
Deposits explained
A deposit is paid upfront towards the full cost of a property. This guide will outline your options depending on how much money you have managed to save.
Mortgage tips
To get the best possible mortgage with the lowest interest rates, consider the following:
- save up for a bigger deposit
- pay off any debts you have (credit cards, payday loan, bills, overdraft, etc)
- avoid going overdrawn
- keep up with monthly payments on time
- sign up to the electoral roll
- settle in a job, lenders often look favourably on job security
- check your credit score (better credit scores can get better mortgages)
Remember, the more money you put down upfront, the less money you'll need to borrow and therefore payback with interest. Lenders also want to make sure you can afford to repay so they will look at your spending habits. Too many outgoings might worry a lender—make sure you’re repaying everything on time.
Notify your lender if you change jobs during the application process. Even if your salary increases, some lenders only offer mortgages to individuals who have held a position for so long.
Does a student loan affect your mortgage?
If you’re repaying a student loan, only the monthly repayments will affect the mortgage you can get—not the total 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.
This amount is usually small based on your annual wage and although it will affect your affordability from the bank’s perspective, it won’t affect it to any serious degree.
Setting the mortgage term
The mortgage term is how long it will take you to pay off your mortgage. A standard term is 25 years meaning if you took out a mortgage in 2020 you would have repaid your mortgage (plus interest) by 2045. The mortgage term will impact how much you pay each month. If you set a longer-term mortgage, your monthly payments will be lower as the repayments of the money borrowed will be thinned out over that longer period.
Whilst your monthly payments will be lower, overall you will end up paying more interest over the term than if you had a shorter-term mortgage. With shorter terms, you end up paying more each month but paying back all the money quickly and therefore with less interest. However, it's no good setting a shorter term if you cannot afford the higher monthly payments so find a balance to suit you.
Different mortgages types
Repayment mortgage
Also known as capital and interest mortgages, this is the most common type of mortgage. You pay back the amount you each month plus interest for the agreed timeframe. When that period is up, you will have paid off the money you owe.
Fixed-rate mortgage
A mortgage where the monthly repayments stay at the same rate of interest for the ’fixed’ period (usually two to five years). This means you can be confident in how much you will be spending per month for the fixed term and budget accordingly. After the fixed period, the interest rate changes to the lender’s Standard Variable Rate (SVR), which is likely to be higher than the rate you had.
Interest-only mortgage
This mortgage is harder to come by and is more common for buy to let investors. You only pay the interest accrued on the loan, not the loan itself. This means that your monthly payments are lower than that of 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.
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
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. This means some months you may pay more or less.
Tracker mortgage
Uses an interest rate external to that of your lender’s rate, usually the Bank of England’s interest rate. The interest will be made up of the base rate set by the Bank of England plus a fixed percentage set by your lender.
If your lender gives a fixed rate of two per cent interest and the Bank of England’s base rate is at one per cent, you will have a total of three per cent interest to pay back. Since the Bank of England’s base rate can rise and fall, this means your interest rate will increase or decrease too. This mortgage can last anywhere from two years to ten years, depending on the lender.
Capped rate mortgage
Limits/caps how much interest you can be charged on your monthly payments for an introductory period between two to five years. The interest rate can still go up or down based on your lender’s Standard Variable Rate (SVR) but—importantly—the payments will never go above a certain amount because of the limit/cap in place.
Offset mortgage
Enables you to pay less interest on the overall mortgage by having savings in a linked bank account (such as a savings account). 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 on interest payments in the long run. However, if you withdraw money from the linked 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's introductory deal 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 so; you can pay off the rest of your mortgage, for example by selling your home or remortgage because you've found a better deal.
Should I use a mortgage adviser?
Sometimes known as mortgage brokers, they are mortgage experts who are able to find mortgages most suitable for you. They often have access to deals that you won't have access to or be able to find by going directly to a lender. They will discuss your financial situation and which mortgage you should apply for. Some come with a fee but some are paid via 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.
What is remortgaging?
Remortgaging is a term used for when you find another mortgage for the same property, this can be with your current lender or a different one. When the introductory deal on your current mortgage ends and you go on to the Standard Variable Rate (SVR) mortgage, you may want to find a better deal with lower interest rates.
Remortgaging can be used to pay back more on your mortgage by shortening the agreed repayment time period. It can also be used to release equity on your home, this means you get money to pay another debt, renovate your property or even open a business.
Mortgage fees
Be aware of the fees you may be charged throughout the process as mortgage fees 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 get a mortgage with lower fees and higher interest percentages. It all depends on what you can afford and what you’re willing to pay. Paying more upfront may mean less to pay in the future and vice versa.
BOOKING FEE
Also known as an application/reservation fee, it's 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
For the lender to value the property independently and match the cost of the property to what they’re lending (approx. £250).
ADVISER/BROKER FEE
If you used a mortgage adviser, they will need to be paid for their work. Sometimes this can be through a commission from the lender so you don't need to pay them, others will require a part payment upfront and the remainder once the sale completes (approx. £500).
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