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Helping you secure the best mortgage deal
Buying a property simply with your own capital is something that very few of us can do. The cost of a property is just too high for buyers to have access to that sort of money without bankrupting themselves.
This is where mortgages help home buyers complete that hefty, life-changing purchase.
Today we’re going to take a look at the different kinds of mortgages that are available in this extensive market to see which one is best for you, the costs involved in acquiring one, the pros and cons, and we’ll answer some important burning questions.
What is a mortgage?
A mortgage is a loan that is taken out to buy a property allowing you to put down a manageable deposit and have the rest of the property price covered by the mortgage amount.
How do mortgages work?
Firstly a borrower must meet the requirements set by their mortgage lender to be offered a mortgage, including an adequate credit score and a down payment.
The borrower will pay a deposit on their purchase, and the rest will be covered by the mortgage. The borrower will agree to pay the lender back with monthly payments covering both the principal cost of the loan and the interest. The property will be used as collateral against the loan.
How do mortgage deposits work?
A mortgage deposit is an upfront sum of money paid towards the value of your home. This is usually 5%, though a number closer to 20% would be recommended.
So if you choose to pay 5% out of your funds, this leaves 95% to be covered by an LTV (loan-to-value) mortgage.
So if you’re looking to buy a property for £200,000, with a 10% deposit, you would pay £20,000 upfront. The LTV mortgage loan would cover the remaining £180,000 of the property value.
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What type of mortgage do I need?
There are several types of mortgage loans available so you can select one that best suits your requirements.
First-time buyer mortgage
You qualify for being a first-time buyer if you have never owned a residential property domestically or abroad or have only owned commercial property with no living space.
As part of the application process, the lender will undertake a credit check, review your salary and other overheads like credit card debts.
The deposit of a first-time buyer loan is usually at least 10%; the higher the deposit, the less risk is caught up in owing more money in mortgage payments.
Buy-to-let mortgages are recommended for landlords who buy a property with the intent of renting it out.
These differ from residential mortgages in that they can run on an interest-only monthly payment option. This means the borrower would still need to repay the full capital debt once the interest has been repaid. This means low payments, but you will need to be willing to take out a new mortgage or repay it with savings at the end of the interest period.
This is when you switch your interest rate with your current lender or switch to a new lender altogether, usually to find lower interest rates or better terms.
As your current mortgage rate comes to an end, your interest rate will probably be put on your lender’s standard variable rate, which will be higher than your current rate. Remortgaging allows you to seek lower interest rates and protect yourself against rising interest rates.
Also known as a business mortgage, these are made with business owners in mind who want to buy land or real estate for commercial purposes.
Due to the higher variation in property and land size in comparison to a simple residential mortgage, a commercial mortgage is not usually a pre-set product but will adapt to the size of the collateral.
The terms can be as little as three years, and some can stretch up to twenty-five years with an average of fifteen years. The deposits are usually 30% of the property value but can vary depending on the risk of the business.
The different types of mortgages
Beyond the purposes of why you are seeking a mortgage, the interest rates, repayments, and terms from mortgage lenders have a large degree of variation.
This refers to a mortgage loan with a fixed interest rate for the duration of the loan that will be unaffected by my market conditions. This gives borrowers predictability throughout their loan agreement, making it a popular choice among borrowers.
The interest rate can be fixed for up to 15 years, though this is rare, and the longer the period lasts, the higher the interest rate is, as this protects the lender against unfavourable changes in the market.
Fixed-rate mortgages usually incur an up-front fee and entail early repayment charges.
At the end of your agreed mortgage period, your lender will change your interest rate to an SVR (standard variable interest rate) which is typically significantly more expensive than your previous interest rate, so it’s important to remortgage before you are transferred to the SVR.
Bad credit mortgage
Acquiring a loan with poor credit history can be difficult but not impossible. There is no set credit score that lenders use to approve a mortgage; instead, they will assess your credit performance on a case-by-case basis and assign their score.
A bad credit mortgage usually has fixed terms and higher monthly repayments with an LTV value of 75% or lower, meaning it can cover up to 75% of the property cost, so you will need at least 25% of the property’s value in cash.
These are a good option if you want to get on the property ladder sooner, but it may be worth improving your financial situation to have a wider selection of loans to choose from so you can get a better interest rate with more freedom of choice.
Moving house mortgage
When you move house, you can ‘port’ your mortgage over to your new property, which would be desirable if your current rate is agreeable, then you need to pay off your existing mortgage and then take out a second for the new property.
The benefit of a new mortgage, as opposed to porting it over, is that you may be able to get a more competitive deal if market interest rates have fallen. However, you will need to consider the cost of early repayment charges and other costs to end your current deal. This is worth factoring in when choosing which would be the most cost-effective.
Discounted variable-rate mortgages
A bank’s SVR is influenced by the Bank of England’s base rate but is not tied to it. At the end of your fixed-rate mortgage term, you will be put on the SVR.
The SVR can be expensive, sometimes twice as much as the interest rate in your original plan. A discounted variable mortgage will track the bank’s SVR and remain at a fixed discounted rate below the SVR for a set term.
For example, if the bank’s SVR is 5%, and your discount is 1%, your rate will be 4%. If the bank raises or lowers its SVR, your discount of 1% will match the updated rate.
This kind of mortgage can offer competitive interest rates if your bank lowers their rates in line with Bank Of England rates, and they often have lower early repayment fees than a fixed-rate mortgage.
Interest-only and repayment mortgage
With a repayment mortgage, your monthly repayment covers a chunk of the capital borrowed as well as the monthly interest. This means if you meet all monthly repayments, you will have paid off the entirety of your loan. The mortgage term of a repayment loan is generally around 25 years.
With interest-only mortgages, you will only repay the interest part of your loan during the loan term and pay off all of the capital at the end, which you will need to pay in one lump sum. They are generally only available for buy-to-let borrowers.
These are only advisable if you have a separate finance plan, referred to as a ‘repayment vehicle’, to cover the cost of the final payment once it comes around. This could be something like investments in stocks or rent garnered from leasing a property, otherwise, there is a risk involved if you have no security in paying off the loan once the term is complete.
Furthermore, as you’re only paying off the interest and not making a dent in the capital cost, there will be no reduction in payments as the capital owed remains the same up until the end of the agreement, at which time you’ll pay it off all at once.
Similar to an SVR loan, a tracker loan’s interest rate takes its lead from the Bank of England’s base rate. So when the BoE’s base rises by 1%, so too does your rate.
This also applies to decreases. The B0E’s Monetary Policy Committee convene eight times a year to vote on what the rate should be, meaning a high potential for variability in your interest rate.
Tracker mortgages often come with a collar, also known as a floor, meaning that in the event of a dramatic base rate fall, your rate will never go lower than the mortgage collar. Some trackers have the opposite, known as a cap, which means your rate will never go above the agreed limit. These tend to have higher initial rates due to the security afforded by the cap.
At the end of the tracker’s term, often around two years, your rate will revert to the lender’s SVR.
Standard variable rate mortgage
An SVR loan, also known as a reversion-rate mortgage, is similar to a tracker loan, except that instead of tracking the Bank of England rates, the bank sets its rate based loosely on the BoE rate.
Fixed, tracker, and discount agreements will transfer over to the SVR once the initial term is completed if you don’t remortgage. An SVR is typically much higher than a fixed rate; according to Moneyfacts, the average SVR was 4.9% in 2019, compared to a 2.52% average on fixed-rate mortgages.
With an offset mortgage, your savings account is linked to your mortgage, and the value of your savings is deducted from the total mortgage balance, lowering your monthly payments.
So if you have £50,000 in savings and a mortgage of £200,000, you’ll only pay interest on £150,000.
While you won’t earn interest on your savings anymore, you’ll find that while you usually pay more interest on your mortgage than you earn from savings, an offset mortgage can still help you save money in loan repayments.
You can still access the funds in your savings, but as they are depleted, the amount of money you used to offset the loan will reduce and drive your repayments up.
In the case of a guarantor mortgage, you will get someone else to use their home as collateral on your loan. They can also put a lump sum of their savings into a savings account held by your lender, which they will be unable to withdraw until you have paid off an agreed amount of your loan.
The guarantor generally needs to be a close family member, own their property, have a good credit record, and earn a high enough income to cover your repayments.
The guarantor will have no legal right to your property however, this is simply to finalise the loan. In some cases, the guarantor will be responsible for 100% of the mortgage; in others, mortgage lenders will make them responsible only for a percentage of the property value.
If you fail to make up your monthly repayments, the guarantor will step in to cover them. If they are unable to pay what’s owed, their home will be assumed as collateral.
Under a joint mortgage, you and your fellow mortgagor will be jointly responsible for meeting loan repayments. Married and unmarried couples can both get a mortgage together, as well as a friend, family member, or business partner.
This is a popular choice for parents helping their children get on the property ladder, and many lenders will accept a joint mortgage between a borrower and a parent.
A benefit of a joint mortgage is that with two borrowers, lenders will often advance you more money as they have two sets of incomes to offset against the mortgage.
Are there any government-backed mortgage schemes?
As an incentive to get people onto the property ladder, the government offers a range of schemes to make getting on the property ladder more feasible.
95% Mortgage scheme
This scheme aims to make homeownership more accessible by allowing buyers to purchase a home with a deposit of just 5%. This scheme extends up to properties costing £600,000, and participating lenders need to offer it as a fixed-rate mortgage with a 5-year term.
This scheme is especially helpful in the wake of Covid-19, when buyers may be experiencing lower income. It also offers a higher rate of approval as government assures lenders they will recoup some of the costs if payments are not made.
First Homes scheme
This policy provides the opportunity to buy a discounted home to first-time buyers in England. The 30% discount offered by this scheme on the average price of a new build can equate to a saving of £100,000.
New properties are built specifically to be sold at a discounted rate of at least 30%, though at the discretion of local councils, the cost can be reduced by 50% in expensive areas.
Help to Buy scheme
If you have 5% of the deposit needed for a home, the government will lend you an equity loan of up to 20% of the property value (40% in London). You will then need to get a mortgage to cover the remaining 75%.
Once you pay off your mortgage, sell your home or reach the end of the equity loan term (generally 25 years), you will need to repay the equity loan. This scheme is exclusively available for new builds and is only for first-time buyers.
With shared ownership, you will start out owning only a share of your property. You will pay rent on the share that you don’t own as well as cover mortgage repayments, the rent on the share you don’t own and monthly property service charges.
With this scheme, a buyer can make a purchase they wouldn’t be able to make in full by only purchasing as small a share as 10% of the property, plus the deposit you pay will reflect the share that you purchase, however, a larger share means a smaller mortgage overall.
There is a swathe of new properties being built up and down the country specifically catered for this modern, affordable way of getting on the property ladder.
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What are the pros and cons of a mortgage?
Provides an opportunity to own a home
Mortgages in all their many shapes and sizes all function to be able to get people on the property ladder who otherwise could not get there for many years, or maybe ever, on their funds.
Choice and flexibility
Everyone’s financial situation is different, and the mortgage market has adapted over the years to acknowledge this. The sheer range of mortgage deals ensures that there is flexibility and freedom to suit your restrictions and requirements.
Several Government schemes
Mortgages can allow access to the property ladder, but they come with financial constraints that can restrict potential buyers from taking them out. But with a range of government schemes designed to incentivise first-time buyers and previous buyers alike, the cost of getting a mortgage is made much more agreeable.
Repay more money than you borrowed
The upshot of being able to get on the property ladder ahead of your time is that you will end up paying mortgage lenders considerably more than you initially staked. When the term of your initial loan is complete, you will be placed on a standard variable interest rate which will incur dramatically more in interest than your initial agreement.
Fees and additional costs
Mortgage lenders can tie their loan terms up in a host of extra fees to make parting with the initial loan more financially beneficial to them. These include an arrangement or product fee, a mortgage booking fee, and a valuation fee.
Once you’ve acquired a loan, some agreements will also incur early repayment fees if you want to settle up your agreement ahead of schedule.
Your home may be repossessed if repayments aren’t met
The big one is that if you fall far behind in your payments, the mortgage lender can claim your home as collateral. This is only a last resort, and your lender is required to refer you to seek independent debt advice if you are struggling with your payments. Once your home is acquired, they are obliged to sell it on.
This is, of course, the biggest, most devastating fear of someone seeking a mortgage, so it’s paramount that you are in a comfortable enough position to ensure you can keep up with your payments throughout your agreed term.
What is a mortgage in principle?
A mortgage in principle is essentially a theoretical mortgage your lender estimates to show how much they think you can borrow. It costs nothing to receive one, and you are not tied to it.
The amount you receive on your actual mortgage may differ from the estimate depending on your financial situation, your deposit, and the lender’s criteria. They tend to last between 60-90 days and can be required by some show estate agents you are capable of purchasing.
What do I need to qualify for a mortgage?
Initially, you will need to make sure you have the finances to cover a mortgage. This includes deciding how much of a deposit you can afford to put down. Remember to keep in mind the various schemes that might help you during this phase.
Then you’ll have to figure out how much you can afford to borrow and pay back each month; mortgage calculators are designed to help with this.
How do I get a mortgage?
Your lender will need three months of bank statements, proof of income, and your passport as a minimum. They may also carry out a soft credit check. If your loan is approved, they will give you a mortgage in principle to show to sellers and agents that your ability to purchase is reliable.
How much does a mortgage cost?
A mortgage is tied up in a list of various administrative costs that are important to be aware of when appraising your ability to afford one.
Your interest rate is affected by the BoE’s base rate, currently at an all-time low of 0.1%, where it’s expected to stay until 2024, as well as the length of time you agree to borrow for. The shorter the period, the lower the rate; a two-year fixed plan averages at 2.4%, while five years is closer to 4%.
A mortgage generally incurs one and sometimes two fees.
The largest of the two is the arrangement fee; this can be paid upfront or added to the overall cost of the mortgage and covers administration costs. You can expect to pay between £1000-£2000 for this fee.
Next, the mortgage booking fee is used to reserve your loan and costs between £100-£200.
You can also be charged for a valuation survey, which costs an average of £300.
Early repayment charges
If you pay off your mortgage before your deal ends to move to another lender or to transfer to a new plan with your current lender, you may be charged an early repayment fee, which will be a percentage of the total amount you are borrowing on your plan.
Once you complete your mortgage and clear the balance completely, your lender may charge an exit fee administrative cost to cover the closing of the account; this can cost between £50-£300. Some lenders do not charge an exit fee at all.
Can I get a mortgage if I have a bad credit score?
Yes, though a poor credit rating will limit your options. Some high street banks will deny your mortgage application, while building societies can be more lenient if you have poor credit.
You may have to pay above-average interest rates and a larger deposit, and while a bad credit rating will not prohibit you from getting a mortgage completely, it may be worth improving your score to better your options.
How can I get the best mortgage deals?
The mortgage market is competitive, and lenders offer a range of options that make shopping around essential.
Consider the rate and fees
While differences in interest rates may only differ by a few decimal points, these points can add up to thousands of pounds in the long run.
Make sure the plan you choose offers the best interest rate for the term you plan on paying it back in.
Improve your credit rating
Establishing a series of consistent payments and responsible usage will show lenders you are a reliable borrower and can sweeten your deal.
Compare deals across the market
Comparing mortgages using mortgage comparison sites has never been easier and will allow you to see the differences in rates, terms, and fees so you can make a fully informed, wise decision.
Why compare mortgage quotes with Utility Saving Expert?
Using an expert independent price checker like Utility Saving Expert gives you a quick, unbiased appraisal of your options, from cheapest to most expensive, streamlining the difficult task of narrowing down your loan options.
As soon as you miss a monthly payment, you are technically in default, though most lenders wait up to 30 days to officially pursue.
In this situation, it’s important to open a dialogue with your lender and not ignore their solicitations. Chances are you will be able to work something out, plus it will keep you in good standing with your lender.
After you have defaulted for 120 days, your default can become a foreclosure, in which case your lender can claim your home and sell it to recoup the money lost from your mortgage debt.
Stamp duty land tax is a tax levied on residential property transactions. If you are a first-time buyer, you won’t pay stamp duty on properties up to £300,000, and you will receive a discounted rate on properties costing up to £500,000.
Stamp duty is 2% on properties costing £125,001-£250,000, and 5% on properties between £250,001-£350,000. That’s £2500 and £5000 respectively.
At the top end, a lender will usually offer you between 3 and 4.5 times more than your annual income.
Yes, being a foreigner does not prohibit you from getting a mortgage, though the process can be more time-consuming. The exact terms set will vary depending on the lender you choose.