A mortgage is, quite simply, a loan granted by a lender – usually a bank or building society – for the purposes of buying property.
Most mortgages these days work on a repayment (or “capital and interest”) basis, which means you pay back the amount borrowed (the capital) plus interest on a monthly basis over an agreed repayment term. By the end of the term, the mortgage loan is fully repaid and you own the property outright. If you fall into arrears with your payments, the lender has the legal right to take possession of your home.
Some lenders offer interest-only mortgages. On this type of mortgage your monthly payment only covers the interest accruing on the debt, and the capital does not reduce over the term. Alongside the mortgage, you make regular payments into an investment plan which, at the end of the agreed term, will pay out a lump sum which is then used to pay off the total mortgage balance. Interest-only mortgages were very popular in the past, but are less common today.
Finding the best mortgage deal
There are dozens of mortgage lenders in the UK, including high-street banks and building societies and more specialised lenders who may only offer mortgages online or via mortgage brokers. There are also thousands of different mortgage deals on the market at any one time, and they can change daily. With so much choice, finding the right mortgage deal can be challenging. Most first time buyers use one of the following three methods to source the best deal:
Shop around – This method involves the most legwork, and may involve comparing mortgage deals directly by visiting high-street branches, phoning around or checking lenders’ websites. This approach may help you find the best rates on the high street, but you could be missing out on potentially better deals from less mainstream lenders.
Use price comparison sites – This is a good way to get a quick overview of some of the best deals on the market, including mortgages from smaller or more specialist lenders. However, be aware that some comparison sites make money by referring customers to affiliated lenders, so recommendations of a particular headline rate may not be as impartial as they first appear.
Deal with a mortgage broker – Mortgage brokers and independent financial advisers often have access to the widest range of mortgages from both mainstream and specialist lenders, and can provide impartial advice on the mortgage that best suits your needs, as well as dealing with the application on your behalf. Many lenders also have special broker-only mortgage deals that may be better than equivalent high-street rates.
Whichever route you choose, bear in mind that the best deal doesn’t necessarily always equal the lowest interest rate. For example, you should consider whether you are happy with a variable mortgage rate, or would prefer a fixed-rate mortgage. It’s also important to take into account other costs such as mortgage arrangement fees, which can vary significantly from one deal to the next. Remember to keep an eye out for special first time buyer mortgage deals, which often include incentives such as cashback or a free valuation.
Agreement in principle
Once you’ve selected a lender and the type of mortgage you want, your next step should be to get an agreement in principle. Different lenders may have their own name for this – such as a “decision in principle” or a “mortgage promise” – but it’s basically the same thing: a provisional agreement to lend a certain amount based on the information you provide – such as your employment details, salary, credit commitments etc. – and an initial credit check.
This isn’t the same as a full mortgage offer, which will involve further underwriting checks, employers’ references and so on. However, it provides a good indication of how much you are likely to be able to borrow, and having an agreement in principle can work to your advantage when negotiating an offer on a property; it shows the seller that you have already taken steps to arrange a mortgage and are serious about your commitment to buy.
Applying for a mortgage
It typically takes several weeks to process a mortgage application from beginning to end. You can help this along by being prepared. It’s always worthwhile getting a copy of your credit records beforehand so you know whether there is anything in your credit history that might affect your application – this could be something as innocent as a missed payment or dispute with your mobile phone company or a utility provider. You can obtain your credit records from any of the three UK credit reference agencies:
You should also gather together any other documentation that will be needed to support your mortgage application, such as bank account statements and payslips (typically for the most recent three months). It can help to obtain a direct address or named contact for your employer’s Human Resources department, to allow the lender to request or follow up on reference requests. If you are self-employed or a freelance worker, make sure you have up-to-date copies of your accounts, and be prepared to answer any questions about the sustainability of your income, particularly if your profits or income has varied from year to year.
The mortgage offer
Once your application has been approved, you will receive a formal mortgage offer, and a copy of the lender’s mortgage terms and conditions. Copies of these documents will also be sent to your conveyancing solicitor or licensed conveyancer, who will review them and can provide any further advice or guidance you require to understand your rights and obligations under the terms and conditions. Congratulations; between the deposit you’ve saved and your mortgage offer, you now have the funding in place to buy your first home.
Last reviewed May 2016.