It’s completely normal to feel overwhelmed when it comes to mortgages. From APR to tracker, fixed rate and every other type of jargon, it’s not always the easiest thing to work out. Especially if you’ve never had significant debt before.
We’ll go through everything, from what a mortgage is, how you get one and what one might be best for you, along with links to our other guides so you can continue learning. Finding the right mortgage for you doesn’t have to be stressful!
What is a mortgage?
A mortgage is, simply put, a loan that you get in order to buy a property. For most people, they won’t have the whole amount for the asking price in cash. So they pay a deposit (usually at least 10% of the asking price) and then they apply to a mortgage lender (like a bank or building society) for the rest.
How does a mortgage work?
A mortgage is a large loan on your property that you will 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 charge you on the loan.
Most mortgages have a repayment term of around 25 years, but you can get them for shorter or longer periods of time. This means that the total amount of the mortgage, including the interest, has been split over the years it will take to repay it, and that’s how much you pay every month.
How to work out your mortgage
Here's an example using a repayment mortgage:
If you are buying a property worth £200,000,
you will likely need a deposit of £20,000.
That means you need a mortgage of £180,000.
If you had a deal with 2%
interest, the interest would be £48,922.
The total to repay would be £228,882.
If your mortgage term is 25 years,
the monthly repayment amount would be £763.
(Mortgage calculations are fairly complicated, but roughly, 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
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 would pay a lower total amount.
Going back to the above example, if you paid the £180,000 plus 2% interest back over 15 years instead of 25, you would pay £1158 a month, but your total repayment would be £208,497.
That’s a £20,385 saving.
It really 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 the year, so you can bring down your mortgage.
Repayment vs interest only mortgages
It’s rare to have an interest only mortgage at the moment, as more lenders focus on offering repayment mortgages.
Repayment mortgages ensure your monthly payment goes towards both the property value and the interest you owe. So at the end of the term, you own the property and you’ve paid the interest off in full.
An interest only mortgage is just that – you only pay the interest. This means 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. This is mainly only available for buy to let properties.
What mortgage can I afford?
Your mortgage offers will be dependent on a few factors: Mortgages are taking a chance on you – they’re giving you a huge amount of money and they have to trust that you are likely to pay it back. That’s why they do mortgage affordability tests.
Whilst 10% is usually the minimum for a deposit (unless you are using a Help to Buy scheme, or certain mortgages where 5% is accepted) having your deposit be 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.
Often having a bigger deposit will also open up better offers, saving you money.
Mortgage lenders tend to work by the 4.5 rule – they will only lend you 4.5 times your annual income. This can make it harder to buy on your own, compared to buying as a couple or with a friend/family member. This doesn’t make getting a mortgage impossible, you just have to use it as a guide when considering properties.
If you are buying with someone else, and your combined income is £50,000 a year, you can apply for a mortgage of £225,000. If you had a deposit of 10%, that would be £22,500. So the properties you consider buying should be priced around £247,500.
Mortgage underwriters (people who consider your mortgage application) may have a look at the last 6 months of your accounts to assess whether there are any concerns. Make sure your accounts look healthy, with no overdraft charges, wildly big spends etc.
For more tips, have a look at our first time buyer’s guide to mortgages
and have a look at our 5 things you didn’t know about getting a mortgage
which has tips on what to do before applying.
Where to get a mortgage
As a comparison site ourselves, we absolutely recommend shopping around for the best deal. You’ll find there’s quite a variation in terms of the interest, and how long the mortgage will be fixed for (this means you’ll pay the same set amount every month).
However, if you really like your bank or building society, they may offer a great deal to existing customers, so it’s worth asking them about their mortgages.
You could also consider using a mortgage broker – this is someone who will consider the different offers available on the market that would work best for you. As a specialist they may have access to better deals than those available to the public on comparison sites. 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.
If you find the different types of mortgages difficult to understand, a broker may offer peace of mind.
You could find out more from the Mortgage Advice Bureau
How to apply for a mortgage
Applying for a mortgage should be fairly straightforward, but you do need some details and documents in advance.
You’ll need to prove your identity, so a driver’s license/passport as well as a utility bill is good to take. You’ll also need to show your annual income, so a P60 from your employer, your last 3 months payslips and bank statements for the last 3-6 months will help with this. If you are self employed, you may need to bring your SA302 tax return.
You can confirm these details with the lender when you make an appointment, and they should tell you if you need to bring anything else.
The lender will go through the application with you, and they will probably need information about the property, what the sale price is and possibly some information about your outgoings.
Make sure to ask lots of questions about the mortgage, including the total repayable amount, the rules about overpaying and any charges or fees.
When you’ve filled out the application, the lenders will perform a credit check, review the information and arrange a valuation of the property. This is to ensure that the property you want to buy is worth the amount you are asking for.
In general processing a mortgage application can take between 18-40 days, but may take longer.
A mortgage in principle
A mortgage in principle, or mortgage in agreement is something you get 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 are not obligated to get your mortgage with the lender who offered you the agreement in principle.
Have a look at our article on what an agreement in principle is
Mortgage charges and costs
Considering the interest you’ll be paying on what is usually a rather large amount of money, you’d be forgiven for thinking that was the main cost. Unfortunately, many mortgages come with set up fees.
It’s worth having a look at these and factoring these costs in to your budget. Some give you the option to add the fee to your mortgage total amount, but that means you’ll be paying interest on it!
On the flip side, some mortgages come with cashback deals, or waive the fee if you’re an existing banking customer. Always balance out the extra costs with how much your mortgage is costing. If you’ve got a great deal on a fixed rate for 4 years, but the cost is £250 set up fee, that may still be a better option than one with no fee, but a higher rate.
What happens when the fixed rate ends
When your mortgage fixed rate term comes to an end (usually between 1-5 years, depending on which mortgage product you chose) you will be placed on SVR – the Standard Variable Rate. This is often more expensive and your lender can change their SVR at any time.
The good news is that you can remortgage at this point – lenders often benefit from people not wanting to go through the hassle of remortgaging and finding another deal every few years.
Remortgaging simply means you are transferring your mortgage to a new deal. This could be with the same lender, or a new one. If you are staying with the same mortgage lender but just signing up to a new deal, you will not need to pay for conveyancing.
If you are remortgaging with a new lender, you will need to pay solicitor fees. The new lender will pay off the old lender, and you now 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.
What happens to my mortgage when I want to move?
> If you’ve arranged a mortgage for 25 years, it doesn’t mean you have to stay in that property until it’s paid off. 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 is left from the sale after that is paid.
Ideally, if you have paid off a chunk of your mortgage and your property has increased in value during the time you’ve lived there, you will have enough from the sale for a deposit on a new property.
If you haven’t paid off much, and your property hasn’t increased in value, you may find yourself in negative equity
. This is when your property is worth less than you bought it for. If this is the case, you may still owe the mortgage lender after selling, or you may not have enough for a deposit on a new property. If this is the case, consider whether you need to sell at that time, or whether you can make improvements to the property that might help it increase in value.
Find the right mortgage for you is important - what deal you get will depend on your income, the price of the property and the size of your deposit. But there's no reason not to remortgage and keep on top of what you're paying off, to speed up your mortgage repayment and save yourself money. Don't just pick the first mortgage you find, and if you want more guidance, talk to a mortgage broker, who will find the best deal for you.
- How expensive the property is
- How big a deposit you have
- What your finances look like