What is a mortgage?
A mortgage is a loan you get to buy a property. You provide a deposit out of your own savings, and the lender assesses your affordability based on how much you earn, what your credit history is like, and what your outgoings are.
When you’re approved, the money is paid to your seller, and you pay back a monthly amount over a number of years, which usually includes the interest.
Mortgage lenders are often banks and building societies, but they can simply be lenders who only work with mortgages.
What does LTV mean?
LTV stands for Loan To Value – it’s the percentage you often see by the side of the mortgage deal. A 90% LTV would mean you had a mortgage of 90% and you provided a deposit of 10%. The lower the LTV, the bigger your deposit and the less you’re borrowing.
As there is less risk for the lender, interest rates for lower LTVs tend to be better. There are also usually more options from a large variety of lenders.
When you get up to the 90% and even 95% LTVs, you may find the interest rates are higher and that there aren’t that many options.
How important is my deposit?
The LTV is why your deposit matters so much. Saving up a 20% deposit means that more options will be open to you. That said, if you’ve not got a huge deposit but you have a good income and you really want to get on the ladder, you could always take the deal and remortgage a few years down the line.
Different types of mortgages
There are different types of mortgages that you might want to consider depending on your situation. It is useful to do your research on the different types of mortgages and what might be best suited for you and the positives and negatives of each type.
The main types of mortgages are:
Fixed rate mortgages
A fixed rate is a set rate of interest that you’ll pay for a certain time. It’s a way of locking in a good deal, and knowing you’ll pay the same amount each month, regardless of changes with the lender. For example, you might find a great deal for 2% interest, so you might get it fixed rate for 2 years.
Usually the lower the interest, the lower the time you can lock it in for. The good thing is that you can remortgage when the fixed rate ends, and at that point you will have paid off more – so your LTV the next time around will be lower, and you can hopefully get an even better rate.
When your fixed rate ends, you are transferred to the SVR (Standard Variable Rate) of interest. This changes and is often not as good a deal as a fixed rate would be, so it’s usually worth remortgaging. You can do this by staying with your current lender or move to someone else for a better deal.
It’s also worth bearing in mind that if you lock in a fixed rate for a long time, maybe 5 years, the interest rate may drop, so you’ll be paying a higher amount than you’d need to, because you’re locked in to the 5 years.
It also isn’t a good idea to do a long-term fixed rate if you might want to move again within that time, as you’d have to pay a fee.
It’s worth comparing and looking at different interest rates, and seeing what offers are available to you, based on your income,
credit score, spending and deposit.
Variable rate mortgages
A variable rate mortgage means that your monthly payments can change over time depending on certain factors. These are split into two types: tracker mortgages and standard variable mortgages.
Tracker mortgages
A tracker mortgage will track the interest rate defined by the Bank of England and will rise and fall accordingly. There may be a limit on how low your interest rate can drop, but there’s usually no limit on how much it can rise.
Standard Variable Rate mortgage (SVR)
A SVR mortgage payment varies on the lender’s changes and can rise and fall each month.
This is usually the mortgage that you will be moved to after your fixed-rate, tracker, or discount mortgage comes to an end.
Interest only mortgages
Having an interest only mortgage means you are only paying off the interest of the money you have borrowed and not the mortgage itself. Therefore, you will need to pay off the mortgage in a lump sum at the end of your mortgage term or when you sell the property.
The main benefit of this type of mortgage is that you will have cheaper monthly payments as you are only paying off the interest. This can be useful to be able to afford a more expensive property until you are able to switch to a repayment mortgage.
However, as you are not paying off the loan each month you will need to find a way to pay off the mortgage in one go. This might mean you need a bigger deposit and a higher income to be approved for this type of mortgage. The overall interest you end up paying will also be more than a standard repayment mortgage.
Offset mortgages
An offset mortgage is a good option if you have a large amount of money in savings. The mortgage is linked to one of your savings accounts and the amount in that account is used to lower the total interest you pay on your mortgage each month.
You will not earn any interest on the savings that are being used to offset against the mortgage. You will usually still be able to access money in the savings account, but the less you have in the savings account the more interest you will have to pay that month.
For example, if you have a mortgage of £150,000 but you have £20,000 in your savings then you will only be paying interest on the amount of £130,000.
Discount mortgages
A discount mortgage is a mortgage that offers a discount form the Standard Variable Rate for a set amount of time. You will pay a reduced amount of interest for the set period and will switch to a SVR mortgage once this period is over.
Specialist mortgages
Some mortgage lenders may offer specialist mortgages or
incentives for First Time Buyers. These can include:
How do I choose?
Whilst you should definitely do your own research, it’s really worth
talking to a mortgage broker.
This is someone who is independent from any one lender but has access to a variety of deals and can tell you which offers might be best for you.
If you have a small deposit, you may want to get a fixed rate for two years and then remortgage for a better deal, when you’ve built up equity in your home. If you have a larger deposit, or if you’re buying a second home or Buy to Let property, there will be different options.
Speaking to a
professional mortgage broker, especially an independent one, will help you discover what options are out there for you, and which one will work best in your circumstances.
Choosing the right mortgage FAQs
How do you choose who to get a mortgage with?
Choosing who to get a mortgage with can depend on the type of mortgage you will need. Some mortgage lenders will not offer the type of mortgage you are looking for so this will narrow down your options. A mortgage broker can help you find the best deal.
It is important to research different mortgage lenders and compare mortgage rates and reviews.
How do you choose a mortgage broker?
Choosing a good mortgage broker is important as they will be helping you find a lender and your mortgage. Mortgage brokers may have access to deals that you cannot find by looking on your own.
To find the mortgage broker that is right for you read reviews, compare fees, check their availability, and always check the
FCA’s Financial Services Register to make sure they are properly qualified.
What is the most popular mortgage in the UK?
A fixed-rate mortgage is the most common type of mortgage in the UK and is especially popular with First Time Buyers.