Taking out a mortgage can be one of the most confusing elements of the home-buying process, yet most people will need one to buy a home. Go searching and you’ll find thousands of mortgage deals advertised, each with varying interest rates and conditions, so it can be difficult to know which one is right for you. Here, we cover the key things you need to know about mortgages to help you on your home ownership journey.
What is a mortgage?
A mortgage is a loan that you take out from a lender (usually a bank or building society) to buy a home or land. Unless you’re in a position to buy your home outright with cash, you’ll need to take out a mortgage. The mortgage is secured against the property until you’ve repaid it in full, meaning the lender can repossess your home if you don’t keep up your mortgage repayments.
How do mortgages work?
You repay the amount you’ve borrowed by making monthly repayments to the lender over a number of years, known as the ‘term’. Typically, the lower the interest rate is, the lower your monthly mortgage repayments will be.
Repayment vs interest-only mortgages – what’s the difference?
With repayment mortgages, your monthly repayments cover the amount you’ve borrowed plus interest. By the end of your mortgage term, provided you’ve made all your repayments, you will have repaid the amount you borrowed in full.
With interest-only mortgages, your monthly repayments only cover the interest charges. During your mortgage term, you don’t repay any of the loan initially borrowed. The idea is that you save enough money over the years to be able to repay the mortgage in full at the end of the term, for example, by selling another property or using cash savings. You may be able to switch from an interest-only mortgage to a repayment mortgage by remortgaging, either with your current lender or a new lender. If you choose to do this, it’s best to seek professional guidance from a mortgage adviser.
How much can I borrow as a mortgage?
Lenders have different rules and requirements when it comes to deciding how much they’ll lend you as a mortgage. The amount you can borrow is based on several different factors:
- How much you’ve saved as a deposit
- Your income
- Your budget for monthly repayments
- Your credit score
- The mortgage term
- The type of property you’re buying
- Whether you’re applying for a mortgage alone or with someone else
- Any affordable home ownership schemes you plan to use
What does LTV mean?
LTV or ‘loan-to-value’ is home-buying jargon for the size of the mortgage compared to the overall property value. It’s expressed as a percentage.
Here’s an example of LTV:
If you’re buying a home worth £300,000 with a 10% deposit of £30,000, you’ll need to get a 90% LTV mortgage to cover the rest. That’s a mortgage of £270,000. Whether you’ll be able to borrow this amount depends on the factors above.
LTV is measured in bands and mortgage interest rates generally decrease with each band you move down. The lower the interest rate, the lower your mortgage repayments will be.
Which type of mortgage is right for me?
With thousands of mortgage deals available, how do you know which one to choose? We recommend speaking to an experienced mortgage adviser who can help find the right mortgage for you. The main types of mortgage are:
- Fixed rate mortgages – The interest rate stays the same for the initial tie-in period of the deal. Because of this, your monthly mortgage repayment amount also stays the same for that period.
- Variable rate mortgages – The interest rate is set by the lender and can go up and down, as can your monthly repayment amounts.
- Buy to let mortgages – A specialist mortgage, designed for landlords buying a property with the intention of renting it out to tenants.
- Discount rate mortgages – Also known as ‘discount mortgages’, these mortgages have a variable interest rate. The interest rate is discounted, usually below the lender’s standard variable rate (SVR). The discounted rate can either apply for a fixed term or the lifetime of the mortgage.
- Tracker mortgages – A type of variable rate mortgage, with an interest rate linked to the Bank of England base rate or another base rate. The interest rate goes up and down as it ‘tracks’ this rate. You benefit from lower monthly repayments when the tracked rate is low, and risk higher monthly repayments when the tracked rate is high.
- Offset mortgages – An offset mortgage links your mortgage with your savings and sometimes your current account. Your credit balances are offset against your mortgage debt so you only pay interest on the difference, while also paying off the loan.
Where can I get a mortgage?
When you’re ready to apply for a mortgage, you have several options. You can either apply to a lender directly and choose from their range of mortgage products, or seek advice from a mortgage adviser or independent financial adviser, who can compare different options on the market. Either way, we always recommend seeking guidance from an experienced adviser who can help you find the right mortgage to suit your needs. With Moneybox Mortgage Advice, you can get free, impartial advice and access to over 90 lenders on the market.
Moneybox Mortgage Advice is provided by Moneybox Mortgages Ltd.
Your property may be repossessed if you do not keep up repayments on your mortgage.
With buy to let mortgages, there is no guarantee that it will be possible to arrange continuous letting of the property, nor that rental income will be sufficient to meet the cost of the mortgage.