A Complete Guide to Mortgages

If you’re new to the property market then mortgages can feel a little overwhelming – there are so many lenders offering a huge range of products, it can be hard to know where to start.

In this guide we’ve got you covered, with all the mortgage basics you need to feel confident through the whole process.

What is a mortgage?

A mortgage is a type of loan specifically for buying property or land. It can be taken over a period of just a few years or up to 40, although 20-30 years is most common. A mortgage is usually paid back monthly with interest.

A mortgage differs from a personal loan in that it is legally secured against the property or land that you’re buying. If you fail to meet the repayments on your mortgage, your lender can claim ownership of your home and you could lose it. This is known as repossession.

How mortgages work

There are several elements to consider when you’re thinking about getting a mortgage. Each will impact how much your mortgage costs you overall, and different types of mortgage may be suitable for different people.

Deposit requirements

Most standard mortgages require you to have a minimum of 10% of the value of the property in cash as a deposit. This means that if, for example, you are buying a house worth £200,000, you will need to have £20,000 to qualify for a mortgage. This usually needs to be in the form of savings rather than additional borrowing.

Generally speaking, the more deposit you can put down the better, as having a larger deposit means you will be borrowing less and therefore paying less every month as well as overall. A larger deposit can also mean you qualify for better interest rates from lenders as they will see the loan as lower risk. In some circumstances you may be able to get a mortgage with just a 5% deposit, although this may involve a specialist scheme or lender.

Fixed versus variable rates

When you choose your mortgage, you’ll need to pick between a fixed or variable interest rate. A fixed rate is, as you might expect, fixed for a certain period of time, often two, three or five years, or sometimes even longer. The benefit of a fixed-rate mortgage is that it gives you certainty about your monthly repayments, and isn’t impacted by any changes in the Bank of England’s base rate.

A variable rate on the other hand can vary depending on the wider economic situation, and so can rise or fall along with general interest rates. A variable rate mortgage is less predictable than a fixed rate mortgage, but you can potentially benefit from interest rates falling, so if you expect them to be going down in the short to medium term, it might be a better option.

Repayment and interest only

The other choice to make is whether to opt for a repayment mortgage or an interest only mortgage. The cost of a mortgage is split into two main chunks – the repayment of the capital amount borrowed and the interest that the lender charges on the loan.

With a repayment mortgage, your monthly repayments cover an element of both, so that by the end of the mortgage term your loan will be paid off completely. With an interest only mortgage you only pay the interest every month, and at the end of the term have to repay the capital in full. Although this means you pay significantly less every month, it also means you pay more interest overall as the capital amount never reduces, so the interest is charged on the full amount for the duration of the loan.

Lenders and rates

There are a huge range of lenders offering mortgages, from high street banks offering mortgages alongside their other banking and finance products, through to specialist lenders who offer mortgages for particular circumstances or types of investment. Rates too will vary significantly depending on the type of mortgage, your deposit and your personal circumstances, including your income and credit history. The smart way to choose the right lender and get the best interest rates is to go through a mortgage broker.

Conveyancing and valuations

Before they will agree to a mortgage, a lender will want to be sure that your property is worth the amount you’re paying for it, so they will want to carry out a valuation. You will also need to appoint a solicitor who will handle all of the legal side of the process for you, known as conveyancing. This involves all of the legal paperwork, any queries from the seller, exchanging contracts, paying stamp duty and registering the property in your name with the Land Registry.

The length of the whole mortgage process can be unpredictable depending on things like the property type and how many people are involved in the chain, but on average it takes roughly six months from start to finish to buy a house.

How to get a mortgage: A three step process

Now that you understand the basics of mortgages, you’re probably wondering about the first steps for securing a mortgage. Should you go straight to your bank or is it better to shop around? How do you work out how much mortgage you can afford?

We’ve identified three key steps to help you start your mortgage application journey:

Find a mortgage broker

A mortgage broker is someone with extensive knowledge and experience of the mortgage market, who can help you find the best mortgage for you based on your personal circumstances.

Many people wrongly assume that a broker is only useful for large purchases or business investments, but a mortgage broker can save you time and money whatever your situation. A broker will also guide you through the process, helping you with all the paperwork requirements and letting you know exactly what you need to do when.

Work out what you can afford

The amount of money you can borrow will depend on several factors, including the amount of deposit you have saved and how much income you have coming in, as well as any other financial commitments you currently have, including things like car finance, credit card debt and personal loans.

Essentially a lender will want to be sure that you can afford your mortgage repayments, and so it’s important that you can demonstrate this. Your broker will be able to take you through some affordability calculations and help you get all of your paperwork in order. Being prepared at this stage can save a lot of time further down the line.

Check your credit file

One of the key factors that will affect your mortgage decision is whether or not you have any history of bad credit. Whilst bad credit doesn’t have to be a deal breaker when it comes to getting a mortgage, it can mean needing to shop around a bit more or paying slightly higher interest rates, at least for an initial period.

The best thing to do is to check your credit file and get a clear picture of exactly where you stand, so you’re aware of any potential issues before you make a mortgage application. You should also check your credit file for any errors so that these can be corrected in advance. If you’re worried about how your credit history might impact your mortgage then speak to a mortgage broker who specialises in bad credit mortgages.

Different types of mortgage

Alongside the mainstream mortgage market there are many lenders and products targeted at more niche borrowers, so even if you’re not sure you’re eligible for a mortgage, it’s worth speaking to a broker as there may well be a solution for you.

Some of the common specialist mortgages include:

• Mortgages designed for first-time buyers struggling to get on the property ladder. Options here include 5% deposit mortgages, guarantor mortgages and mortgages where the deposit is gifted from a close family member.
• Shared Ownership mortgages – these are specially for people purchasing property through the Shared Ownership scheme, where you start by just buying a percentage share in a property and paying rent on the rest.
• Buy-to-let mortgages – for investment properties where you intend to rent the property out to a third party rather than live in it yourself.
• Bad credit mortgages – if you have a history of bad credit and are worried about how this might affect your mortgage, there are specialist lenders who will consider applications from people with adverse credit.
• Remortgaging – this applies when you want to take out a new mortgage on a property with an existing mortgage, normally to replace the existing mortgage at a better rate or sometimes to increase the borrowing to cover refurbishments or renovations.
• Second home mortgage – if you already have a mortgage on a property that you live in for most of the time but want to buy a second home, you’ll need a second home mortgage. Lenders may be stricter here with affordability criteria and the rates they offer as you already have an existing mortgage commitment.
• Self-build mortgages – this is a specific type of mortgage for anyone who wants to build their own home from scratch and is often released in stages to pay initially for the land and then for each stage of the building work. This means you’re not paying interest on the whole amount from day one.
• Bridging loans – short term borrowing to cover a cash-flow gap. A bridging loan is often used to finance the purchase of another property while you’re waiting for a sale to go through on another.
• Expat mortgages – for anyone living overseas as their main residence and who wants to buy a property either in the country they now live in, or back in their country of origin. Expat mortgages are sometimes seen as higher risk than standard mortgages, although they effectively work in the same way.
• Commercial mortgages – if you want a mortgage for a business headquarters, you’ll need a commercial mortgage. This could include a mortgage for a hotel or restaurant premises or a mortgage for an office building.
• Charity or church mortgage – there are also specialist lenders who will consider loans for buildings from registered charities, community interest companies and churches. The key thing here will be proving affordability as many charities rely on donations, which makes income hard to predict.

As you can see, whatever your mortgage requirements, there will very likely be a lender who will be prepared to consider your application, it’s just a case of finding the right match.

Get matched with a specialist mortgage broker

Whatever your personal circumstances, whether you’re looking for a first time buyer mortgage or a mortgage for a charity, the brokers we work with can help. We undertake a thorough vetting process of all the advisors we work with, giving you the reassurance you need to know that you’re talking to someone with the right experience and expertise.

Give us a call now on 0808 189 0463 or make an enquiry and we’ll quickly assess your situation and set up a free, no-obligation chat with a broker who’s right for you.