What is a Mortgage?
A mortgage is a loan to buy property or land. You’ll need to pay back the amount you borrowed (the capital) plus interest.
You are unlikely to get a mortgage for the full value of the property you plan to buy. You will need to put down a cash deposit for at least 5% of the property’s value then take out a mortgage for the rest (e.g. 95% of the value).
Most mortgages have terms of 25 to 35 years, although this can be shorter or longer. Your mortgage will be secured against the value of your property until the whole sum of the loan is paid off.
This means that if you're unable to keep up with repayments, your mortgage provider could repossess the property. This is the worst case scenario, however.
You can get a mortgage from a lender such as:
- A bank
- A building society
- A specialist mortgage lender
You can take out a mortgage on your own or jointly with up to three other people.
A conveyancing solicitor will liaise with your mortgage provider to help with the legal aspects of buying a house. We’ve compiled this guide on everything you need to know about mortgages, from the different types of mortgage to how to apply for one.
What is Loan-to-Value?
Your loan-to-value (LTV) is how much of the property’s value you borrow as a mortgage.
For example, if you bought a property for £200,000 and put down a 10% (£20,000) deposit and borrowed £180,000 as a mortgage, your LTV would be 90% (as £180,000 is 90% of £200,000).
The lower your LTV, and the bigger your deposit, the more mortgage deals you’ll have access to and the cheaper they will be.
The best mortgage deals normally have a maximum LTV of 60%.
Lenders used to offer 100% mortgages but these deals are very rare at the moment.
What is Remortgaging?
Remortgaging is when you take out a new mortgage to pay off an existing one. Borrowers normally remortgage to benefit from a lower interest rate.
You might find that your LTV is different when you come to remortgage. This is because the value of your home might have changed.
Going back to the above example, if you remortgaged after five years you might find your property is now worth £250,000. If you took out a new £180,000 mortgage to pay off the existing one, it would be 72% of the property’s value. This could mean you are eligible for cheaper mortgage deals than before when your LTV was 90%.
Some people remortgage to release equity. In the above example, you could take out a £200,000 mortgage, pay off the £180,000 mortgage and have £20,000 in cash. Your LTV would be 80% (£200,000 is 80% of £250,000).
How to Apply for a Mortgage
You can either apply for a mortgage directly from a bank or building society, or via a mortgage broker or independent financial adviser. You should begin the application for a mortgage before you start looking for a house to avoid delaying the conveyancing process.
Mortgage from Bank or Building Society
Some banks offer their current account customers special mortgage deals. You should compare these mortgages against what is available elsewhere – they won’t necessarily be the best mortgage for you.
It’s important to understand that if you speak to a mortgage adviser at a bank or building society they will only advise you on mortgages offered by that particular lender, not other lenders’ mortgages.
The advantage of a mortgage broker, or independent financial adviser (IFA), is that they can compare the whole mortgage market for the best mortgage for you. They will offer impartial advice and provide you with a range of choices, whereas a bank can only offer you its own mortgage deals.
Although you might have to pay a mortgage broker a fee, using one can save you money in the long run. They also do a lot of the legwork in applying for a mortgage for you.
What Do You Need to Get a Mortgage
To prepare for a mortgage interview with a lender, you'll usually you'd need the following:
- Form of ID
- Proof of address
- Employment details
- Three to six months of bank statements
- Payslips as proof of salary
- Utility bills
What is a Tracker Mortgage?
A tracker mortgage usually tracks the Bank of England base interest rate. This is known as the “base rate” or “bank rate”.
Usually the Bank of England holds a meeting to decide the base rate every month. It sometimes holds extra meetings to change the base rate at other times.
A tracker mortgage will normally be the base rate plus a certain percentage. For example, it might be base rate plus 1%. So if the base rate is 0.5%, you’ll pay 1.5%. So if the base rate goes up to 0.7%, you’ll pay 1.7%. If it goes down to 0.2%, you’ll pay 1.2%. How much interest you are charged will affect how much you pay each month.
A key advantage of tracker mortgages is that you benefit from any fall in the base rate. But the downside is that your payments will go up if the base rate goes up.
Some tracker mortgages are “lifetime” trackers which last for the entire mortgage term. Others will be for two to five years, after which they will revert to the lender’s standard variable rate (SVR).
What is a Fixed Rate Mortgage?
A fixed rate mortgage has an interest rate fixed for a set amount of time. For example, you might fix at 2% for two years. Your interest rate, and therefore your monthly payment, won’t change in this timescale.
Fixed rate mortgages make it easy to budget as you know how much your mortgage payments will be. However, you won’t benefit from any falls in the base rate. This could leave you paying more than you would with another mortgage deal.
Be aware that once your fixed rate period ends, you will normally automatically be put on to the lender's Standard Variable Rate (SVR). This is often higher than you were paying on your fixed rate mortgage. In this case, you may want to consider remortgaging your house and look for a better mortgage deal.
What is a Standard Variable Rate Mortgage?
Each mortgage lender has its own standard variable rate (SVR). While a lender’s SVR often moves in line with the Bank of England base rate, the lender can increase or decrease the rate whenever it wants.
This means the amount of interest you pay on your mortgage, and therefore your payments, can change from month to month.
SVRs are normally at a higher interest rate than the best fixed rate deals. It’s normally advisable to remortgage if you’re paying your lender’s SVR.
What is an Offset Mortgage?
An offset mortgage allows you to “offset” savings held with the same lender, and not pay interest on that amount.
For example, if you had a £100,000 mortgage and £20,000 in savings, offsetting would mean you just pay interest on £80,000. This would mean lower monthly mortgage repayments.
However, you would not earn interest on your savings.
An offset mortgage saves you money by reducing the amount of capital you pay interest on. Some lenders also allow you to offset money in your current account.
What is a Mortgage in Principle
A mortgage in principle is your lender's word that it would, in theory, lend you a certain amount of money.
A mortgage in principle will help you look more serious as a buyer and will work in your favour when you're making an offer on a house.
It's important to remember that a mortgage in principle isn't a guarantee of how much a lender can offer you. Your application could still be declined. The mortgage in principle will usually last between 60 and 90 days.
The Advantages of a Mortgage
Allows You to Buy a House - A mortgage is the only way most people can afford to buy a house. Without a mortgage you’d need to have the full purchase price of the property in cash.
Cost Effective – With a mortgage, many people pay it back over 25 to 35 years with an instalment each month. By paying a small amount every month, it's a more a substantial amount of money that’s easily manageable.
You’ll Be a Homeowner – The main advantage of taking out a mortgage will be owning your home at the end of it.
More Beneficial than Renting – Although renting a house can sometimes be cheaper, with a mortgage, you’re paying money towards owning your home instead of straight to a landlord. It normally works out cheaper in the long run to buy instead of renting.
The Disadvantages of a Mortgage
Interest Rates – You’ll pay interest on the amount you borrow if you take out a mortgage. This means that over the course of the 25 to 35 years, you pay back a lot more than the original price of the house.
Decrease in Property Value – If house prices fall, your home could be worth less than you paid either during the mortgage term, or at the end of the mortgage term.
Debt – A mortgage loan is a substantial amount of money and will be the highest debt most people have to pay in their lifetimes. The added interest on top can make paying it back overwhelming.
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