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Mortgages

A comprehensive guide on mortgages

What is a mortgage?

A mortgage is an agreement put in place with a lender (generally a bank or a building society) in which they agree to lend you a sum of money to cover a percentage of the property value or purchase price. The amount the lender will provide depends on the mortgage type and factors contributing to eligibility to repay the mortgage, such as income multiples (how much the borrowers earn), size of the deposit for the property and value of the property.

The size of the deposit in comparison to the value of the property is referred to as the loan-to-value (LTV).  The smaller the LTV, the greater the likelihood of you getting a better deal on the interest rate repayments. Most lenders offer a loan term of 25 years but that can be shorter or longer. Using a mortgage broker can help you get lower interest rates as well as favourable payment terms that are suited to your circumstances.

(Note: Buy-to-let mortgages will also look at rental yield % as a contributing factor).

The lender will pay out the mortgage in a lump sum to the seller of the property or previous mortgage lender. The individual(s)/ business that takes out the mortgage will then repay the lender on a monthly basis, based on a predetermined schedule. You can choose to repay a combination of the borrowed amount and the interest or the interest only. Each of these mortgage types has different pros and cons so it's important to speak to a qualified mortgage advisor about which is best for you.

Working with a mortgage broker

If you are considering taking out a mortgage, then speaking to an independent mortgage broker is essential. Mortgage brokers have access to a wide range of products to compare, will liaise with solicitors, conduct admin and support, offer advice on any additional bolt-on products you may consider when purchasing a property, such as life insurance or/and a will and can even help speed up the entire process.
Find out more

How does a mortgage work?

When you start to look to purchase a home, you might look to approach a mortgage broker or a lender directly to get a mortgage 'offer in principle'.

A mortgage in principle is a simple way to find out if you are eligible to borrow an amount you need to buy a property. The lender will check your credit rating, amongst other things, to decide your eligibility.

This gives you the ability to start putting in offers to property owners with a level of confidence that you will be accepted when you apply for the mortgage as the purchase goes through.


Further reading: Why use a mortgage broker?

Steps to taking out a mortgage

01
Fill in a web application

Fill in a web application

02
Speak to a mortgage broker

Speak to a mortgage broker

03
Find a mortgage product that works for you

Find a mortgage product that works for you

How much can I borrow?
When applying for a mortgage, the amount lent will be based on the amount required to buy the property and whether your financial circumstances, such as your income, are sufficient to cover the monthly payments. Typically, lenders will lend up to 4.5 times your annual salary

For instance: If Sarah wants to purchase a property worth £150,000 and has 10% deposit (£15,000), she needs to borrow £135,000. If she earns £30,000 per year, then she needs 4.5 times her annual salary to reach the £135,000

When picking a mortgage you have a few options available to you.

Types of mortgages

First-time buyer

A first-time buyer mortgage is a mortgage that is available to individuals who have never owned or had a property in their name in the UK or abroad, with the exception of business premises that have no living space attached to it.

Before looking for a mortgage, you have to save for a deposit that is at least 5% to 20% of the cost of your property. For example, if you want to buy a home that has an open market value of £200,000, you need to have an initial deposit of £10,000 if the requirement is set at 5%.

The main financial advantages of being a first-time buyer are that you have access to schemes that make getting on the ladder a little easier such as:

- Help-to-buy schemes
- Shared Ownership
- Right to buy/Right to acquire

Through help-to-buy schemes, you can deposit 5% of the purchased property price and enjoy the first five years with interest-free monthly payments on an equity amount between 20% and 40% which depends on where you live.

With shared ownership, you can buy a part/share of the property from the landlord. You can then take out a mortgage to pay for your share of the property and enjoy less rent on the share you don’t own. Furthermore, if you can afford it, later on, you can buy the remaining share of the property from the landlord by mortgaging it as well.

The government has two schemes in which tenants who have rented from the public sector can apply to buy and mortgage the properties they live in under Right to Buy and Right to Acquire schemes.

Remortgage

When you remortgage, you choose to move onto your lenders standard variable rate, move onto a new fixed-rate mortgage with the same lender or change lenders entirely. Usually, this is to save on interest repayments  but could be to consolidate any debts you may have accumulated, release equity from the property or because of a change in circumstances like marriage etc

Buy-to-Let

A buy-to-let mortgage is taken out with the agreement that the landlord (i.e. the person who buys the home and takes out the mortgage) will rent the property to a third party.  Lenders use different  criteria on a buy-to-let mortgage which are applied on a case-by-case basis, they may insist;

- You are already an owner of a home outright or with a mortgage
- You have a good credit rating
- Your yearly earning is more than £25,000
- Your age does not exceed the upper limit of the lender’s requirement

The deposit amount in buy-to-let mortgages varies between 20% to 40% of the property’s open market value and the interest rates are generally higher than other mortgage products. Most of the time, borrowers prefer taking out buy-to-let mortgages that are interest-only which means that they pay only the interest every month and pay the capital amount at the end of the loan term.

Mortgage broker or direct lender

Working with a mortgage broker or going with a direct lender is down to personal
preference.

A mortgage broker is a property specialist that connects you with the best lender out there. An independent mortgage broker (i.e. one that isn’t working for just 1 bank) will have whole-of-market access and can find the best deal available for you from multiple lenders. This means they will likely have access to a larger variety of mortgage products than if they just worked for one lender. They can also expedite the application process and can sometimes get you discounts on other fees such as valuation fees, surveyor fees, and conveyancing fees.

Note: You have to pay a broker fee for the services that can be adjusted to your monthly payments.

A direct lender is a financial institution that is involved in every step of the mortgage process that includes originating, processing, and funding the loans. A direct lender can be a bank, credit union, building society, or a mortgage company that solely deals in Mortgages Most of the time, people avoid approaching a lender directly as it robs them of the advantage of comparing multiple mortgage products and choosing the best one for themselves. Therefore, if you are going to a direct lender, it’s a good idea to speak to several lenders to make sure you are getting the best options available.

Variable Interest Mortgages

With a variable interest rate, the lender charges an interest rate that lasts as long as your mortgage term. You can experience an increase or decrease in the interest rate during your loan term. Most lenders rates are affected by the base rate set by the Bank of England.

 

Variable-rate deals are divided into four categories.

 

Tracker Mortgage Deals


Tracker interest rates track and operate above the base rate of the Bank of England. If the interest rate is falling and hits low levels, the tracker mortgage deal  could be the best deal you can get. However, if the interest rate is rising and you are paying an interest percentage rate that is a few points above the base rate, you can end up paying a lot more.

Tracker mortgages have a short life, usually 2 to 5 years. A few lenders offer tracker deals that last for your whole variable mortgage term or until you shift to another deal.

 

Standard Variable Rate Mortgage Deals


Standard variable rates (SVRs) can be 2 to 5 interest base points above the base rate of the Bank of England. Lenders have their own SVRs that can vary massively between lenders.

SVRs are often expensive and their average rates are way above other cheap deals available from lenders. As the lenders can move interest rates intentionally, it is riskier and that is why it is not the popular form of lending anymore.

 

Discount Rate Mortgage Deals


A discount rate deal is when a lender offers a discount on their standard variable rate for a certain period. You have to be careful as it is not a guarantee that your lender will move its SVR, and the discount associated with it down, if the Bank Of England’s base rate falls.

 

Capped Rate Mortgage Deals


With a capped rate mortgage deal, your lender cannot raise the interest rate above a certain level. Your interest rate will come down if the SVR comes down with the base rate of the Bank of England.

The lenders, however, usually set their cap quite high which allows them to change the interest rate and take it to the upper limit at any time. The interest rate in capped deals is usually higher than the SVRs and fixed interest rates.

Fixed interest mortgage

In a fixed-interest mortgage, the interest rate stays the same throughout the period that is advertised by the lender. Although it is a great option to have when interest rates increase, you won’t get any benefit if the interest rates fall.

Fixed-rate deals tend to have a lower interest rate than variable-rate mortgages to entice new customers or customers to switch from rival lenders . Once your fixed rate ends, you will be automatically moved onto the standard variable rate. You can, of course, remortgage at this point and start a new fixed-rate mortgage if it makes sense to do so.

Changing away from a fixed rate mortgage before the agreed term (i.e. 5 years) will likely cost you an ERC (early redemption charge) and so its important to get advice on which option is best for you from a qualified, independent mortgage advisor.

Length of the mortgage

A mortgage is likely going to be the biggest financial commitment that you will ever make. The length of your mortgage is dependent on the amount you borrow, how much you are willing to pay each month, and the time duration the lender is willing to lend for. The overall mortgage term is the length of the time you need to pay back the borrowed sum plus interest. Usually, 25 years is the standard length of a mortgage term. Any loan term longer than 25 years is considered an extended loan term. A few lenders offer extended mortgage terms that can be up to 40 years. If you are able to afford higher monthly payments, your lender can offer you a short term mortgage. Short-term mortgages cost more per month but you can own your home much sooner as you pay the balance off quicker and pay less in total as interest is charged over a shorter term. A longer-term mortgage costs less each month but you pay more overall as interest is charged over the long term. For example, paying off a £150,000 mortgage with an interest rate of 4% would cost:
Mortgage term Monthly payment Overall cost
25 years £791 £237,428
15 years £1,109 £199,662

Repayment Or interest-only?

A mortgage consists of two elements. The first one is the capital (i.e. the money you borrow) and the second is the interest charged by the lender on the amount you borrow. If you choose a repayment mortgage product, you pay back the capital and the interest together by making monthly repayments for an agreed loan term. As you keep up with the repayments, your mortgage balance gets smaller every passing month. With an interest-only mortgage, you only pay the interest due on the borrowed amount each month and pay back the capital at the end of the loan term. Although your monthly payments will be less, you still owe the original amount you borrowed at the end of the mortgage term. In this instance, it's common to have investment products running alongside your mortgage so that you have savings ready at the end of the mortgage term to repay the capital you borrowed Note: Your lender may be able to combine both options, dividing your mortgage loan between repayment and an interest-only mortgage. With both the repayment mortgage and an interest-only mortgage, you can be charged interest at a variable rate or a fixed rate.

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Please note:  Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up with repayments. clearkey.co.uk is an independent marketing website that acts as an introducer to FCA regulated companies. The guidance provided within this website is subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK. The content of the site is for information purposes only and does not constitute advice. Actual available rates will depend upon your circumstance. By filling out this form you agree to be contacted by an FCA regulated advisor who will help create a quote for you based on your criteria.