We all know that buying a home is one of the most important things you’ll ever do. And finding the right mortgage to buy your dream home is a big decision too.
When you’re looking for a mortgage, it can feel like you have an endless number of options. We know how important it is to understand your options and get the right mortgage and most suitable deal.
That’s why we’ve put together some resources on this page to help you understand, in black and white, the options available to you.
We’re here to help you make informed decisions about your finances and make sure that you have all the information you need when the time comes to get a mortgage.
What is a mortgage and how do they work?
A mortgage is a loan that allows you to buy property. It’s a legal agreement between you and the lender (which is usually a bank or building society) that sets out how much money you borrow, what it will be used for, and how often you will repay it.
In order to secure a mortgage, the lender will need to know:
- Full details of your current financial situation
- Employment details
- Credit history
- Any savings and assets you have
- Any existing mortgage details
- Any outstanding debts you might already have
- Your current outgoings
The lender will want to see that you have an initial deposit of around 5-10% of the property’s price before they will approve your mortgage application, which means you must have saved this amount in order to secure your loan.
A mortgage is secured against the property that you want to buy. That means if you don’t pay your mortgage, the lender can take back the house.
A mortgage typically lasts for 25 years – although they can range from six months to 40 years depending on your situation. The longer the length of your mortgage, the more interest you will pay over time and if you have a shorter term then you will need to pay more in monthly instalments.
How much you pay back on a monthly basis will depend on:
- The total amount borrowed
- The agreed interest rate
- The type of mortgage taken out
- The term length agreed to
Speaking to a mortgage broker can be useful in discovering unseen deals and rates. A mortgage broker will help you identify the right mortgage products for your needs and make sure that you’re getting the most competitive rates.
Your guide to the different types of mortgages for UK homebuyers
The UK mortgage market is a complex system with many different options. It’s therefore important to understand what kind of mortgage you’re applying for and what it means, so that you can make the best choice for your future.
You may know what type of mortgage you want, but it can be hard to figure out what you qualify for and which one you are most likely to be accepted for. It’s recommended that you explore all of your options, speak to advisors and look beyond the general choices put forth by your bank.
For example, some mortgages have lower interest rates than others, but have more high-cost fees. There are also different repayment methods that can affect the total cost of your mortgage over time.
Finding the right mortgage isn’t just about finding the lowest rate; it’s about finding the one that suits your financial situation.
Fixed rate mortgages
Fixed rate mortgages are probably the most common type of mortgage in the UK right now, they are particularly favoured by first-time buyers.
With a fixed rate mortgage, your interest rate stays the same over the course of your loan term (typically between 10 and 25 years). The length of your loan term will also determine how much money you pay each month as well as how much interest will accrue on your loan balance over time.
Fixed rate mortgages may be deal for borrowers who don’t want to worry about their monthly payments fluctuating over time – they’ll know exactly how much they’ll pay every month without having to worry about inflation or other factors affecting interest rates down the road. However, fixed rate mortgages typically come with higher interest rates than variable rates.
- Budgeting: A fixed-rate mortgage allows you to plan and budget your monthly finances without risk of changes. During the introductory rate period, the interest rates won’t change, so your repayments won’t change, even if rates increase. Your monthly budgeting will be greatly benefited by this.
- Low interest rates: Mortgages with fixed rates can be more affordable if interest rates at the time of taking out the mortgage are low. Fixed mortgages usually have a two- or five-year term, but you can get longer terms that lock in the interest rate for a decade or more.
- Lose out on interest rate drops: If rates go down after you get a fixed rate mortgage, then you won’t be able to take advantage of those lower rates unless you refinance into a new loan at that time – which could cost money in closing costs and possibly add fees onto your balance as well.
- Early repayment charges: If you want to exit a fixed deal before the end of the term, you’ll usually have to pay an early repayment charge. This can be anything from 1% to 5% of the outstanding balance on your loan, depending on how long you’ve been in your mortgage and how much time is left on it. If you plan to move home after a short period of time, it’s worth considering opting for a fixed term of no more than 5 years.
Tracker mortgages are types of variable rate mortgages that track a base rate – typically the Bank of England base rate. You might see your mortgage repayments (including your interest payment) change every month if you get a tracker mortgage. Suppose the base rate is 0.5%, and you are paying that plus 3% for a rate of 3.5%. Your mortgage rate will fall with the base rate if it falls. You may pay more each month when the base rate rises, however.
There are some lifetime tracker mortgages available, which last for the duration of the commitment, though most come with introductory deals. As soon as the introductory deal is over, the lender usually transfers you to the SVR. You may also be required to pay a minimum rate, no matter how much the base rate drops or rises.
- Repayment costs drop with the base rate: First and foremost, the most advantageous aspect of a tracker mortgage is the correlation between the base rate and repayment charges – the lower it drops the lower you pay back.
- Lenders cannot amend the rate: A variable-rate mortgage allows the lender to change the rate at any time. Standard variable rates (SVR) are controlled by them, which means your repayments could rise or fall at any time. The tracker rate changes only when the rate being tracked changes (usually the BoE’s base rate). The lender cannot suddenly raise your rate on you because of this protection.
- No early repayment charges: The flexibility of tracker-rate mortgages allows you to make extra payments, since they don’t have early repayment penalties. When you pay off a fixed-rate mortgage within its term, you are usually charged an early repayment penalty. As a result, a tracker-rate mortgage may allow you to repay your mortgage early if you anticipate moving in a year or receiving a large sum of money to help pay off the mortgage.
- Your repayments rise when the base rate does: As opposed to the drop in base rate, the alternative situation does in turn mean a rise in repayment costs. You may struggle to budget for your repayments if the BoE raises the base rates, which could result in financial difficulties.
- Fluctuations could affect budgeting: When you’re a first-time buyer or you’re sticking to a strict monthly budget, fluctuations in the base rate could impact your budget. This can make it harder for you to plan your outgoings accurately.
A guarantor mortgage is a product that is specifically given to those who need the help of another responsible person to secure the mortgage. This person then becomes the additional security needed for the lender to agree to the mortgage.
To get a guarantor mortgage, you will need a person with good credit (who is also a homeowner), who agrees to guarantee that they’ll pay off your loan if you default. This person will be the guarantor, and will therefore not own any rights to the property.
When you apply for a guarantor mortgage, your lender will ask for information about both you and your guarantor. They will look at your finances together and decide whether they think that it’s worth approving your application. If they do approve it, then they’ll ask your guarantor to sign an agreement saying that they agree to pay back the loan if needed – and if it becomes necessary for them to do so, then the lender can pursue them for payment instead of coming after you directly.
The added security of having a guarantor makes it easier for lenders to approve these types of loans because they know someone else is responsible for making sure payments are made.
- Secure a higher mortgage amount: If the homeowner does not have a high enough income to get approved for a standard mortgage, a guarantor can unlock a higher loan amount.
- Bad credit history can be disregarded: A common obstacle faced by first-time buyers is a poor credit history. Having a reliable guarantor means that lenders can disregard your credit score due to the strong credit history and income of your guarantor. This is a good way to get onto the property ladder for someone who wouldn’t meet the criteria of a standard mortgage.
- The guarantor becomes liable: Your guarantor will be responsible for paying back any unpaid debts on your behalf if you fail to do so yourself. This means that the guarantors’ credit rating could be negatively impacted by unpaid debts on your behalf.
Interest only mortgages
An interest-only mortgage is a loan that allows you to pay only the interest on your loan each month. You do not have to pay off any of the principal until the end of the term – which can be anywhere from 10 years to 30 years.
This type of mortgage is a good option if you can’t afford high regular monthly payments at this time, but plan on having a large sum of money available at the end of the loan term
Interest-only mortgages are not offered by mortgage lenders separately. As an alternative, you can choose to take out a home loan as an interest-only mortgage instead of a repayment mortgage when you apply.
It’s important to note, however, that lenders evaluate interest-only mortgages differently than capital repayment mortgages. As a result, it may be harder to qualify for one than for a regular repayment mortgage. First-time buyers may not be able to use it because of this.
- Lower monthly costs: These mortgages allow people to pay less in monthly payments than they would on a standard mortgage without negatively impacting their credit score or making them ineligible for other loans or credit cards in the future.
- Higher deposits: -Interest-only mortgages typically require larger down payments than traditional mortgages, so they might not be an option for first-time homebuyers who are short on funds.
- Large sum of money required when repaying the capital at the end of the mortgage term: It’s crucial to note that with an interest-only mortgage, you’ll be responsible for paying back the principal at some point in the future. Some people see this as a plus because they want the flexibility to use their savings or investments toward other goals. However, others may not be prepared for this extra expense which could mean having to sell the property.
An offset mortgage is linked to your savings account, enabling you to reduce the amount of interest charged on your mortgage with your balance. Your savings do not pay for the mortgage, your savings are simply ‘offset’ against your mortgage.
Your savings will not earn interest with an offset mortgage. Offset mortgages, however, can still save you money because mortgage interest is usually higher than savings interest.
- As an example, if you had £50,000 in your savings account and your mortgage totalled up to £300,000, you’d only pay interest on the remaining £250,000 of the loan.
You can get the following types of offset mortgage:
- Interest-only offset mortgage: You are responsible for paying the interest on the mortgage each month, but will have to pay the capital in another way.
- Fixed rate offset mortgage: The interest rate paid on the mortgage once offset by your balance is fixed for a period of time.
- Tracker offset mortgage: The interest rate you pay is determined by the Bank of England’s base rate after it has been offset by your savings.
- Discount offset mortgage: You are given a set discount on the standard variable rate by your lender. The interest owed will then depend on the balance.
- You can make bigger savings each month due to the reduced interest on repayments.
- You can still gain access to your savings should you need them, but there will be different terms and conditions applied to each mortgage deal so it is important to check.
- You can offset your interest rates on a family member’s savings account, making an offset mortgage a good solution for those looking to get onto the property ladder.
- Because you are offsetting your savings balance, you will not earn any interest on the savings.
- Because offset mortgages are flexible and offset features, they are usually more expensive than standard fixed or tracker mortgages.
Preparing for your mortgage application: how to boost your chances
The key to any successful mortgage application is early preparation. This involves collating all the relevant documents, doing your research and getting your finances in check.
But what else can you do to maximise your chances of being accepted by a lender?
- Calculate Affordability and Budget
When you are shopping around for the right mortgage deal, one of the first things you will need to do is calculate how much you can afford to pay upfront and on a monthly basis. Calculate your deposit + what you need to borrow to figure out the property price you can afford.
- Organise Your Paperwork
Lenders will require evidence of your income to ensure you can afford to repay your mortgage. If you have all of the evidence collated in one big batch, this can speed up the approval process. You will need:
- The last three months’ of bank statements
- The last three months’ of payslips
- Proof of any commission you may have received
- The latest P60 tax form
- If self-employed, evidence of the last three years of tax returns
- Proof of your deposit (such as savings account statements)
- Passport or driving licence
- Utility bills or council tax bills for proof of address
- Register for the electoral roll
If you’re not already, it’s essential that you register on the electoral roll to validate your application. This is a quick, easy and necessary step to take as it helps to identify you at your current address – being registered also improves your credit score!
- Improve your credit score
Your credit score is one of the most important factors in whether or not you qualify for a mortgage. If you have bad credit and want to buy a house, you’ll need to work on improving your score first. You can do this by paying off any outstanding debts (like credit cards), making consistent payments on time and keeping balances low on all accounts.
The mortgage process explained in 5 steps
Applying for a mortgage can be both a daunting and lengthy process, but preparing yourself for the stages and setbacks in advance can help make the process easier and less stressful. Here’s a rough guide to how the mortgage application and approval process looks:
Step 1: Speak to a mortgage broker
You may want to start by finding a mortgage broker. They’ll help you understand all your options and get the appropriate deal for you. Brokers or advisers assist you with applying for a mortgage, based on your personal financial situation.
They can streamline the process by advising which lenders will accept your application, helping you improve it, and taking care of some of the paperwork for you.
You might even want to consider using a specialist broker – one who specialises in bad credit applicants or first-time home buyers, for example – because they can give you access to deals that might not be available at other places.
- It’s recommended that you consult the Financial Services Register to determine whether your broker is authorised to provide mortgage advice.
Step 2: Get a decision in principle
It is recommended that applicants apply for a decision in principle, this gives an indication of how much you could loan from your mortgage lender. Although not legally binding (or set in stone), completing this step makes it easier to shop for homes. It offers a guide price and maximum value to aim for, enabling you to make judgement based on your affordability.
- A decision in principle is usually required by property managers/owners when viewing a home – proof of this approval shows that you’re a serious buyer.
Step 3: Search for a property and put your offer in
The first step is to find a home that matches your needs, budget and preferences. You can do this by looking at listings online or asking a local estate agent for recommendations. Once you’ve found the right property for you, submit an offer through the seller’s agent or directly to the seller themselves (depending on the seller). If they accept your offer, congratulations! You’re one step closer to securing a home.
Step 4: Apply for your mortgage
Once you have found a property that you like and your offer has been accepted, you should apply formally for a mortgage. You can arrange this with the help of a mortgage broker. To confirm that the property is worth about what you intend to pay for it, the lender will conduct a valuation.
Mortgage providers will consider your income and savings to determine whether or not you can afford to keep up with repayments. As part of this process, they’ll assess your ability to continue paying should interest rates vary or your circumstances were to change.
- Loan to income ratio: A lender’s decision is based on what’s known as the loan-to-income ratio – how much you want to borrow divided by your income. Borrowers are usually only allowed to borrow up to four-and-a-half times their income.
- The Affordability Assessment: Your mortgage lender will want to assess your monthly payment, including all expenses and income, before they offer you a loan. This process is straightforward but important. Your lender will ask you about your expenses (rent, utility bills, and so on) and check that they’re not higher than what you can afford to pay each month. They’ll also want to know how much money you have coming in each month – including benefits and any child support payments – and how much this amount can cover in terms of household expenses.
Step 5: Receive your formal mortgage offer
If during the application and valuation process there are no problems, the lender will then provide you with a formal mortgage offer. This is usually offered within four weeks of submitting an application, but can take longer if any problems arise during the valuation (or if you have failed to submit all the documentation needed).
At this stage, it is recommended that you talk to a solicitor, it is their job to undertake conveyancing and check the following:
- That the property is worth what you are paying for it
- That there are no legal issues
- That you understand your legal responsibilities
The solicitor will also be involved in the exchanging of contracts. Until this has happened, nothing is legally finalised. The buyer and seller must swap their signed contracts and the deposit must be paid before the property sale becomes legally binding.
Mortgage-related fees and charges
You may not have considered what else you’ll have to pay for when you take on a mortgage. It’s important to be aware of the fees and charges associated with taking out a loan, so that you can prepare yourself financially and avoid surprises.
Whether you’re buying a house, refinancing or remortgaging, it’s important to go through each lender’s terms and conditions carefully. Make sure you understand exactly what it is you’re paying for and how much each fee will add up to over the course of the loan.
- Mortgage lenders are required to include any mortgage-related costs in their annual interest calculation as of March 2016 – this is formally known as the Annual Percentage rate Charge (APRC). It is a legal requirement that lenders include all mortgage related charges in a mortgage illustration document.
|Mortgage Broker Fees||Mortgage broker fees are one of the most common charges that you’ll encounter when applying for a mortgage. If you use a mortgage broker, they will typically charge a flat fee for their services and a percentage of the total loan amount based on how much work they do.|
The mortgage broker can often take payment from the lender in the form of commission, rather than taking a direct fee. In some cases, the broker can charge both, but you have a right to understand in advance how your broker or advisor will be paid.
|Valuation Fee||The valuation fee is a fee charged by the lender to ensure that the property you are buying is worth what you’re paying for it. The lender will hire an independent valuer to conduct a valuation of the property, which will take into account factors like location, condition and market trends. The valuer will then provide a written report to confirm the value of the property.|
This fee is payable to the lender when your mortgage application is submitted, and can be anywhere £200-£1000.
|Booking fee||The booking fee is often charged at the start of the application process and is sometimes known as a ‘reservation fee’. This upfront charge can be included within the arrangement fee, whilst other lenders may only choose to add it depending on the mortgage amount. |
This fee will not be refunded, even if the mortgage falls through or you decide not to take the mortgage out.
|Arrangement fee||The arrangement fee is a charge you pay when you apply for a mortgage. The amount varies depending on the lender and the type of mortgage. The fee can be up to £2,000, but can be more if your application is complex or you want to borrow a large sum of money. It can be paid in a single upfront payment or in instalments that are calculated within your monthly mortgage costs. |
If you do decide to add this fee onto your mortgage payments, it may increase your instalments significantly – especially if the fee is priced at a percentage of your total mortgage cost.
What is a mortgage term and how do you choose the right one?
If you’re wanting to buy a house and are looking to set up a mortgage, one of the first things you’ll need to do is choose a mortgage term. Mortgages can be fairly complicated to get to grips with, particularly when discussing things like mortgage terms, so we’ve compiled all the information you need about them here to be able to make the right decision for your situation.
A mortgage term refers to the period that your mortgage runs for – this is the amount of time that you’ll spend paying your mortgage off. The mortgage term will end once the monthly payments have been completed. Once this time period has elapsed, the remaining balance is payable immediately, however there may not be anything left to pay by this point.
Mortgage terms are generally similar regardless of which type of mortgage you go for, but they differ slightly if you’ve decided to take out an interest-only mortgage.
|Interest-only mortgages differ from more conventional mortgages as you only pay interest for the length of the term – however, the full amount owed towards the house still has to be paid at the end of the term. Interest-only mortgages tend to be more expensive than repayment mortgages because the amount owed for the property doesn’t go down, which means there will be more interest to pay. |
Interest-free mortgages can be risky as you still need to ensure that you can pay the remaining balance for the house once the mortgage term has elapsed, despite the monthly payments being cheaper.
You’ll agree upon the length of the term, payment amount and interest rate with your lender whilst setting your mortgage up, with prices usually varying depending on the length of the term.
You may occasionally come across the term ‘mortgage product’ – it’s important to note that this is different from the mortgage term itself, referring to the interest rate that you pay for a certain amount of time.
Interest rates are usually set at a fixed rate for a set period – often five years or less. Once this time has elapsed, you would need to either remortgage and work out another deal, or move to the lender’s SRV (set variable rate). If you’re on your lender’s SRV, your monthly payment amount could change each month, depending on the market conditions at the time.
If the SRV increases, you’ll pay more, but the money will go towards interest, instead of paying back the capital owed. This means that it can be risky to move to your lender’s SRV, although they do allow for a greater degree of flexibility.
How does a mortgage term work and how long are mortgage terms?
Your mortgage term will differ depending on which type of mortgage you choose to take out, but most of the time they work fairly similarly. The term itself will be agreed upon by you and your lender before completion. With a repayment mortgage, you’ll pay a set amount each month – this includes interest and other fees, as well as the amount you’ve borrowed.
With an interest-only mortgage, you’ll still pay money every month towards it, but you’ll just pay the interest instead of the amount borrowed.
The standard length of a mortgage term in the UK is usually 25 years, although this isn’t set in stone. Mortgages of 30 or 40 years aren’t uncommon now, however they can be shorter than 25 years if you’re able to put up a higher deposit. Five years is generally the shortest term you can get, but you would need to have most of the property price saved already.
|If you’re approaching retirement age, some lenders won’t agree to a mortgage term, particularly if it’s a lengthy one. Many lenders have a maximum age for taking out a mortgage – this is just one stipulation you may have to submit to when going through the property purchase process.|
Short term vs long term
One of the big questions people have when taking on a new mortgage is “how long should my mortgage be?” Having a long term mortgage has its benefits, as does its short term equivalent, so it’s something you really need to think about before making a decision. With 25 years considered to be the standard length of a mortgage, anything longer than that is considered to be a long term mortgage.
Instead of thinking in strictly long term/short term measures, you need to be thinking from a personal perspective about what’s right for you and your own situation. There are lots of different factors that will come into play, including:
- Your deposit
- Your savings and financial circumstances
- Your age
- The affordability of your loan
The general consensus is that the shorter the mortgage term the better, as this means that you’ll be mortgage-free quicker and you’ll save money on interest. On the other hand, you’ll usually have to put up more money up-front to get a shorter mortgage (or pay a higher monthly payment), which might not be affordable for everyone.
Longer terms are often preferable for first-time buyers to help them get on the housing ladder, but again, this isn’t a one size fits all situation. Once you’ve moved off your introductory mortgage rate you’ll have to remortgage, which could make future interest payments higher – you’ll also need to budget for this.
Changing a mortgage term
The term of your mortgage can be changed after it’s been confirmed, with both increases and decreases possible, although you’ll need to get permission from your lender first.
One of the main reasons for choosing to extend your mortgage is if your income has been reduced – by extending your mortgage, you can reduce your monthly payments, even though you may pay more interest in the long run. In these sorts of situations your lender will usually conduct affordability checks – extra fees may be added.
Interest-only mortgages can also be extended as well as traditional repayment mortgages, particularly if you feel like you might not be able to raise the capital to cover the remaining balance by the time the mortgage term ends. You might even be able to switch over to a repayment mortgage, but again, this is something you’ll need to discuss with your lender.
Mortgage decreases are possible in certain circumstances and might be a more viable option than overpaying, depending on your circumstances at the time. If you come into a lump sum or your salary increases, you may be able to decrease your mortgage – this would lead to higher monthly payments, but you would pay less interest overall.
Making additional mortgage payments
It’s possible to make additional mortgage payments as well as the set monthly payments you have to pay. There are two ways of doing this – either by increasing the amount you pay each month or by submitting a lump sum. Mortgage lenders typically allow you to overpay by 10% each year without incurring additional fees, although this may change depending on who your mortgage is with.
This process is usually referred to as ‘overpaying’ – there are several benefits to overpaying your mortgage, which we’ve outlined below:
- A reduction in interest – If you shorten the length of your mortgage by overpaying, you should pay less interest overall. Your interest will also be calculated based on a lower rate as you’ll have less to pay off, leading to lower than usual interest rates.
- You can become mortgage-free sooner and have more flexibility – By overpaying you’ll become mortgage-free sooner, taking the weight off your mind.
- The equity of your property could increase at a faster rate – When you take out a mortgage, something called a loan-to-value (LTV) ratio is applied – this is a measure that compares the appraised value of the property with the sum of your mortgage. The more money you put down, the lower your LTV ratio (below 80% is considered preferable). Overpaying your mortgage should reduce your LTV ratio, which may give you an advantage in the future if you decide to remortgage later on.
- Increased flexibility – By choosing to overpay, you allow more flexibility into your life, as you can make these payments whenever you like. If you suddenly come into a lump sum of money, you can choose to use this to overpay your mortgage, whilst choosing not to pay any extra at more difficult times.
Overpaying can help you save a lot of money, however the amount you save will depend on how much you owe, the length of your mortgage, your current interest rate and how much you choose to overpay.
By overpaying substantial amounts (so long as you can afford it), you can shorten the length of your mortgage considerably, also potentially saving thousands of pounds by reducing your overall interest payments. It might be worth checking when the interest on your loan is calculated – if it’s calculated on a monthly or quarterly basis, you could strategically overpay a lump sum beforehand, thus reducing your interest rapidly the next time it’s calculated.
Mortgage overpayment calculators are fantastic tools and can be used to attempt to predict how much you could save, so it’s well worth having a go!
Mortgage interest rates explained
Another important factor when it comes to mortgages is interest rates – as well as the money needed to pay off the capital borrowed from the lender, you’ll also need funds to pay off the interest accumulated over the mortgage term. The main thing to be aware of here is that interest can fluctuate, sometimes wildly, so you need to make sure you can afford an increase in interest if it happens.
With a repayment mortgage, your interest is calculated based on the amount of money still owed to the lender. The more you owe, the more interest you’ll pay across your entire mortgage term. Most of the time you’ll start off on a fixed interest rate – this term usually lasts up to 5 years.
After this period ends, you’ll need to either remortgage for another fixed rate, or switch over to your provider’s variable tariff – you’ll automatically move across to this if you don’t remortgage. The variable tariff can change every month, so if you want a little more peace of mind, remortgaging to another fixed rate might be the best option for you.
During the start of your mortgage term, you’ll often pay more money monthly towards the interest instead of the capital borrowed. However, towards the end of your mortgage term this will change, with you instead paying more towards the amount borrowed than the interest.
An interest-only mortgage differs hugely from a repayment mortgage, as you only pay the interest each month.
|Interest rate changes are often a result of economic factors at the time – the economy can change massively during your mortgage term, particularly if you have a long term mortgage.|
The 2022 Mini-Budget announced by Kwasi Kwarteng is an example of how interest rates can be affected by the economic climate, seeing interest rates rise sharply up to an average of 5-6% at the time. This has also had an effect on the rest of the housing market, with house prices predicted to fall by 8% next year.
Interest rates can also drop (typically when the economy is prosperous), so it’s not all bad news, but this volatility is one of the reasons why lenders need to make sure you have enough income to ride out any changes to your mortgage interest rates.
The economy can be fairly unpredictable at times, but by studying economics and looking towards the future, you might be able to have a good guess at how interest rates might change for you as time goes by – if in doubt, speak to a financial adviser before taking out a mortgage.
How much interest will you pay on your mortgage?
This is a question that is impossible to answer completely, as there are so many varying factors involved that will differ depending on your individual circumstances. However, there are some general guidelines you can follow to get a rough idea.
The longer the mortgage term, the more interest you will pay. Whilst your monthly repayments will be a lot lower with a long term mortgage, you will likely end up paying more in total, due to the extra interest and any additional fees. So if you are able to pay a higher deposit or go for a shorter term, this may be a better option. However, you will need to make sure you can pay the higher monthly payments that a short term mortgage demands.
The longer the mortgage, the more you’ll need to remortgage over the years – whilst you may get a good fixed interest rate at first, you might not be able to get the same rate when you remortgage.
Your mortgage adviser should be able to give you more advice about the interest rates you can expect to see, based on your own personal circumstances. Mortgage interest calculators can also be very helpful in these situations.
Everything you need to know about buy-to-let mortgages
If you’re considering buying a property in order to let it out, you’ll need a buy-to-let mortgage. Buy-to-let mortgages differ greatly from standard residential mortgages, with different terms and conditions applying for landlords. They’re typically considered to be higher risk than standard repayment mortgages, so you need to ensure you can meet the eligibility criteria.
The conditions for a buy-to-let mortgage differ depending on the provider, the property type and the cost of the property, but they typically include:
- Having a good credit score – Your credit score is something that will be checked whatever type of mortgage you apply for, but it’s particularly important with a buy-to-let mortgage.
- Maximum age requirements – As with residential mortgages, there are usually maximum age requirements for a buy-to-let mortgage, aimed at retirement age.
- Minimum age requirements – There may also be minimum age requirements for a buy-to-let mortgage, with many providers requiring you to be over the age of 21.
- Owning your own home – This isn’t always a must, but many lenders will only consider you for a buy-to-let mortgage if you already own your own home. You may be able to get a buy-to-let mortgage with an outstanding mortgage on your home, but this is something you’ll need to check first.
- Evidence of income/savings – Like with residential mortgages, you will have to show proof that you can pay for your buy-to-let mortgage, as well as the interest and any extra fees. Having a regular income and/or savings will help with this – the lender will usually want to see a selection of bank statements as proof of income. They’ll also want to see that you have a separate income apart from your rental income.
- The LTV ratio limit – With a buy-to-let mortgage, you’ll usually need to make sure your LTV ratio limit is at least 75%, meaning at least 25% of the capital for the property as a deposit.
- Expected rental income – Another thing that will be checked is the amount of rental income you expect to earn each month from your tenants. Lenders typically prefer this to cover 125% of your mortgage repayments.
How does a buy-to-let mortgage work?
Buy-to-let mortgages work in a very different way to traditional residential mortgages, so the process may take some getting used to, even if you already have a mortgage on your own home.
One of the main differences between the two mortgage types is that with a buy-to-let mortgage, the fees and interest rates are typically higher, so you’ll have to budget this into your costs. The minimum deposit amount is usually higher too. With residential mortgages, you can usually secure a property with a 10% deposit, however with a buy-to-let mortgage, you’ll often need to put up at least 20% of the capital upfront.
Unlike residential mortgages, the majority of buy-to-let mortgages tend to be interest-only. As a landlord, this can allow you to make the most of your rental income.
If you do take out an interest-only mortgage, you’ll want to make sure you have enough money to pay for the property at the end of the mortgage term, as you’re only required to pay the interest whilst it’s active. You can still take out a repayment buy-to-let mortgage, but they’re less common for buy-to-let properties.
Another thing to be aware of is that unlike residential mortgages, most buy-to-let mortgages aren’t covered by the Financial Conduct Authority (FCA).
|The FCA regulates the financial services industry in the UK, working to protect consumers whilst keeping the industry stable as a whole. They also work with HM Treasury and are allowed to promote healthy industry competition between different providers. Mortgage companies are usually regulated by the FCA, unless you’re applying for a buy-to-let mortgage.|
There are some exceptions to the rule with what are known as consumer buy-to-let mortgages, which are covered and assessed by the same rules as a traditional residential mortgage. Consumer buy-to-let mortgages usually apply to situations in which you purchase a property in order to let it out to a close family member – these mortgages are covered by the FCA.
Tips for taking out a buy-to-let mortgage
Before deciding to apply for a buy-to-let mortgage, you need to research the situation as much as possible, making sure that you’re as prepared as you can be when the time comes to start paying off your mortgage. We’ve listed a few handy tips that should help you construct a plan of action.
- Make sure you will be able to pay off the mortgage at the end of the term – Most buy-to-let mortgages are taken out as interest-only mortgages. As you only pay the interest over the course of the mortgage term, you need to be able to pay off the remaining balance when the period ends.
- Don’t plan to pay off the mortgage purely on selling the property – As buy-to-let mortgages are usually taken out as interest-only mortgages, it’s easy to assume you can pay the remaining balance when you decide to sell the property at the end of the mortgage term. However, the housing market can be unpredictable, and there’s no telling what property prices will be like at the time or if you’ll be able to sell the property quickly when the time comes. You need to ensure that you have other forms of income to pay the mortgage balance in case a situation arises in which you can’t sell the property.
- Make plans for times in which rent might not be paid – There may be times when you don’t have any tenants paying rent in your property (known as a void period), which can lead to a significant drop in your rental income if left void for a few months. There will often be times when the property is empty, so when you do have a rental income coming in, you should put some of it aside to make up for these periods.
- Take account of extra fees and charges – Most landlords choose to use a letting agency to arrange renting a property. This can make things much easier for you, but you will need to pay fees to the letting agent for this. You’ll also be accountable for any repairs needed for the property, such as broken boilers or plumbing issues, so you’ll need to ensure that you have enough saved for additional maintenance.
What are the tax implications of renting out a property?
Another thing you need to take into consideration when planning to rent a property with a buy-to-let mortgage is the tax implications. Like any income, tax will usually be due – the current basic rate of income tax in England, Wales and Northern Ireland is 20% over the personal allowance of £12,570. Scottish income tax has slightly different thresholds – more information can be found here.
Rental income is classed as a taxable income and you may be liable for income tax if your annual income is more than the personal allowance. If you have a job or another income, there may also be further tax implications, which is something you’ll need to check with HMRC.
Tax allowances may be applied in certain situations, allowing you to offset your expenses (such as council tax, maintenance/repair fees and letting agency fees), so you can reduce the amount of tax you pay overall. Tax on a buy-to-let property will usually be paid for by making a self-assessment declaration to HMRC.
Capital gains tax
Another important tax you need to be aware of is capital gains tax. Capital gains tax is a tax charged when you sell goods or assets for a higher value than the purchase rate, also applying to the property market. The basic rate for capital gains tax is 18%, which can rise up to 28% if you’re eligible for a higher rate of tax.
Like income tax, there is a threshold in which you don’t pay capital gains tax when selling a property, which is currently £12,300. Your allowance can be combined with your spouse to raise this to a total of £24,600. Capital gains tax can be offset against other expenses, including legal fees, solicitor fees, estate agent fees and stamp duty.
If you have gained money from the sale of a property, this will have to be declared to HMRC, with the tax being payable within 30 days of the declaration. Your capital gains tax allowance cannot be carried over from the previous year.
Mortgage interest tax relief
In the past, it was sometimes possible for landlords to deduct mortgage interest from their rental income, reducing the tax owed as part of the process. However, this isn’t possible anymore – instead, you’ll receive a tax credit. This is based upon 20% of the interest part of your mortgage payments – if you have an interest-only mortgage, this would be 20% of the total cost of your regular payments.
Whilst not strictly a tax in the technical sense of the word, stamp duty is still something you’ll need to consider. Stamp duty is a charge paid on a property when the property is bought – if you already own another property, it will apply when buying a property to let.
The current threshold for stamp duty is £250,000, so if your property is sold below that cost, you won’t be affected by it. The amount you pay differs depending on a number of factors, such as:
- When the property was purchased
- How much the property was sold for
- If you’re eligible for a stamp duty exemption or relief (an exemption is usually granted if you’re purchasing your first home, which likely won’t affect you if you’re buying a property to let out)
If you already own a property and want to buy another property that’s eligible for stamp duty, you’ll usually pay an extra 3%, although this may be slightly higher, depending on the overall cost of the property.
Mortgage vs loans: what’s the difference?
Whilst a mortgage is a type of loan, it’s also very different to a traditional loan. Essentially, a loan is a financial agreement between two parties, with the lender giving the borrower money with the expectation that the money will be paid back, usually with interest attached.
There are many different types of loans available – two of the main types are revolving loans and term loans. With a term loan, you pay the money owed back over a specific period of time, as well as any interest accrued. However, with a revolving loan, money can be withdrawn up to a specified credit limit, with additional funds available for withdrawal as repayments are made.
A mortgage is technically a loan, however the property itself is tied to the terms of the loan, making it a secured loan. The property is used as collateral in case the mortgage can’t be paid off, meaning it can be repossessed in extreme circumstances.
If the repayments aren’t made, a process called foreclosure is entered, in which the lender can claim and sell the property themselves. This is why it’s so important to ensure that you will be able to keep up with the payments, both from a lender and a borrower perspective.
What is remortgaging and how does it work?
A remortgage is when you move to a different deal with your lender or choose to move your mortgage completely to a new lender. The purpose of remortgaging is usually to save money on mortgage payments or to borrow more money than what is currently owed. This cash injection is then commonly used to cover any outstanding debts or pay for large expenses (renovations, second properties etc.).
When you switch to a different lender, the new lender will pay off the remainder of your current mortgage and transfer your debt to the new lender. This process can be lengthy and complex, it tends to also require additional administration and checks.
Remortgaging usually takes around two months, but can take longer if the correct paperwork is not completed. We recommend giving yourself plenty of time to remortgage to identify the most suitable deals.
Reasons why you might remortgage
Many homeowners choose to remortgage towards the end of their mortgage term or when the lender’s initial discounted period is coming to an end. Most commonly, the main reason people remortgage is to search for a cheaper deal. However, there are many other reasons why a remortgage might be an ideal solution:
- Higher interest rates: In some cases, the lender’s interest rate reverts back to the standard variable rate (SVR) after around two or five years of a discounted period. Because of this, the monthly repayments are likely to increase.
- Interest rates fall: It may be that the interest rates fall dramatically, particularly in comparison to the rate at which your mortgage was initially taken out at, motivating homeowners to find a cheaper deal.
- Release equity: You may choose to release equity with the intention of paying for home improvements.
- Switching to a shorter fixed rate: If you find yourself locked into a longer fixed period, it may become more suitable for you to switch to a shorter fixed rate.
Be mindful that you may need to pay an early repayment charge for leaving a mortgage before the current deal ends.
Getting a joint mortgage: everything you need to know
It is not uncommon for homebuyers to choose to purchase with a partner, sibling or
friend. Because of this, it is possible to take out a joint mortgage to share the responsibilities.
Some benefits of getting a joint mortgage include:
- A mortgage based on multiple income sources is usually higher than a mortgage based on a single income.
- Because of the typically higher amount, homeowners can look at higher value properties.
- In some cases, a joint mortgage may be the only way of getting onto the property ladder. This is particularly true for those with lower incomes.
- When two people are looking to take out a mortgage, they can pool their savings together to pay for the deposit.
What is a joint mortgage?
A joint mortgage is a loan taken out by two or more people. The primary borrower is the person who will be responsible for making the monthly payments, but all of the borrowers are equally responsible for paying back the loan. This means that if one borrower defaults on their obligation, the other borrowers will be held accountable and responsible for repaying the debt.
- Most joint mortgages can be obtained by two people, however, specialist lenders may grant a mortgage to up to four people.
- First time buyers are also eligible for a joint mortgage, providing the parties involved meet the criteria.
- A joint mortgage can also be used to purchase an investment property with a business partner.
It’s important to remember that when you borrow money with another person, you become financially linked – this is also known as financial association. It is indicated on your credit report if you have had any financial associates in the last six years.
Joint tenancy vs tenants in common
Couples who are unmarried have the option of registering with the land registry as joint tenants or as tenants in common when they buy a property together. The whole property is owned jointly under joint tenancy, while each partner owns a specified share under tenants-in-common. Before you decide which option is right for you, make sure you review each one carefully.
- 50-50 payments: A joint tenancy means automatically splitting the purchase price down the middle, there are no calculations involved.
- Right of survivorship: One of the key aspects of a joint tenancy that requires careful consideration is the ‘right of survivorship’ rule. Should one person pass away, the other automatically takes full ownership of the property.
- Separation terms: Should a relationship break down before anyone has passed away, joint tenants can either choose to sell together or one party can buy out the 50% share. In an instance where a decision cannot be made, a court case may be necessary to settle ownership of the property.
A joint tenancy is when each person (sometimes up to four people) that contributes to the purchasing of a property has equal rights to the entire property, rather than a quantified share. This means that each of you are viewed as a single entity from a legal perspective, and all of those involved must take out one mortgage together.
Under a joint tenancy, all house-related decisions need to be made together. Therefore, all parties must agree to the sale of the property should this idea come to light.
The main difference between being joint tenants and being tenants in common is that you cannot pass on the right to the property to anyone else.
Tenants in common
- Flexible ownership: Tenants decide for themselves how much each contributes to the property price. This can be altered over time should one person choose to increase their contribution.
- Clear percentage of ownership upon sale: A tenancy in common involves an agreement that evidences the share of ownership, this means that upon sale, each party receives the correct share of the property.
- Individual shares can be passed on: Unlike joint tenancy, tenancies in common enables owners to sell or pass down their share in the event of death.
Tenancies in common allow each party to own a separate share of the property, with different sizes possible. Friends who wish to pool their resources to purchase a house together or parents who want to assist their children with getting on the property ladder, tend to prefer this type of joint ownership.
This type of joint ownership is more flexible than joint tenancy, as the decision of shares and purchase price split lies in the hands of the owners. So long as the calculations equal 100% of the cost, you can choose to split 60-30 or however else works.
It is recommended that those registering as tenants in common obtain the help of a solicitor, who can help bring clarity to the situation and assist in deciphering on what proportion each party will own.
Things to consider before committing to a joint mortgage
Like any other mortgage, there are drawbacks to consider and potential problems that could arise. Purchasing a house with another person is a big commitment, we advise ensuring that you can rely on the other person morally and financially before taking on a joint mortgage.
- If the other person has a lower credit score, this can affect your likelihood of being accepted by a lender for a mortgage.
- Your own credit record could be tarnished if you become legally associated with someone who does not have a good credit record.
- If the other person fails to pay their share of the repayments, this could result in legal action being taken against you.
Once you’ve decided that a joint mortgage is the right decision, we recommend holding conversations with the other person(s) to determine:
- How will the equity of the home be divided?
- How much will each person contribute to upfront costs and monthly repayments?
- Who will take sole responsibility for the property and costs should one person choose to leave the property?
Dealing with a joint mortgage after separation
One of the biggest issues people face with joint mortgages is the aftermath of a separation or divorce. When you separate from your partner and have a joint mortgage together, both parties are still liable for paying the mortgage off in full. You must keep up with mortgage payments to avoid negatively impacting yours and your ex-partners credit score.
A breakdown of your options during a separation
If you are facing divorce or separation with a joint mortgage, there are a few different options and approaches you can take:
- Sell the home: It could be worthwhile having a discussion with your ex-partner about selling the property. This requires paying off the remaining mortgage, selling the property and agreeing to splitting the rest of the money between you. Should you be in negative equity, you may need to divide any outstanding debt equally.
- Pay off the mortgage: If your divorce is amicable, it may be possible to continue paying off the mortgage until it’s completely paid off. Once this is complete, you can sell the property and divide the proceeds.
- Transfer of equity: This process means buying your ex-partner out of the property. After getting signed permission from the other person, it is possible to change the mortgage contract and deeds so it is in just one person’s name. To do this, the person staying on the mortgage must pay the other their share of equity.
If you are unable to pay for the mortgage alone, it may be possible to speak to a broker about a ‘guarantor mortgage’. Put simply, this means having a close family member or your ex-partner to agree to paying the mortgage should you fail to do so.
It is always recommended that you seek legal advice during separation to seek the most suitable solution for dealing with your mortgage.
Frequently Asked Questions
What credit score do you need for a mortgage?
There is no one-size-fits-all credit score that is required to get a mortgage. Lenders will work out a credit score when you submit your application, this is done on a case by case basis to determine whether or not the applicant is a risk. However, a higher credit score is less likely to be problematic to lenders, as it indicates that you are trustworthy and reliable when it comes toi repaying debt.
You can refer to sites like Experian for information on your credit report, this will give you insight into where you can improve your score.
Is a mortgage in principle reliable?
A mortgage in principle is as reliable as the information you give to your provider about your financial situation. A mortgage in principle assesses your potential eligibility and loan amount based on your income, current living situation, history and sometimes a soft credit check. This calculation is not a legal commitment. Your lender will give an accurate offer once they have conducted an in-depth financial analysis.
How long does a mortgage in principle last?
A mortgage in principle usually expires after 60-90 days, depending on the lender. This gives the applicant time to search for a property up to the value suggested and apply formally for a mortgage. You will usually have to re-apply if the mortgage in principle expires, but this should be fairly straightforward providing no major changes have occurred.
Do I need to use a mortgage broker?
A mortgage advisor is recommended when you are buying a property or remortgaging, but it is not a necessity. It is beneficial to hire a mortgage broker at the start of your house hunting journey, as they can help to find suitable deals that coincide with your requirements. They can often give you access to different products that you may not find yourself. A specialist mortgage broker as helpful for unique and complex circumstances.
How many payslips do you need when applying for a mortgage?
You should anticipate to provide at least three months of payslips when you submit your mortgage application. A lender needs to see evidence of regular income to decide whether or not you can afford to make your monthly mortgage payments. If you are self-employed, you will need to showcase tax returns and/or the last two to three years of account statements to prove your earnings.
Can you be gifted a deposit for your mortgage?
You can be given a deposit for your mortgage by close family members or a partner with sufficient evidence that it does not need to be repaid. Some lenders may be hesitant to accept a gifted deposit if they cannot see evidence of it being gifted (rather than a loan). You must inform your lender and solicitor of where your deposit will be coming from, along with the name, relationship and written letter from the person giving the money.
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