Whether you’re a first-time buyer, a prospective landlord or you’re looking to remortgage, it’s important to understand the market and what’s available to you. Read our guides to find out about various types of mortgages, what rates to expect and what to do to increase your chances of acceptance.
A mortgage is a type of loan used to borrow money to buy a property. Mortgages are available for residential homes as well as commercial properties like HMOs or business premises. Mortgages are usually paid back over a long period of time – the standard used to be 25 years, but as house prices have risen, you can now get 30- or even 40-year mortgages.
You will borrow the money to buy your property from a lender, usually a bank or building society, and will have to put down a deposit (most commonly at least 10 of the property value). Then, you’ll make payments every month which will pay back the amount you borrowed (the capital) plus interest until the end of the mortgage term.
Many mortgages, including fixed rate mortgages and tracker mortgages, offer an interest rate that is set for a certain amount of time – often 2 or 5 years. After this time, your mortgage will be moved to your lender’s standard variable rate, which is often much higher than the interest rate you had been paying before. That’s when it’s time to get in touch with a mortgage broker and see if you can remortgage with a better interest rate.
Read our mortgage guides to find out more, but the main types of mortgages are:
Fixed rate: A mortgage where your monthly repayments will stay the same for a certain period – usually 2, 3 or 5 years, no matter what the Bank of England sets the interest rate to.
Tracker: Follows the Bank of England’s Base Rate, plus a percentage on top, so payments can vary from month to month. Some trackers last for the lifetime of the mortgage, while others have a term that lasts 2-3 years.
Standard variable rate (SVR): Mainly offered as the option once a fixed rate or term tracker mortgage period ends, this rate is set by the lender and varies according to the market’s interest rates. Payments will vary as your lender’s SVR goes up and down.
Capital repayment: These mortgages have monthly payments that include paying back the capital (the amount you originally borrowed) plus interest. This means that at the end of the mortgage period, the loan is paid off in full.
Interest-only: A mortgage where you only pay the interest due on your loan, and don’t pay back any capital. Landlords often take out this type of mortgage, as they can sell the property to pay back the capital on the loan.
Do a quick online search to find a benchmark for a good mortgage interest rate. This will help you get an idea of what is on offer before you get in touch with a broker.
Use a service like HaMuch to compare mortgage brokers and find one that suits you. Ask them whether they’re tied to certain lenders, can offer all mortgages available to brokers, or can check deals with all lenders. There’s no right or wrong, but you’ll probably get a better interest rate if you choose a mortgage broker that isn’t tied to a particular panel of lenders. Make sure you ask them what fees they charge, if any.
Make sure you read everything that your mortgage broker gives you in full before they submit the application. Then, once it’s submitted, you’ll receive more paperwork to read! Make sure you understand the Key Facts Illustration and check that it has the correct date, names of the borrowers and name of your broker on it.
You should also check the mortgage offer once you get it. If you notice that your name has been spelled wrong or the loan amount is incorrect, it’s crucial that you get this updated to ensure your offer isn’t retracted.
LTV stands for ‘loan-to-value’. It refers to the ratio of your mortgage to the value of the property you’ve purchased, or want to purchase. For example, if you take out a £180,000 mortgage to buy a property that’s worth £200,000, your mortgage is 90 of the property’s value. Therefore, your LTV is 90.
Lenders look at your LTV when considering approving your mortgage application. This is because if you have a lower LTV, they will see you as being at a lower risk of missing your monthly repayments, and often offer lower interest rates because of this.
So if you’re buying your first home or are looking to remortgage, see if you can save some more money to pay up front to lower your LTV. Lenders usually offer their interest rates in LTV brackets, so even putting an extra £50 up front can help push you into the lower bracket.
Guarantor mortgages work in exactly the same way as another mortgage, whatever type of mortgage you choose, except that a family member or close friend agrees to be responsible for your repayments if you can’t pay them. That’s why these mortgages are sometimes called ‘family-assisted’ mortgages. The person that agrees to take responsibility for your repayments is called a ‘guarantor’, and they won’t ever be named on the deeds or own a share of the property if they do end up making payments for you.
Guarantor mortgages are ideal for people who want to get on the property ladder but don’t have good credit or much of a deposit. With a guarantor that is in a stable financial situation, applicants without much credit history become more desirable as the lender can be more certain that repayments will be made on time.
Yes, you can get a mortgage when self employed. It’s a myth that it’s completely impossible to get a mortgage if you have your own business, but it can be more tricky. Most lenders will require more information from you before they’re happy to approve a mortgage application.
In general, lenders require you to provide two to three years of accounts. But if you’re newly self employed, you won’t have those accounts, so the lender will want to see proof of income in another way. If you work on a contract basis, they may ask to see these contracts to help them gather a picture of your average income. Just make sure you have all your accounts made up correctly, by a qualified accountant if possible, and be ready to answer some extra questions about your income.
Green mortgages are a relatively new incentive designed to encourage people to buy homes with an energy performance certificate (EPC) rating of A or B. They tend to give you preferential interest rates or cashback for buying a more energy-efficient home or making ‘green’ home improvements such as installing solar panels or an air source heat pump.
It’s important to remember that the ‘green’ side of the mortgage comes from the lender incentivising you to buy a more energy-efficient home, not from any practices that the lender is carrying out. Just because you have a green mortgage it doesn’t mean that your lender isn’t investing in industries like fossil fuels.
Offset mortgages are mortgages that are linked with a savings account. It works by offsetting the interest you would earn on your savings against your mortgage, so you reduce the amount of interest you pay on your mortgage.
For example, you could add £15,000 to your offset savings account that’s linked to your mortgage of £125,000. Those savings will be offset against your mortgage, so you’d only pay interest on the difference – in this example, £110,000.
The advantages of offset mortgages are that you could save more on your mortgage interest than you would earn in a savings account, and you can usually still make deposits and withdrawals from your savings account. However, your savings won’t earn any interest while they’re in an offset savings account, and interest rates can be higher on offset mortgages. It’s worth getting financial advice before you go ahead with an offset mortgage.
Whether you fix for 2 or 5 years is down to how risk-averse you are, how much stability you like to have and your financial situation. Always make sure you speak with a mortgage broker or financial advisor before deciding how long to fix your mortgage period for.
If you’re counting on interest rates falling in the relatively near future, you may want to opt for a 2-year fix so you can switch to a cheaper deal when they come around. However, if you prefer certainty, you could fix for 5 years so you know that even if interest rates rise in that time, as long as your income and expenditure remains roughly the same, you’ll be able to afford the repayments.
It’s also worth considering how long you intend to live at your current property. If you don’t think you’ll be there in 5 years before your fixed deal ends, remember that you may have to pay off that mortgage (with another mortgage) when you move home. Some mortgages are portable, meaning that you can take them with you to your new home, but not all are and your mortgage might not be suitable for the new property. If this is the case, you’ll have to pay an early repayment charge. These charges are generally higher on 5-year deals than they are on 2-year deals.
So, if you’re considering moving within a couple of years, a 2-year fix might give you more flexibility to change deals without facing high early repayment charges.