What is a residential mortgage?
A residential mortgage is essentially a large loan designed to help the borrower purchase a house with the property in question put up as security.
The general idea is to make up the value of the property with a combination of an up-front cash deposit and a mortgage loan which you then pay back in monthly instalments over an agreed term with interest added.
Residential mortgages can only be taken out on a house being used as the borrower’s residence; if you’re using a property for commercial purposes (i.e. letting), you’ll need a different kind of loan, like a buy-to-let mortgage.
Deposits and loan-to-value ratios policy
When you take out a mortgage, you’ll need to pay a certain percentage of the value of the loan up front as a deposit, and then borrow the rest.
The loan-to-value ratio is the difference between the size of your loan and the total value of the property in question, expressed as a percentage.
For example, if the house you want to buy is worth £500,000 and you pay a deposit of £50,000, your loan will be £450,000.
The £50,000 deposit is 10% of the property value, so the borrowed amount, and therefore the LTV, is 90%.
Mortgages with lower LTVs (and higher deposits) come with interest rates, reflecting the reduced risk to the lender, as they are lending less money.
It’s best to strike a balance between the deposit size and the interest rate on repayments, rather than opting for a smaller deposit that results in higher overall payments.
Types of residential mortgage - repayment policy
When it comes to repayment methods, there are two main types of mortgage products available: repayment and interest-only mortgages.
With a repayment plan, your monthly payments will consist of a portion of the actual value of the mortgage (called the capital), plus interest.
With an interest-only plan, your monthly payments will consist solely of interest, and the remaining capital will be repaid at the end of the term, or during the term if you have the means.
Types of residential mortgage - interest policy
Interest is charged on mortgages in three different ways depending on the kind of loan you take out.
Fixed rate mortgages
With these plans, the rate of interest you pay is fixed for a set term (generally two, three, or five years). This means you can budget efficiently and plan well, knowing that your monthly payments won’t change over the course of the fixed term.
Variable rate mortgages
With a variable rate mortgage, you’ll pay the lender’s standard variable rate (SVR), which changes monthly at the lender's discretion, tracking economic changes.
Tracker mortgages
The interest rate for a tracker mortgage varies monthly and tracks changes in the Bank of England base rate, staying a set percentage above it.
Types of residential mortgage - reasons for borrowing policy
There are various different types of mortgage available to suit different types of borrowers. Whether you’re a first-time buyer looking to get on the property ladder or moving into your fifth home, there’s likely a mortgage tailored to suit your needs.
First-time buyers
For first-time buyers, mortgages can seem as expensive as they are necessary. The likelihood is that you’ve never taken out a loan as large as your first mortgage, but don’t let this scare you – as long as you have a decent enough credit score you should be able to take advantage of great interest rates and a solid loan-to-value ratio (LTV).
There are also various government schemes in place, like Help to Buy designed to assist first-time buyers struggling to come up with the cash to get on the property ladder.
Remortgaging
At any point during your mortgage, you’ll be able to switch to a new one if you so desire, for example, if you think you could benefit from better interest rates.
You’ll most likely face charges for doing so but it can still be worth it given the potential savings in the long run. Speak to your existing mortgage provider if you want to do this so that you can work out exactly what it will cost you.
Home movers
If you’re moving house before your mortgage term ends, you can 'port' your mortgage. This means you’ll take your existing mortgage to your new property, effectively remortgaging with the same company.
Bear in mind that if you do this before your original mortgage expires, you may face a penalty for early redemption.
Compare mortgage plans
With the various types of mortgage plans available, taking one out can be a confusing process. After reading this guide and figuring out what kind of product you're after, visit our mortgage comparison page to see what mortgage deals you could get, so you can move into your new house right away.