What is a mortgage?
A mortgage, put simply, is a large loan that is secured against a property. The mortgage provider will lend you money equivalent to the value of the property, generally in order to allow you to purchase the property outright, though mortgages are often taken out on properties that are already owned in order to raise capital for a variety of purposes.
You then pay back the mortgage over time, in a manner that will depend on the specific mortgage product taken out.
What types of mortgage are there?
There are various different types of mortgages available, but they can be separated into broad categories according to the following criteria.
Mortgages can be split into two types according to how the monthly repayments are formed:Repayment Mortgages
With these kinds of mortgage, each month you pay back a portion of what you borrowed, plus interest, until the whole amount is paid off in full. Exactly how much interest you are charged will vary, but the broad structure of repayments remains the same for all repayment mortgagesInterest-Only Mortgages
These work slightly differently; each month you pay only the interest that is being charged, you do not make any contribution toward paying off the actual balance until the term of the mortgage is up, at which point you must pay off the amount that you borrowed in full.
Your lender must agree the intended repayment vehicle whilst the mortgage is being arranged.
Mortgages can then be split into three further categories according to the way the interest is calculated:Variable Rate Mortgages
When you take out a variable rate mortgage, you pay interest at what is known as the specific lender’s standard variable rate, or SVR. The SVR will fluctuate regularly, very broadly in line with inflation and with changes in the Bank of England’s base rate, but exactly how it does change is ultimately up to the lender.Tracker Mortgages
The interest rate on a tracker mortgage changes regularly directly with the Bank of England base rate, remaining constantly at a set percentage (usually 0.5-2%) above it.Fixed Rate Mortgages
When you take out a fixed rate mortgage, the level of interest you will pay stays the same throughout a fixed term, usually between two and five years.
Generally, after the term is up, you will revert to paying the lender’s standard variable rate.
What is an offset mortgage?
An offset mortgage is one where you can use any existing savings you have as effective overpayments or contributions towards your mortgage balance, with interest only being payable on the remainder.
So if you have a mortgage worth £250,000, and you have £50,000 in a savings account, then you will only pay interest on the remaining £200,000. Importantly, unlike with straightforward overpayments, you will still be able to access your savings if you have an offset mortgage.
Can I mortgage a property I want to let out?
Yes, the typical mortgage that most people take out on their property is known as a residential mortgage.
If you wish to let out a property then you can take out a specialised buy-to-let mortgage. Buy-to-let mortgages tend to be interest-only, with a repayment plan worked out based on the potential rental income of the property in question.
How long do mortgages normally last?
Typically, mortgages last around 20 years, but in reality this can change according to a whole variety of factors. When you set up your mortgage you will decided the term (i.e. the length of the mortgage) according to your repayment plan.
How big a mortgage can I take out?
Exactly how much you can borrow will depend on various factors to do with your financial situation as well as, of course, the value of the property that is being put up as security.
Historically, mortgage lenders used to simply use a basic multiple of your base income in order to work out how much they are willing to lend you. Now, they will conduct a more thorough financial evaluation, taking into account your net income, with your regular outgoings and expenses factored in, in order to work out how much you can borrow. They will also look at your credit score and any loans or credit cards you currently have.
If you are using your mortgage to purchase a property, then you will need to work out what size deposit you can pay or are required to pay up front before a mortgage lender will lend you the rest.
The size of deposit that you are required to pay will depend on your financial situation and credit history.
The difference between the amount borrowed and the actual value of the property is known as the loan-to-value ratio, or LTV.
Say you want to purchase a property worth £500,000, and you’re told you need to come up with a deposit of 10% (£50,000). Your mortgage provider then lends you £450,000 which, compared to the original property value, gives you an LTV of 90%.
Generally speaking, a lower LTV (and so a bigger deposit) is the safer option, allowing you to get better deals all around and, of course, since you’re borrowing less in the first place, your monthly repayments will be smaller.
Can I take out a joint mortgage with a partner or friend?
Yes, you will be allowed to take out a mortgage with a partner or friend if you choose to live together. You should make sure, if you do so, that you draw up some kind of trust deed giving both of you power of sale so that you are covered in the event of a dispute.
You should also decide, and put in writing, whether you’ll be joint tenants (sharing the property on a 50/50 basis) or whether you’ll be tenants in common, with each owning a different share dependant on your respective incomes.
Will I need to pay any administrative fees when I take out a mortgage?
Usually, you will be charged some extra fees when you come to take out your mortgage. Typical fees include:
- Legal costs
- Valuation costs, and
- Arrangement fees (essentially administrative fees charged by the lender).
Exactly which of these fees (and others) you’ll be charged will vary from lender to lender so if you’re at all unsure, get in touch with the bank or building society you plan on doing business with and they’ll let you know.
Will I be charged for paying off my mortgage early?
Yes, almost all mortgage providers will normally charge what is known as an ‘early repayment charge’ if you decide that you can, and wish to pay the whole balance of your mortgage off early. This is essentially because in doing so, you are losing the lender money in interest that you would otherwise be paying over the course of the term.
On some repayment mortgage plans, you will be allowed to make overpayments each month, that is, paying more than your usual monthly repayment. Overpayments are typically allowed up to 10% above your standard monthly payment, but again this will depend on each particular mortgage plan, so always check with your lender if you are unsure.
What happens if I can no longer afford my monthly payments?
If for any reason you find yourself having trouble keeping up with your existing payment plan then you should get in touch with your lender right away and let them know. There are various different options you may have available, from taking a ‘repayment holiday’ (essentially stopping payments for a short time) to starting a new, adjusted repayment plan.
It is imperative that you contact your lender as soon as possible though as multiple missed payments could result in your home being repossessed.
Can I still get a mortgage if my credit rating is bad?
There are mortgage plans out there to suit people in a whole range of financial situations and so if your credit score is less than perfect, don’t worry, the chances are that there is a product out there for you.
If you do have a bad credit score, while you will likely still be able to get some kind of mortgage, you won’t be able to benefit from the best deals; you’ll probably be offered slightly higher than average interest rates, or maybe a lower LTV ratio. This is just to reflect the increased risk that the lender is taking by allowing you to borrow money with a less than perfect track record of repaying in the past.
My house has gone up in value, can I remortgage for more money?
Yes you can, this is known as releasing equity subject to affordability checks by your lender.
Say you have a mortgage worth £400,000 on a property that is worth £450,000. The £50,000 difference between what you’ve borrowed and the value is the equity, and is likely what you paid as a deposit.
Now if, in this same situation, over the course of a few years, your property goes up in value, say by another £50,000. Then the equity in your property has increased and, if you so desire, you could choose to remortgage and release some of that equity as cash, while maintaining the same LTV on your loan.
If you do decide to remortgage though, watch out for early repayment charges that your current lender might charge. The chances are, if your increase in equity is large enough, that it will still be worth remortgaging, but you don’t want to be caught off guard by early repayment charges.
What if I want to move house before I’ve paid off my mortgage?
If you want to move house, you may be able to simply port your existing mortgage over to your new property and continue paying it off as usual.
You may have to undergo new affordability and credit checks if you do so and if your new property’s value is significantly different from your old one then the situation may get a little more complicated. If you do want to move house, get in touch with your existing mortgage provider first and they’ll let you know what options you have at your disposal.
How can I get the best deals on mortgages?
The world of mortgages is broad and complex but there are a few things you can do to try and ensure that you get the best deals you have available to you.
Firstly you want to do as much as you can to clear up your credit rating. If you do have a poor credit rating, then it’s not something you can sort out or improve overnight, but if you do have time on your hands, then taking out a credit building credit card and using it for a while will help you.
Saving up so that you can afford a larger deposit will stand you in good stead, allowing you to take out a mortgage with a lower LTV ratio, meaning smaller monthly repayments and less money to pay back overall. This also gives you the option of potentially remortgaging in the future to release some more equity.
The best thing you can do though to get the best deal given your financial situation is simply to extensively compare different mortgage plans online. Using a free mortgage comparison service like Money Expert’s will allow you to go over the various different plans that are on offer so that you can easily see what kind of deal you could expect.