Given that, as of early 2015, the average house price in the UK is over £250,000, and is almost double that in London, most of us will need some kind of help when we come to buy a home.
This is where residential mortgages come in. We’ll explain what residential mortgages are, what different forms they come in and how you can go about getting one over the course of this guide.
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
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.
So if the house you want to buy is worth £500,000, and you pay a deposit of £50,000, your loan will be worth £450,000.
The £50,000 deposit is 10% of the value of the property and so you’re the borrowed amount, and therefore the LTV, is 90%.
Mortgages with lower LTVs (and so higher deposits) come with lower interest rates, reflecting the reduced risk on the part of the lender given that they are giving out less cash.
It is best to strike a balance between the size of the deposit you’d have to pay, and the rate of interest attached to the repayments rather than to be tempted to opt to pay less at first and end up paying more out overall.
Types of Residential Mortgage – Repayment
When it comes to repayment methods, there are broadly two different types of mortgage product 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 only of the interest added to the borrowed amount, and then you pay back the remaining capital at the end of the term, or during the term if you have the means.
Types of Residential Mortgage – Interest
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 what is known as the lender’s standard variable rate (SVR) of interest, which changes monthly at the discretion of the lender, tracking general economic changes in the country and in the lending market.Tracker Mortgages
The interest rate you pay when you take out a tracker mortgage will vary monthly as well but will directly track changes in the Bank of England base rate, staying a set percentage above it at all times.
Types of Residential Mortgage – Reasons for Borrowing
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 you’re moving into your fifth home, there’s bound to be a mortgage available tailored to suit your specific 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 help out first time buyers who are struggling to come up with the cash to get a foot 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 – if you think you could benefit from better interest rates for example.
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 is over, you’ll have the option of doing what is known as ‘porting’ a mortgage. This means you’ll take your existing mortgage to your new property, effectively remortgaging with the same company.
Bear in mind though that if you do decide to do this before your original mortgage expires, you’re likely to face penalty charging for early redemption.
Compare Mortgage Plans
With the various different types of mortgage plan available, taking one out can be a confusing process. But once you’ve read this guide and worked out roughly what kind of product you’re after, head over to our mortgage comparison page in order to see what kind of deals you could be getting so that you can move in to your new house immediately.