What is a mortgage?
Do you want to buy a property in the UK? First, you need to understand what a mortgage is. Latest Deals is here to help you! In this guide, you will find everything you need to know about mortgages.
What is a mortgage?
A mortgage is a type of loan used for buying a property.
A mortgage is an agreement between a lender and a borrower.
The lender is the financial institution that is lending the money. The borrower is you, the person borrowing the money.
You can get a mortgage from a bank or a building society.
Mortgages are secured loans. This means that until you have paid off the mortgage in full, the institution who lent you the money owns part of the property.
How does a mortgage work?
In the UK, a residential mortgage usually lasts around 25 years. You can get shorter and you can get longer.
If it is a Repayment Mortgage, that means at the end of the mortgage term, you will have paid back the money.
However, there are other types of mortgages too. We cover these later in the guide.
To get a mortgage, in most cases, you need to put down a deposit. This is a sum of money.
All mortgages charge interest - a fee - so it's essential to keep that in mind when choosing the right mortgage for you.
You can get a mortgage on your own, or with other people.
What is a mortgage deposit?
A mortgage deposit is a down-payment to pay for part of the property.
You need to pay a deposit to get a mortgage.
In the UK, the minimum deposit to get a mortgage is around 10% of the property’s value.
How much you need to pay depends on your individual circumstances and what mortgages are available.
IMPORTANT NOTE: It may be possible to pay less than 10% with various Government schemes. These vary over time and may come with many conditions.
How does a mortgage deposit work?
EXAMPLE: If you are buying a property that costs £350,000, you may need to pay a deposit of 10%.
10% of £350,000 = £35,000.
If the house costs £350,000 and you have already paid £35,000, then the remaining amount you need as a mortgage is £350,000 - £35,000 = £315,000.
The deposit you will need is £35,000 (10%).
The mortgage you will need is for £315,000 (90%).
The percentage of the house price you are borrowing is called the Loan-to-Value (LTV).
So in the example above, the mortgage was for 90% of the property. The LTV is 90%.
The LTV might be 80%, 85%, 90%, 95%... any amount depending on your circumstances.
IMPORTANT NOTE: The more you put down as a deposit, the less money you will need to borrow.
Where can you find a mortgage?
You can find a mortgage with most UK banks and also with building societies.
You can get a mortgage directly from a bank or building society, or you can get a mortgage via a mortgage broker or mortgage adviser, who will give you advice and help you find the best mortgage deal for you.
We recommend that you speak with a professional mortgage adviser (you can often do so for free).
Should I choose a bank or building society?
Building societies don't have to pay regular dividends to shareholders as banks do, so usually, they can provide better mortgage deals with lower interest rates. However, always speak with a professional mortgage adviser first.
What type of mortgage do I need?
There are many types of mortgages, and you can find more information about them in our guide about types of mortgages.
The types of mortgages available will change depending on your circumstances, for example, if you are a first-time buyer, if you are going to use the Help to Buy Scheme, if you are going to use the Right to Buy Scheme, or if you need a Guarantor Mortgage, these can all change what type of mortgage is available to you.
In addition, if you have a bad credit history, if you are self-employed, or if you need a 100% mortgage because you can't afford a mortgage deposit, there are mortgages specifically for these cases.
What mortgage you need depends on you and your individual situation.
Interest-only Mortgage and Repayment Mortgage
There are two types of mortgages regarding payments:
What is an interest-only mortgage?
All mortgages charge a fee. This fee is called Interest.
Interest is the cost of borrowing money. It is calculated as a percentage of the mortgage (the debt).
This percentage is called the Interest Rate. You will see interest rates of 0% - 8%.
For example, if you borrow £100,000 and it has an interest rate of 2%, that means each year you will have to pay £2,000 in fees.
This does not reduce your debt! If you only pay interest you do not reduce your mortgage debt. In this example, it will remain at £100,000.
If you get an interest-only mortgage, you will need to pay for the interest rate charged. This is usually paid each month.
IMPORTANT NOTE: Interest-only mortgages do not reduce your debt. You never clear your mortgage. Example: Your house is £100,000 and interest is 2% per year. You pay £2,000 per year. Your interest-only mortgage term is for 20 years. £2,000 x 20 years = £40,000. Even after 20 years and paying £40,000 of interest, your mortgage debt remains at £100,000.
At the end of the mortgage term for an interest-only mortgage, you will need to pay off the mortgage in full.
What is a repayment mortgage?
The most common type of mortgage is the repayment mortgage. In this type of mortgage, you pay interest and an extra amount of money to reduce your mortgage debt. These tend to be paid monthly and lumped together in one sum.
At the end of your mortgage term, you may own 100% of your property.
Fixed Rate Mortgage and Variable Rate Mortgage
A mortgage can also change depending on how the interest rates are set. For that, there are two types of mortgages: fixed rate mortgage and variable rate mortgage.
What is a fixed rate mortgage?
A fixed rate mortgage means that the interest rate remains constant for a fixed term. This is often between one to five years.
This is of benefit if you want your mortgage payments to remain the same for long periods of time.
What is a variable rate mortgage?
A variable rate mortgage can also be called a discount mortgage or tracker mortgage. A variable rate mortgage can have its interest rate changed at any point in time. But, they usually follow the Bank of England base rate. This type of mortgage usually has lower interest rates, but there is no guarantee that they won’t increase. They fluctuate according to the economy of the UK.
What happens after the fixed term?
Often, after the fixed term is finished, the fixed-rate mortgage will then turn into a variable rate mortgage. Many people seek to re-mortgage to get a better deal (but that’s for another guide). Sometimes, you can find mortgage deals that are fixed or variable for the entire duration of the mortgage term, but that's not common.
Learn here more about how remortgaging works.
How much does a mortgage cost?
The cost of a mortgage depends on what type of mortgage you get, how much money you have to borrow, the terms and conditions of your mortgage, the length of your mortgage, and the interest rates you have agreed on.
You also need to be aware of the different types of mortgage fees.
There are many different types of mortgage fees.
You could be charged for an application/arrangement fee, even if you get accepted or not for a mortgage, valuation fees to see how much your property is worth, higher lending charges, if your deposit is small, broker fees if you are using a mortgage broker, early repayment charges, if you want to pay it off before the end of your mortgage term, exit fees if you want to move to another lender, missed mortgage repayment fees, if you forget to pay or can't pay a monthly mortgage repayment and many more depending on your case.
IMPORTANT NOTE: It's crucial to ask for all the fees you could be charged before getting a mortgage deal. A professional mortgage advisor can help to explain these fees to you.w
Also called a mortgage deposit, a down-payment is the money you pay upfront to buy a property. For first-time buyers, this is usually 10% in the UK.
- Interest Rate
This is a percentage that shows how much you will pay as a fee to the lender.
- Mortgage Payment
Your mortgage payment is the amount you pay every month to pay back the money you have borrowed with interest.
- Mortgage Term
A mortgage term is how long your mortgage will last. In the UK, this is usually 25 years, but it can be up to 40 years.