Mortgages are a type of loan which is secured against property and is commonly used to fund the purchase of a property. Mortgages tend to come with much lower interest rates than other types of loans and can be taken over longer terms, meaning the payments are usually affordable, even when borrowing more than 4 or 5 times your annual income.
Mortgages are a big financial commitment and are subject to a robust application process, meaning they take time to arrange and can be relatively inflexible compared to other types of borrowing. That said, if you’re looking to purchase or refinance your property, then a mortgage is likely to be the most suitable product.
What is a Mortgage?
A mortgage is a legal agreement used by financial institutions to lend money while taking security by way of a legal charge over the borrower’s property. This gives the lender certain rights over the borrower’s property and binds both parties to abide by the agreed mortgage conditions. Some mortgages come with special features such as cashback mortgages, offset mortgages and current account mortgages.
Mortgages can also come with promotional interest rate features, such as a fixed rate, discounted rates and low variable rates.
How do Mortgages Work?
Mortgages are offered on the basis that they’re secured against property. A lender won’t offer a mortgage for the full property value, meaning you must put down a deposit to cover the balance. The ratio between the maximum mortgage amount and the property value is known as the loan to value (LTV) ratio. For example, if a lender offers a maximum LTV of 90%, that would mean that the borrower must put a minimum deposit of 10% of the property value.
Other factors can impact which products are available for certain borrowers, for example, the borrower’s affordability calculations and the strength of a borrower’s credit history. Most mortgage lenders use credit scoring to assess a borrower’s eligibility for their mortgage products.
Affordability calculations are used to calculate the maximum loan available to each applicant. While each lender takes a different approach, most lenders offer around 4-5 times the applicant’s annual income.
What are the Types of Mortgage Loan?
There are many different types of mortgage loan, including the following:
- Residential mortgages – these are simply mortgages that are offered against a borrower’s main residence, their home. Residential mortgages can be arranged to purchase a property or to repay an existing mortgage, known as a remortgage.
- Buy to let mortgages – Buy to let mortgages are mortgages that can be offered on residential properties that are to be let to others, rather than occupied by the property owner. Buy to let mortgages are often taken out on an interest only basis, meaning only the interest is paid each month, with the entire mortgage balance remaining outstanding.
- Offset mortgages – Offset mortgages are a type of mortgage that links your mortgage account to a savings account. Offset mortgages allow borrowers to save money by offsetting their savings against their mortgage account.
- Commercial mortgages – Commercial mortgages are a type of mortgage that is used to purchase or refinance commercial and semi-commercial properties. There are sub-types of commercial mortgages including semi-commercial mortgages, commercial investment mortgages and owner-occupied commercial mortgages.
- HMO mortgages – HMO mortgages are specifically offered for the purchase or remortgage of HMO properties, also known as multi-lets. Much like buy to let mortgages, HMO mortgages are usually arranged on an interest only basis.
- Expat mortgages – Expat mortgages are offered to UK nationals who have since left the UK and are living overseas. These mortgages can either be offered for residential properties or as expat buy to let mortgages.
What are the Pros of Having a Mortgage?
A mortgage is ultimately a loan and as with any type of borrowing, there are advantages and disadvantages of mortgages. Below we will break down the advantages:
- Mortgages make homeownership possible – Without mortgages, the average property would be far out of reach for most people. As such, mortgages facilitate homeownership for countless people across the country through cost-effective borrowing.
- There are products to suit most people – There is a huge choice of mortgage products and most lenders offer a flexible range of products to meet borrowers’ needs, such as fixed rates, discounted rates and help to buy mortgages.
- Mortgages can allow you to release equity – If you’ve got a lot of equity locked away in your property, but are short of cash to meet your short-term plans, then a remortgage may allow you to borrow money. This can be useful for those looking to release funds to improve their property or to engage in a profitable business transaction.
What are the Cons of Having a Mortgage?
And now for the disadvantages:
- You pay back more than you borrow – Over the term of your mortgage, you’ll pay back more than you borrow, which means that while mortgages may make homeownership realistic, they also add to the cost of it.
- You’ll be faced with additional fees and costs – Throughout the mortgage process, you must pay additional fees and charges such as surveyors fees, legal fees and arrangement fees. These fees add to the cost further and while some lenders allow you to add some of them to the loan, interest will be charged on them, acting as a form of compound interest as interest is then charged on the fees.
- It’s a long-term commitment – Mortgages are a long-term commitment and often come with early repayment charges, meaning you’re penalised for paying them back too early. This means you’re effectively committed to them for a set period of time, and face financial losses for repaying early.
What are the Terms to Know about Mortgage?
There are a number of key mortgage terms that you should understand:
- Agreement in principle – An agreement in principle is a document produced by lenders to show their intention to lend you a certain amount, subject to completing the full application process. This document is based on a simple credit search and the information initially provided, rather than a full application assessment.
- Capital repayment – Capital repayment is a method of repaying your mortgage over the full term through your monthly repayments. Most residential mortgages are arranged on a capital repayment basis.
- Conveyancing – Conveyancing is the name for the legal work that is required for a property purchase or refinancing. Conveyancing is handled through your solicitor and their fees are usually referred to as legal fees.
- Early repayment charges – Early repayment charges, also known as penalties and are charged when your mortgage is repaid early, usually during a promotional rate period such as a fixed rate.
- Equity – Equity is the difference between a property’s value and the amount of mortgage outstanding against it.
- Interest only – Interest only mortgages allow a borrower to pay only the interest each month, paying nothing off the balance in the process. This means that without overpayments being made, the full mortgage balance remains outstanding at the end of the term and must be repaid in full.
- Loan to value – Loan to value is the proportion of mortgage compared to the value of a property, expressed as a percentage.
- Mortgage term – Your mortgage term is the amount of time remaining on your mortgage before it must be repaid.
- Porting – In some cases mortgage can be switched to a new property, meaning you move the mortgage from one property to another. This is known as porting. Not all mortgages are portable.
What is the Mortgage Loan Process?
The mortgage process usually takes around 4-6 weeks and generally follows set steps. The key ones are:
- Apply to your preferred lender for an agreement in principle to ensure that your application has the best chance of approval once a formal mortgage application is made.
- Once approved, you can move on to submitting your formal mortgage application. At this stage, the lender will request a number of documents from you including bank statements, proof of income, proof of ID and residency. Once submitted, the lender will begin their formal assessment of the application, this is known as the underwriting process.
- At this stage, your lender will request details of your conveyancer, so it’s important that you have one lined up.
- Your lender will look to instruct a surveyor to undertake a valuation on the security property. The valuation will be a physical inspection of the property, followed by a formal report on it’s value and condition. As such, this can take several days, depending on the surveyor’s availability.
- If everything goes according to plan with the above steps, the lender will issue a formal mortgage offer. This signals their intention to lend to you formally and breaks down the terms and conditions, as well as any additional work that will be required by your conveyancer.
- Legal work can continue and once it’s finished, you’ll be in a position to complete your purchase or refinance and drawdown your funds.
Who can Get a Mortgage?
Most people can get a mortgage, although each lender sets its own lending criteria. Depending on the property type you’re looking to finance, we can lend to individuals, partnerships, LLPs, limited companies, and even some offshore companies.
What are the Requirements to Get a Mortgage Loan?
Whether you meet a lender’s minimum mortgage requirements will depend on many factors including:
- Your credit history
- Your income
- How much you’d like to borrow
- Your deposit amount
- The type of property you’re looking to finance
- Any regular debts or outgoings that you have
- The property’s rental value (for investment properties)
If your credit history is less than perfect, you may still qualify for many bad credit mortgage loans, which may offer more flexible credit scoring, or even no credit scoring. When taking out a mortgage with bad credit, you may pay a slightly higher interest rate as a result.
What are the Mortgage Interest Rates?
There are a number of types of mortgage interest rates available, here we break them down:
- Fixed-rate mortgages – Fixed rate mortgages allow borrowers to fix their interest rate, and therefore their monthly payments for a set period of time, often between 2-5 years. Fixed-rate mortgages give borrowers peace of mind that their monthly costs will remain the same and can make budgeting simpler.
- Variable rate mortgages – Variable rate mortgages, as the name implies are mortgages with interest rates that can go up or down over time. These changes to the interest rate would see a corresponding increase or decrease in a borrower’s monthly payments. Of course, they benefit when rates drop but could be caught out if rates rise sharply. Variable rate mortgages are usually based on a lender’s standard variable rate, a rate set by each lender at which their standard lending takes place.
- Discounted rate mortgages – Discounted rate mortgages work in much the same way as a variable rate mortgage, but the lender offers a discount on their standard variable rate, saving the borrower money.
- Tracker rate mortgages – Tracker rate mortgages can go up or down, much like a variable rate mortgage, but instead of tracking the lender’s standard variable rate, it follows the Bank of England Base Rate. Of course, as the Bank of England Base Rate can go up or down, so could your mortgage payments.
How are Mortgages Rates Determined?
Each lender has its own product range, which will usually be made up of many products. While some lenders may offer lower rates than others, how mortgage rates are determined tends to be the same for most lenders.
The biggest factor in deciding the interest rate that you pay is the required loan to value (LTV). Higher LTV products usually come with higher interest rates than those at a lower LTV ratio. The next factor is the interest rate type that you require, for example, when interest rates are rising in the economy, a fixed rate product will usually come with a higher rate than a comparable variable rate mortgage. Finally, as mentioned above, your credit history also plays a big part in your mortgage interest rate. A history of bad credit will usually result in a higher mortgage interest rate.
What are the Parties involved in a Mortgage?
The main parties involved are the borrower and the lender. The borrower is the person who has taken out the mortgage and is responsible for keeping up their repayments and meeting the agreed mortgage conditions at all times. The lender is responsible for lending the money and being there to support the borrower should they run into difficulty. For FCA regulated mortgages, the mortgage lender’s responsibilities for taking a fair view of borrowers in financial difficulty will be greater.
How Many Mortgages Can You Have on Your Home?
In theory, there is no limit on the number of mortgages that can be taken out against your home, although in practice, lenders are likely to limit it. A secured loan, also known as a home equity loan can be taken out alongside a mortgage to release equity from your property. You could take more than one secured loan against your property, but as each new loan legally ranks behind the previous lender in the queue of getting their money back, each new loan becomes more difficult. That said, there is no strict limit to how many mortgages you can have, so this will depend on your lenders and your circumstances.
If you have a lot of loans secured against your home and need another, consider remortgaging all of them into one debt consolidation remortgage.
What is the Payment Process of Mortgages?
Mortgages are usually repaid on a monthly basis, with payments taken by direct debit each month For some commercial mortgages, seasonal or quarterly payments are occasionally offered, but this is rare for residential mortgages. Most mortgage lenders offer terms from 5 years up to 35 years, with 25 year terms being the most common choice for most borrowers.
A shorter mortgage term will result in higher monthly payments but will mean that you pay less total interest over the term. This is in contrast to longer-term mortgages, which will come with lower payments, but a higher total interest cost over the mortgage term.
How to Calculate the Payment amount of the Mortgage
The simplest way to calculate your monthly mortgage payments is to use a mortgage calculator. Should you wish to calculate it manually, the process is more complex as the proportion of interest and capital that is paid changes each month.
What are the National Differences in terms of the Definition of the Mortgage?
National differences in mortgages can be vast, with interest rates in many countries being significantly higher than in the UK. In the USA, Germany and Denmark, the average mortgage interest rate is around 6 per cent, with Australia benefitting from comparatively low-interest rates, averaging 2.68 per cent in December 2021. While interest rates differ in each country, mortgages work in the same way in most countries. In simple terms, they are issued as a loan, which is then secured against property. While they are arranged in largely the same way in each country, they can be issued in different currencies and be governed by different regulatory bodies in each country.