L&C are authorised and regulated by the Financial Conduct Authority (reg no. 143002). Please note the FCA does not regulate most Buy to Let mortgages.
How do mortgages work?
Whether you’re buying a house, unit or apartment, most of us don’t have enough money tucked away to cover the full purchase price. In order to get the full amount needed to buy a property, we need to borrow money through a mortgage.
A mortgage is an arrangement where you borrow money from a lender to buy a property, whether as a home or investment. It usually lasts for between 25 – 35 years.
In exchange for allowing you to borrow this money, your lender will charge you interest. This can be either fixed at a certain rate, or variable.
You’ll usually pay your loan off in instalments known as repayments. These are usually required every month.
A mortgage can also be known as a home loan or as home finance.
What types of mortgages are on offer?
You can boil down UK mortgages into the following types:
Unlike a variable rate home loan where repayments move up and down, fixed rate repayments remain unchanged for a set period. This means that for the length of your fixed rate term — usually between one and five years, but sometimes as great as 10 or even 15 years — you’ll know what your repayments will be.
Standard variable rates
A variable rate home loan is a home loan product which has an interest rate which fluctuates up or down over time as your lender sees fit. Unlike a fixed rate home loan where the rate is locked in for a fixed term, the interest rate of a variable rate mortgage moves up and down in accordance with market changes.
Tracker mortgages move in line with a nominated interest rate which is usually the Bank of England base rate. The actual mortgage rate you pay will be a set by your lender at an interest rate above or below the base rate. When base rate goes up and down, your mortgage rate will go up and down by the same amount.
Discount rate mortgages
A discount mortgage works by setting a discount on a lenders standard variable rate (SVR). This means the interest rates can go both up or down in line with the SVR.
Standard home loans have repayments that include both the interest and a small proportion of the capital. If you remove this capital portion from the equation, you can reduce the amount you make in repayments each month. This can be good for some borrowers, including investors and those building a property, but there is an added risk with this type of loan as your loan amount doesn’t reduce, meaning you will still have to pay the whole capital off at the end of the term.
Offset mortgages are linked up to your savings account and can help to reduce your interest payments. Any money deposited into the account offsets interest on your mortgage. For example, if you have a mortgage of £100,000 and savings of £25,000, your mortgage interest is calculated on £75,000 for that month.
This cuts the amount of interest you pay but the mortgage rate is likely to be more expensive than on other deals. You can still access your savings if you need to but the more you offset, the quicker you’ll repay your mortgage.
Capped rate mortgages
This is a type of variable rate mortgage but one with a limit or cap on how high your interest rate can rise. So you can benefit from low interest rates but also enjoy the comfort of knowing that your interest rates will never exceed a certain level.
When you take out this kind of mortgage you also receive some money back. This is normally a percentage of the loan.
This option is available on many other types of mortgage and it allows you some flexibility when making repayments. You can choose to pay more when you can afford it and if you have already overpaid then you can pay less or take a payment holiday. These types of mortgages tend to have higher interest rates than other deals.
95% and 100% mortgages
These types of mortgages are designed for people that either have no deposit or are struggling to save a significant deposit. Loan-to-value rates of 95% or 100% typically incur higher interest rates. Although they were previously widely offered, 100% mortgages fell out of favour after the financial crisis, and now only tend to be offered when a family member is able and willing to provide a guarantee secured against their own residential property.
Buy to let mortgages
Buy to let mortgages are for people who want to buy a property and rent it out rather than live in it themselves. The amount you can borrow is at least partly based on the amount of rent you expect to receive.
Struggling to understand mortgage jargon?
We know that sometimes it seems as though the financial world operates in a different language altogether making it hard to understand what you’re getting into when applying for a mortgage. So to help you out, we have created a mortgage A-Z to simplify the terms your most likely to come across in your application.
How much does it cost?
1. Upfront fees
- Mortgage arrangement fee. This is the fee that your mortgage lender charges to set up your mortgage.
- Product fee. Many lenders will charge you a product fee which is the cost of choosing a specific mortgage.
- Valuation fee. This is a fee charged by your mortgage lender for them to carry out valuation of the property you would like to purchase the mortgage for.
- Legal fees. A legal professional will need to look over your application to make sure it’s compliant.
- Stamp duty. If your property costs over £125,000 you’ll have to pay stamp duty, which is a certain type of land tax. You’ll usually have to pay this tax as an upfront fee within 30 days of settlement.
2. Ongoing fees
- Repayments. The biggest cost of a mortgage is in the regular repayments you have to make on it. Your repayment amount is set by your lender and takes into account the interest rate, how often you’ll be repaying and the length of the loan.
3. Exit fees
- Early Repayment Charge. If you repay your mortgage early or overpay more than your overpayment allowance some mortgage providers will charge you an early repayment fee.
- Redemption administration fee. This is a fee charged by your lender in order to close your mortgage at the end of the term.
How to prepare when applying for a mortgage?
- Make sure your credit report is in order. You can get a copy of your credit report online. Its a good idea to make sure your address history is accurate and it also might help to be registered on the Electoral Roll at your main address.
- Ensure your ID and address documents are up to date. Some mortgage lenders will ask you to provide proof of ID or address to satisfy money laundering requirements and these must be the original document, not a copy, and be current and valid.
- Where is your deposit coming from? All lenders will want to see where your deposit is coming from and whether it is a gift or part of your savings. For example, if the money is coming from your savings account then you will be required to show bank statements as evidence.
- Have all your income proof ready. Your lender will want to know how much you earn, so it is a good idea to have your income proof readily available for your application. You may be required to present your latest 3 months payslips/bank statements, or your latest P60. The documents you will need to supply depends on the requirements of the specific lender.
- Check your solicitors are on the lender’s panel. Lenders these days are extra careful about which lawyers you are using to target mortgage fraud. Ask your solicitor if they can work with most lenders, make sure they are a reputable firm.
- Are you getting a joint loan? Think about how strong your relationship is with the other party. Changes to your relationship could make it hard if one party wishes to sell their part of the property.
- What are your plans for the property over the next few years? Match your mortgage to your future plans. For example, avoid taking out a fixed rate loan if you plan to sell the property shortly after buying it. Many fixed rate mortgages charge a penalty if you pay them off before the end of the set period which can be expensive.
- Are you eligible for the loan? Borrowers generally need to be over 18 years of age. There are other requirements too, but these depend on the lender. Some will want you to have a good credit rating. Others might not allow you to buy inner city apartments. Always read these before applying.
How do I compare different mortgages?
- Decide on a loan type. First, decide whether a fixed rate or variable rate mortgage is more suited to your plans and budget. This is also a good time to find out what your credit score is and know what loans are available to you.
- Compare different lenders for different loans. Compare what different banks and lenders are offering for your chosen loan type and down payment. It is also important to always get more than one quote when looking for a mortgage. This will ensure you get a good mix of options from different types of lenders.
- Ask for a Key Facts Illustration. A lender must give you a loan estimate by law. This will show you interest rates, repayment costs and closing costs for your potential mortgage. Some lenders also have a mortgage calculator feature on their website where you can receive a quick quote.
- Repeat until you find a loan you want. It’s normal to ask for loan estimates from more than one lender until you find a loan you’re happy with.
London and Country Mortgage Experts
L&C work with over 80 different mortgage lenders, including NatWest International, giving you a great opportunity to compare different mortgage deals in the market. To apply for a mortgage through L&C click the link below.
- Fee FREE mortgage advice
- Personal customer service from start to finish
- Comparison of over eighty mortgage lenders
- Winners of the British Mortgage Awards 2016
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