Tim LeonardAbout Mortgages
A mortgage is a way of borrowing that most people will need to use when they want to buy a home. No matter where you are on the property ladder – a first-time buyer, potential home mover or someone looking for a remortgage deal – carrying out a mortgage comparison allows you to compare mortgage rates, and other aspects of a mortgage, to ensure you’re getting the best mortgage for you.
The size of your deposit, or the amount of equity you’ve already built up in a home, will go a long way to determining the mortgage rates you can get. The more you put down as a deposit, the less you’ll need to borrow relative to the value of your home – and a lower loan to value is usually the path to being offered the lower rates.
Your monthly income, outgoings and credit score are also important in securing the mortgage, along with the type of mortgage you need, how long you want to pay it back and whether you want to fix your mortgage rate or not.
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Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a loan or any other debt secured on it.
How to get a mortgage
Getting the right mortgage deal for you is important. After all, it’s a long-term financial commitment and monthly expense you’ll need to keep up for years to come. But where do you begin?
The first step is to work out the type of mortgage you need, something which will depend on why you are looking for a mortgage. Usually you’ll fall into one of the following categories:
First-time buyer
If you’ve never owned a home before, a first-time buyer mortgage is usually what you’ll need. Knowing that you’re just starting out, the deposit requirements on most first-time buyer mortgages are generally small and mortgage deals where upfront fees are kept to a minimum are usually available.
Remortgaging
If you already have a mortgage but want to switch to a new one, you are looking to remortgage. Most people remortgage because their current fixed-rate or discounted term is at an end and they don’t want to move on to their lender’s standard variable rate, which is usually higher. Other reasons you might want to remortgage include to raise funds to pay for home improvements, or because falling interest rates or a rise in the value of your home means you could save money by switching to a new mortgage deal.
Moving home
If you already have a mortgage but want to move home, you may be able to take your current mortgage with you – called porting. Alternatively, you might want to arrange a new mortgage altogether, either with your current lender or a different one. Whichever option you’re considering, you should always weigh up the costs of either porting or exiting your existing deal, along with the potential fees you face if you arrange a brand new mortgage.
Buy-to-let mortgages
If you’re considering buying a property to rent out to tenants, you will need a buy-to-let mortgage. Also sometimes known as landlord mortgages, the minimum deposit on a buy-to-let mortgage is typically higher than on a residential mortgage. You’ll need to show that the rental income you’re likely to receive will more than cover your monthly repayments too.
What are current UK mortgage rates?
Average mortgage rates have mostly been rising since the Bank of England increased the base rate of interest to 4.50% from 4.25% on 11 May.
The average rate on a two-year fixed rate mortgage at 60% LTV (so if you have a 40% deposit or equity) is 4.63%, according to Rightmove, as at 16 May. At 95% LTV, the average two-year fixed mortgage rate is 5.60%. Among five-year fixed rate mortgages, the average rate at 60% LTV is 4.27% and at 95% LTV is 5.15%.
The latest data from Moneyfacts shows the average standard variable rate, or SVR, is 7.37%, a high not seen since December 2007.
How much could a lower mortgage rate save you?
A lower mortgage rate has the potential to significantly reduce your monthly mortgage repayments.
For example, taking out a £150,000 repayment mortgage that you’ll repay over a 20 year term at an interest rate of 5% will typically result in a monthly repayment of around £990. However, find a mortgage deal where the interest rate is 4% for the same sized mortgage repaid over the same 20-year term and your monthly mortgage repayments would be around £909 – so around £81 a month less.
That’s why making sure you compare mortgage rates is important if you want to find the best mortgage deal for you.
» MORE: Try our mortgage repayment calculator
How mortgage rates work
Mortgage rates are the rate of interest the lender charges on your mortgage balance, which affects how much you pay each month. A lower interest rate can mean lower monthly payments. These rates can be fixed or variable during the agreed mortgage term.
A fixed rate mortgage offers peace of mind that your monthly repayment will stay the same for the length of time that you fix, even if interest rates start to rise, however you won’t benefit from interest rates falling either. With a variable rate, on the other hand, the rate of interest you pay can rise and fall, usually in line with any change in the Bank of England base rate. This means your monthly repayments could change too, which can work in your favour if rates fall but can leave you paying more if rates rise.
To choose between a fixed rate or a variable rate, ask yourself:
- Do I want to know exactly what my mortgage will cost each month?
- Do I mind if my repayments increase and decrease without warning?
- Do I want to take advantage of potential drops in the base interest rate?
- Am I willing to remortgage after my fixed-rate period expires?
What types of mortgage can you get?
There are various different types of mortgage available to both new and existing home buyers, including:
- There are various different types of mortgage available to both new and existing home buyers, including:
- Fixed-rate mortgages, which have a fixed interest rate for a set period of time, so your monthly payments and interest rate will stay the same. When that initial term ends, if you don’t remortgage, the interest rate usually moves to your lender’s standard variable rate, or SVR.
- Tracker mortgages, which are a type of variable rate mortgage that tend to follow at a certain percentage above the base rate.
- Discount mortgages, which work by tracking a lender’s standard variable rate at a discounted rate for a set period of time.
- Interest-only mortgages, which only require that you pay off the interest each month, and none of your original loan, until your mortgage is at an end. It’s worth remembering that you will still owe exactly the same amount as you borrowed. Lenders may also ask for evidence of your repayment strategy. Another thing to remember is that interest only mortgages can also be on a fixed or variable rate of interest.
- Offset mortgages, which allow you to set your savings against what you borrow to reduce the interest you must pay.
Why loan-to-value ratio matters
The loan-to-value (LTV) ratio is how much you borrow against the property’s total price, after your deposit amount is deducted.
So, say you want to buy a home worth £200,000 and have a 10% deposit of £20,000. It’s no good applying for a mortgage that only offers a maximum 70% loan to value, requiring a 30% deposit. Instead, you’ll need to find a lender who will offer you a 90% LTV.
The LTV can also affect the interest rate you’re charged. You’ll usually get better rates from lenders if you have a lower LTV.
Interest-only vs repayment mortgages
A mortgage has two parts: capital, which is the amount of money you borrow, and interest, which is what the lender charges on the amount you owe.
With interest-only mortgages, your monthly repayment covers just the interest that you owe on the debt, not the amount borrowed. So you’ll still owe the full amount borrowed at the end of the mortgage term, as you’re not paying back any of the capital borrowed over time. Interest-only residential mortgages have fewer options than repayment mortgages. Also, you may not be able to borrow as much and will need to demonstrate how you will repay the capital at the end of the term.
With a repayment mortgage, you gradually repay all the money you borrowed, over your chosen mortgage term, plus interest. Your mortgage balance will get smaller every month and at the end of the agreed term, there will be no outstanding debt if you’ve met the payments. It’s the most common option.
» MORE: Do I need an interest-only or repayment mortgage?
Factor in mortgage fees
When you compare mortgages, it’s important to consider any fees the lender charges for arranging the mortgage, or if you choose to make overpayments. You should also keep an eye out for other potential costs, such as penalties for late or missed payments. And if you want to repay the entire loan early, the penalty is usually a percentage of the outstanding mortgage while the loan is in its initial deal period – this is known as an early repayment charge.
The annual percentage rate of charge (APRC) takes into account the initial rate, additional fees and charges, such as valuation fees, and the follow-on, standard variable charge rate.
Stamp duty
If you’re buying a property or land, you might need to pay a tax called stamp duty to the Government which could add to your overall costs. How much you’ll pay depends on the value of the property, where you are on the property ladder, and whether you’ll live in the property or rent it out.
In England and Northern Ireland, if you’ve owned a home before and are buying a property to live in, you won’t have to pay any stamp duty if the home is worth less than £250,000. If you’re taking your first step onto the property ladder, first-time buyer stamp duty relief means there’s no stamp duty to pay if your property is worth under £425,000. But in either situation, if your property is worth more than the nil rate threshold relevant to you, stamp duty becomes payable in line with the rate tiers your property falls into.
Stamp duty rates and thresholds are different in Wales and Scotland, and if you’re buying a second property or looking to become a landlord.
» MORE: Use our stamp duty calculator
Can I get a mortgage?
Mortgage lenders have rules about who they’ll lend to. They’ll have a minimum age for applying, usually 18, and 21 for a buy-to-let mortgage, and a maximum age you can be when your mortgage term is due to end, which varies from lender to lender.
You’ll usually need to have been a UK resident for at least three years and have the right to live and work in the UK.
Lenders will check your finances, so they are confident you can afford the repayments. So they’ll look at documents, such as your payslips to verify how much you earn and bank statements to see how much you spend each month, and they’ll ask about any debts you’re paying off such as car finance loans. They’ll also look at your credit record. Lenders want to be sure you’ll be able to afford your mortgage now and in the future.
If you work for yourself, it’s possible to get a mortgage if you are self-employed. Or if you receive benefits, it can be possible to get a mortgage on benefits too.
Work out how much mortgage you can afford
You’ll get a good idea of how much mortgage you can genuinely afford to pay each month, and how much you would be comfortable spending on the property by taking a close look at your bank statements. What is your income – and your partner’s, if it’s a joint mortgage – and what are your regular outgoings? What can you cut back on and what are non-negotiable expenses? And consider how much you would be able to put down as a house deposit.
Consider how much you should borrow
While it may be possible to borrow as much as four or five times your salary, lenders will look closely at your personal finances before they come to a decision.
As well as your income, they will look at your other earnings, such as investments, and run a credit check to see your repayment history and credit score to evaluate how much to lend you, taking your house deposit into consideration. The higher your deposit, the more favourable the interest rates become because you’ll need to borrow less as a percentage of the total property price, which makes your loan less of a risk to the lender.
Lenders also look at your debt-to-income ratio, which compares your monthly income to your monthly debt repayments as a measure of affordability. If your outgoings are too high each month relative to your monthly pay, a lender likely won’t approve you for a mortgage.
Knowing how much you can afford can be more important than what you can borrow. You should be left with some disposable income and breathing space in case interest rates rise.
» MORE: How much can I borrow on a mortgage?
How to calculate your mortgage
A quick and simple way to get a ballpark figure is to use NerdWallet’s free mortgage repayment calculator. Just adjust your loan amount, interest rate and repayment term, and you’ll see what the monthly repayment would be.
We also have a mortgage interest rate calculator that shows what might happen to your mortgage repayments when interest rates rise and fall.
» MORE: Mortgage calculators
How to apply for a mortgage
You can apply for a mortgage with a bank or building society. You can apply directly with the lender, telling them which mortgage you’re interested in, or through a mortgage broker. You’ll need to provide identification documents and a proof of address, which might be your passport, driving licence or utility bills.
Lenders will also want to see proof of income and evidence of where your deposit is coming from, including recent bank statements and payslips. It will save time if you have these documents ready before you apply.
Mortgage FAQs
A mortgage is a loan you take out to help you buy a property you don’t have the money to pay for up front, whether you’re a first-time buyer, remortgaging, securing a buy to let, or moving to your next home.
With a repayment mortgage, you pay the loan back in monthly instalments including interest, after putting down a deposit. Alternatively, with an interest-only mortgage, you will repay just the interest and you will repay the capital loan at the end of the mortgage term.
Your mortgage term is how long you’ll make repayments for. The usual maximum term in the UK is 25 years, but you can choose a shorter or longer period, with some providers offering extended terms of up to 40 years. If you have a longer term, your monthly repayments will be lower, but the debt will take longer to pay off and you’ll pay more interest overall.
The amount you need to borrow will depend on the purchase price of the property, and how much you can put down as a deposit.
The loan is secured against the property, which means your home is at risk if you don’t meet the repayments.
A mortgage rate is the rate of interest that you’ll be charged on the loan amount you borrow through a mortgage. A mortgage interest rate can be a fixed rate, meaning it won’t change for a set period of time, or a variable rate, meaning that it could potentially change.
Mortgage lenders regularly alter their mortgage rates to reflect the wider cost of borrowing, market conditions and their lending priorities. This means it’s always advisable to shop around and compare mortgages if you’re looking for a new mortgage deal. Also remember that finding the best mortgage rate doesn’t automatically make that the best mortgage for you. Besides the mortgage rate, you should take into account other factors, including fees, the length of the mortgage term, and if a fixed rate or variable rate mortgage is the most suitable option for you.
The cost of your mortgage will depend on various factors, such as how much you borrow, the size of your deposit, how long your mortgage term is, the mortgage rate you’re paying, and whether you can afford to make overpayments. Your mortgage lender must provide you with the full cost of the mortgage before you apply.
Besides making sure your monthly repayments are affordable, there are many other costs associated with arranging a mortgage to consider, including survey, valuation and mortgage broker fees.
If you’ve previously owned a home and the property you’re buying is worth more than £250,000, stamp duty will be payable as well; if you’re a first-time buyer, stamp duty only becomes payable on properties worth over £425,000.
You should be able to get a mortgage as a first-time buyer, as long as you have a deposit and a steady income. Lenders will take your financial situation into account, but many have dedicated first-time buyer mortgages, which may offer higher LTVs and let you have a fixed rate for a number of years. This may help you plan your future finances and make the first step on the property ladder a little less daunting.
First-time buyers may also be able to secure a mortgage with the help of close relatives through family deposit or family offset mortgages.
Many providers offer dedicated buy-to-let mortgages for properties you rent out to a tenant, rather than live in yourself. These tend to come with extra lending criteria and certain limits. You’ll usually need a larger deposit than for a residential mortgage, and interest rates are often higher. You may also need to already own your own home or have a residential mortgage on another property.
Lenders use credit scores to help decide if they should approve mortgage applications. So a mortgage can be difficult to get if you have a poor credit history, or have been bankrupt in the past. But you may be able to get a guarantor mortgage or a mortgage specifically for those with bad credit through a specialist lender.
You may want to remortgage once your initial fixed-rate period expires, or if your home has increased in value. This can save you money, if you find the right mortgage deal and meet the lending criteria.
If you stay with your provider and get a new agreement with a different interest rate, it’s likely only your monthly repayment amount will change. Switching mortgage providers may require added fees, so it’s worth checking if your current lender can offer you the mortgage deal you’re looking for first.
About the Author
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