What is a mortgage?
A mortgage is a large loan that’s usually repaid over decades that helps you to buy property such as a home and land. Most of us don’t have enough money to buy a new home from our savings alone. So, a mortgage helps us to get on the property ladder and become homeowners or move up it to secure the home of our dreams, or at least the home we can afford.
How does it work?
Mortgages are directly linked to the property you’re buying. The amount you borrow is a percentage of the property’s valuation. The loan is ‘secured’ against the value of your home until you pay it off. As with most loans, you’ll also pay interest on the money you’ve borrowed.
How much can I borrow with a mortgage?
At Loan.co.uk we offer mortgages that range from £10,000 right up to £100 million. To make things even simpler, we’ve built a handy mortgage calculator for you. This is typically a much larger amount than if you were remortgaging which takes into consideration your equity.
Do I need a deposit for a mortgage?
Yes, in most cases. Your new mortgage only provides a percentage of your property’s price, not all of it. That’s where your deposit (also known as a down payment) comes in.
Your deposit pays a portion of the house price value up front, giving you a stake in the property, otherwise known as your equity. The amount of deposit varies (although typically it’s about 5% to 20%). Thanks to your deposit, some of the property will be owned by you.
Lenders often talk about the loan-to-value (LTV) ratio. This is the relationship between the size of the loan (in this instance, your mortgage) and the price of the property. So, if your home is worth £200,000 and you have a £20,000 deposit you’d have 10% equity and an LTV of 90%.
What will lenders look at when deciding if I’m eligible for a mortgage?
When calculating your eligibility for a mortgage, lenders will look at:
- The size of your deposit. The bigger it is, the more options you’ll have
- Your personal income and source of income
- Your credit score and any existing credit commitments
- Your job history
- Your outgoings (including bills such as insurances, utilities, council tax, child maintenance and general lifestyle costs)
All of this information works together to determine how much can you afford. Lenders will try to take a long-term view, not just looking at affordability today, but in the future. So, they try to predict if you’d still be able to pay the mortgage if interest rates went up or your personal circumstances changed.
Which type of mortgage is right for me?
The right mortgage for you will depend on you and your circumstances. Loan.co.uk will be more than happy help you with expert advice as there are plenty of mortgage options to choose from. Here’s a quick overview:
Tracker - A tracker rate mortgage tracks the Bank of England over a set period of time (from two years to the entire length of the mortgage. For example, if the tracker mortgage is set at 2% above the base rate and the base rate was 0.75%, the rate to start with would be 2.75%.
Tracker with cap rate - This is the same as a tracker, but with the amount that the rate can go up capped at a certain maximum level. For example, the mortgage rate could be capped at 3.5%.
Variable rate - Most tracker mortgages revert to a variable rate once the set time period is up. Variable rate mortgages can go up or down depending on decisions made by the Bank of England or the lender. This also means that your monthly payments could be subject to change during your borrowing term.
Fixed rate - The interest rate on your mortgage is fixed at the same rate for a set period, usually for two, three or five years. So, whether interest rates go up or down, you’ll have the peace of mind knowing that that your mortgage repayments will remain the same, enabling you to budget with confidence.
Whether you choose a tracker, fixed, or variable rate mortgage, it comes down to just two repayment options; capital and interest or interest-only.
With the capital and interest option, each monthly repayment you make will both chip away at the capital balance (the loan amount) you owe and pay the interest due on the loan. As time goes by, the capital portion of each monthly repayment becomes larger and the interest part becomes smaller. At the end of the mortgage term (the amount of time you spread your mortgage repayments over), as long as you make all your repayments on time and in full, the mortgage will be repaid and the property will be all yours.
With an interest-only mortgage, you just pay the interest on the amount you borrow. So, you would need to set-up a separate repayment vehicle to pay off the mortgage at the end of term.
To help you to choose the best options for you, be sure to check with a mortgage broker such as Loan.co.uk
How is it repaid?
There are two main ways to repay the mortgage: repayment and interest only.
Repayment mortgages – these pay off the money borrowed (known as the capital) and the interest. They’re paid at regular intervals over a fixed period. Because of this, they guarantee that the entire amount will be paid off by the end of the mortgage term as all the scheduled repayments are made. Also known as capital repayment mortgages, they’re the preferred choice for borrowers in the UK. An increasingly popular type of repayment mortgage is the offset mortgage, where your savings and mortgage are linked. Your savings are ‘offset’ against the balance of your mortgage to help reduce the interest paid and help pay off the mortgage quicker.
Interest only mortgages. These mortgages only pay the interest back to the lender. It’s not until the mortgage term is over that the entire capital is paid. This requires making separate arrangements to repay the capital, known by lenders as a repayment vehicles.
Interest only mortgages are much rarer than repayment mortgages and can prove riskier as the amount saved over the mortgage term might not be enough to cover the full capital. And, you could end up paying more interest as you’re paying it back on the full amount borrowed. Whereas with a repayment mortgage, you’re gradually decreasing the interest owed with each monthly repayment.
How long is the mortgage's repayment period?
Mortgages are usually paid back over a long period spanning decades. They’re a big financial commitment that no one’s expecting you to pay back right away. Traditionally, 25 years was the standard mortgage term, but the trend in recent years has been towards longer terms, such as 30, 35 and even 40 years. It’s worth noting that taking any payment holidays will extend this term.
These particularly long-term mortgages have become popular, especially with first-time buyers, as they offer smaller, more affordable monthly repayments. Note that you’ll pay more in interest the longer the time period that you spread the repayments over. Short-term mortgages (20 years or fewer) help you speed through your repayments and own your home outright in less time. They cost more
per month, but you’ll save on the amount of interest that you’ll end up paying. At Loan.co.uk we offer mortgages with a term of 3 to 40 years.
What happens if I don’t repay the mortgage?
If you default on the loan (miss mortgage payments), the lender may work with you to devise an alternative repayment plan. If this doesn’t work and you continue to miss payments, the lender can repossess (claim back) the property.
Why choose Loan.co.uk?
There are plenty of mortgage brokers out there, but Loan.co.uk is unique because we built a system that will always find you the lowest rate we have available. We will deal with the case from start to finish, no matter if you’re getting a mortgage, taking out a remortgage or even finding a secured loan. We take away all the paperwork from you and fill in application on your behalf, take calls in evenings and weekends to work around your schedule.
Will I have my own dedicated mortgage advisor?
Right from the start you’ll be allocated an expert advisor who will personally manage your case all the way until you have your mortgage in place. They’ll provide you with their direct dial phone number and personal email for any correspondence, making the process as easy as possible. Other mortgage brokers may just pass your case off to admin or hide behind a receptionist if you have urgent questions that need answering.
Will I have access the best mortgage deals around?
Because we’re truly independent, we can secure the best mortgage deals on the market that our partnered lenders offer. We’re also members of exclusive mortgage clubs, so we could get you an exclusive deal that’s just not available on the high street. That could save you a significant amount of money. You’ll also save time, because we shop around for the best deals for you.
Do I get matched with the right lender for my needs and circumstances?
We work out the best mortgage options available to you, automatically taking your credit history into account. Our state-of-the-art systems have a built-in credit scoring system that performs a ‘soft credit search’, so we won’t leave a mark on your credit record when we look for your mortgage lender. Making the process quick and easy and without bothering you with lots of tedious questions.
How do you make my mortgage offer fast and stress-free?
We’ll complete your application for you and package all the necessary documentation together so that your case goes as smoothly as possible. We’ll then chase the lender on your behalf, so your mortgage offer’s issued faster.
You won’t have to chase several parties, Loan.co.uk manage the entire process for you:
- Submit your mortgage application
- Update the estate agent
- Instruct the surveyor
- Instruct and update your solicitors
- Sort out your B&C’s (necessary for any freehold with a mortgage)
- Ensure your mortgage is protected in the event of death and illness
That’s all there is to it, now you can live the life of a homebuyer.