Finding your new home is always exciting, but it’s rare that anyone can purchase it outright – and that’s why most of us take out a mortgage.
Finding the right mortgage deal for you can be quite confusing, especially if you haven’t had much experience with mortgages before.
The first step towards getting the right deal is to get a good understanding of how mortgages work, so that’s why we’ve set out to explain all the basics in an easy two-part guide.
What is a mortgage?
In short, a mortgage is a secured loan that you take out to purchase a property. When you sign a mortgage agreement, the property is given as security, which means your mortgage lender has the right to reclaim your home should you fall behind on the repayments.
Mortgages are typically lengthier than other loans and run for around 25 years – although they can be longer or shorter. Once you enter into a mortgage, you make regular monthly payments until you’ve paid off what you owe. At that point, the lender releases its charge on your property and you will own it outright.
Where can I get a mortgage?
Most banks, building societies and specialist lenders offer their own range of mortgages. Mortgage advice is also available from specialist mortgage brokers, such as Ocean, and some financial advisors.
Whatever type of mortgage you’re after, it will normally either be a fixed rate or variable rate deal.
A fixed rate deal means you will pay the same amount of interest over the number of years specified - for example, a ‘five-year fixed’ mortgage simply means the interest you pay won’t change for those five years. After the fixed rate period ends your mortgage will usually go onto a variable rate – normally a tracker rate, or your lender's Standard Variable Rate. At this point, you can choose to stay at that rate or look to remortgage for a better deal.
With a variable rate deal, the interest charged may change, which means it could increase or decrease at any moment. Variable rate mortgages can come in a few different forms:
A standard variable rate (SVR) mortgage will charge you the mortgage provider’s typical interest rate, which is subject to change, usually at the lender’s discretion. Usually, changes will be triggered by a change in the Bank of England’s base rate, but this isn’t always the case.
A tracker mortgage typically changes in line with the Bank of England’s base rate (e.g. if the base rate goes up or down by 1%, your rate will follow suit) and will usually last for two to five years, but some deals could last for the duration of the mortgage. Trackers rates are expressed in relation to the Base rate such as “the interest rate will be 2% above the Bank of England’s base lending rate”.
Another type of mortgage, a capped rate mortgage, moves in accordance with the provider’s SVR (Standard Variable Rate) – but it is capped at a certain amount, so if interest rates rise the rate you pay will only rise as far as the cap. The combines so of the flexibility of a variable rate mortgage with the security of a fixed rate.
A discount mortgage offers a discount off the lender’s SVR, which means the interest rate they charge will be cheaper. For example, if a lender offered 2% off their SVR - which was normally 5% - you would pay 3% interest. This deal usually only lasts for a specified length of time, after which the rate will usually revert to SVR.
Finally, an offset mortgage is intended for those with considerable savings who want to pay their mortgage off as fast as possible. Both your savings and current account would be linked to your mortgage, meaning you would only pay interest on the difference between your mortgage and your savings.
Nowadays most mortgages are “repayment” mortgages (also known as capital and interest). With a repayment mortgage, your monthly repayment comprises two elements: the interest on the loan, and a repayment of part of the loan capital itself. Once you have made all your payments you will have paid off the whole balance of the loan.
The other type of mortgage is known as “interest only” – whilst they are still available they tend to be used in exceptional circumstances only. This is because your monthly payment only covers the interest on your loan. So at the end of the term of the mortgage, you still owe the value of the original loan and would still need to repay it. So you’d either need access to a lump sum of cash – or you’d have to sell your home and use the proceeds to repay what you owe.
Your lender or broker will explain the different types of mortgage to you in more detail and help you decide which is right for you.
How much money can I borrow?
How much you are able to borrow will depend on a number of factors including your salary and any other income (such as any benefits, tax credits or bonuses), your outgoings, how close you are to retirement age, your credit history, how much available credit you have and if you’re getting a joint mortgage, the other person’s salary, credit history etc. You should only ever consider a mortgage deal if you feel you can comfortably afford the repayment in the long term.
Moneysavingexpert has a free mortgage calculator to help you understand how much you might be able to borrow. However, getting a mortgage is a complicated process, and this calculator only provides a very basic insight – there are many other factors that would be considered in a real mortgage deal.