If you’re looking for a mortgage in January 2020, this fantastic section could be ideal for you. With helpful guides, information, mortgage comparison deals and more!
Our aim is to inform members of the British public about their financial decisions. With so much choice, it can be hard to select the right type of mortgage for your requirements. After all, moving to a new house can be a stressful time, even if you’ve done it before or you’re a first-time buyer.
Types of Mortgages in the UK
In England, there’s a few different types of mortgages you can get, this can include ‘repayment’ and ‘interest-only mortgages’ to buy-to-let and shared equity, but what’s the difference between them? Please read the information below and click on the links to find out more information:
- Regular Mortgage – Typically you’ll apply to a bank or building society for a loan to buy property or land. Generally, ‘most’ mortgages in this manner have a duration of around 25 years, however some can be shorter or longer. The loan is ‘secured’ against the value of your home until it’s paid off. You make repayments every month and if you can’t keep up your repayments, the lender can repossess (take back) your home and sell it so they get their money back.
- Shared Equity – This can also be known as a ‘partnership mortgage’. The lender, such as a bank or building society will ‘agree’ to give you a loan alongside your main mortgage. They do this in ‘return’ for a share of any profits when you sell your house or repay the loan.
- Lifetime Mortgage – In basic terms, this type of mortgage is taken out as a loan, which is secured on your home. It does not need to be repaid until you die or go into long-term care. Usually interest is charged on what you have borrowed, which normally gets added on to the total loan amount. When you die or move into long-term care, your home is sold and the money from the sale is used to pay off the loan.
- Equity Release – This allows people to release ‘cash’ tied up in their home. It normally only applies to people over the age of 55. Most people who take out equity release use a lifetime mortgage.
- Offset Mortgages – Typically this form is designed to ‘link’ your mortgage to a savings account. The savings balance is used to reduce the amount of interest charged. For example, if you had a £200,000 mortgage and £20,000 in savings, you would only be charged interest on £180,000. In most cases, your monthly repayments would be based on the full £200,000, meaning you’ll ‘overpay’ each month. This means you’ll actually pay your mortgage back more quickly.
- Buy-to-Let – Aimed at Landlords who buy a property to rent it out, this type of mortgages is similar to ‘regular mortgages’ however there is some differences. Normally fees are higher, interest rates of the BTL mortgage can be high and there tends to be a minimum deposit which is required.
How do UK mortgages work?
This section we’ll be looking at regular mortgages and how they work, if you’re interested in another form, such as a buy-to-let, shared equity and so on. Please click on one of the links above.
A regular mortgage is simply a type of loan, as a borrower you’ll lend money (called capital) to purchase a house. The lender, such as a bank or building society charges you ‘interest’ for the money until its fully repaid.
Traditionally most British mortgages will have a duration of 25 years; however, some can be shorter or longer. It’s not uncommon for mortgages to be 30 years, though you must remember you’ll be paying more interest back, the longer your mortgage is.
Before being accepted for a mortgage, you’ll need to have a deposit, this is usually around 10%, however it can be lower or higher depending on which provider you select. You’ll also need to think about what type of mortgage you want, you may decide to choose a:
- Repayment Mortgage – This is the most common form of mortgage in the United Kingdom, you’ll simply ‘pay off’ the interest and part of the capital every month. By the end of the mortgage term, such as 25 years, you should have paid the money back in full and the home will be yours.
- Interest-Only Mortgage – As you might expect, the clue is in the name. Typically, you only pay off the interest on the loan each month, this means you won’t pay anything off the amount you borrowed. Since the ‘financial crash’ these types of mortgages are becoming harder to find, as people are left with a huge debt at the end without a way of paying for it.
- Combination – Some banks and building societies may allow you to ‘combine’ both of the options above. This means you can ‘split’ your loan between repayment and interest-only.
Step by Step Application Process
Applying for a mortgage is easy, after all millions of people have done it. In most cases it’s a two-stage process, here’s what happens:
You can apply for a mortgage online or in person at a local branch. You’ll normally be asked questions such as what type of mortgage you’d like, the duration you want to lend, your financial situation and so on.
In most cases, your provider will ‘highlight’ information about the products and services they offer, such as the typical interest rate, additional charges and ‘perks’ they may have. Generally, you’ll get the ‘best’ rate from your current bank or building society, which you use for day-to-day activities, however it’s definitely a ‘good idea’ to compare deals, to see if you can get a better offer elsewhere. Sometimes your current bank isn’t always the best option, as a new provider may offer better rates to ‘get your business’.
The bank, building society or mortgage broker will start to collect more information about you. This is generally known as the ‘affordability assessment’, you may be asked for documents to confirm your salary, expenditure and so on. Most providers are now conducting ‘stress tests’ after the financial crisis, so your financial life will need to be in good shape to be accepted.
If your application gets been accepted, the lender will provide you with a ‘binding offer’. This offer is normally valid for around seven days; however, some can be longer. During this period, the lender usually can’t change or withdraw their offer except in some limited circumstances. Each provider will have different rules and requirements on what ‘limited circumstances’ might entail, for further information please ask your bank or building society to clarify.
It’s important to remember that applying for a mortgage, shouldn’t be something you do without careful consideration. Just because you can ‘afford’ a mortgage now, you need to think about your future, what if you lose your job, become ill and so on. What happens if the Bank of England increase the interest rate? How will your finances be able to cope with this?
If you’re unsure about your situation and need further advice, please speak to a professional financial advisor to assess your personal circumstances in more detail.
Should you Buy Freehold or Leasehold?
Purchasing a property can be an exciting time, however have you considered all aspects? Generally, you’ll find your ideal home is regarded as either freehold or leasehold, but what does this mean?
- Freehold – This means the owner of the property owns the building outright, including the land it’s built on. In the vast majority of cases, most houses are freehold, but some may be leasehold, this is more common through shared-ownership schemes.
- Leasehold – This typically applies to flats and commercial properties, however with a leasehold, you’ll own the property and its land for the length of your lease agreement with the freeholder. This means when the lease ends, ownership returns to the freeholder, unless you can extend the lease. If the lease is for less than 60 years, you might struggle to get a mortgage.
As you may expect, it’s normally recommended to purchase a property which is freehold as you’ll own both the house and the land it sits on.
Frequently Asked Questions
What is a Fixed Rate Mortgage?
In basic terms, a fixed rate mortgage means your interest rate stays the same. It doesn’t go ‘up’ or ‘down’, this means should the national interest rate increase, yours will stay the same, meaning you could be paying less than everyone else.
Equally should the national interest rate decrease, you could be paying more than everybody else. It can be more challenging to find fixed-rate mortgages for the entire duration of your loan, most providers will only ‘fix’ the rates for a certain number of years.
What’s the age limit for Mortgages?
Most banks and building societies will specify that you need to be at least 18 years old for a residential mortgage, such as a regular home or flat. You’ll typically need to be 21 or older for a buy-to-let mortgage. Usually the maximum age at the end of the mortgage term should be 70 years old or your retirement age. Some providers may not accept applications for more mature members of society, however this can vary from each provider, so it’s worth applying in most cases.
What happens if my Mortgage Interest rate goes up?
Although interest rates have been at an ‘historic low’ for the last few years, at some point they may go up. It’s impossible for anybody to predict when this may happen. If you’re struggling to meet repayments now, it might be a good idea to speak to a financial advisor or debt advice charity to access your financial situation.
You should ‘work out’ if you could still afford a mortgage should interest rates increase by 5% within a six-month period. Did you know, on Black Wednesday in 1992, the British Chancellor raised interest rates by 2% in one day! As you can see, a rise can happen at any time.
What is a Tracker Mortgage?
Typically, a tracker mortgage is a variable rate mortgage. The interest rate usually ‘tracks’ the Bank of England base rate, and its set at a margin above or below it.
For example, let’s say your tracker rate was 2% above the Bank of England’s base rate, this would mean should the Bank of England set their rate at 1%, you’d be paying 3%. Should they set it at 5%, you’d be paying 7% and so on.