Getting a mortgage… the three words that drive fear into the hearts of twenty-somethings everywhere. In this guide, we will cover deposits, the various types of mortgage deals available (especially those for first time home buyers), and the process of getting a loan.
What is a deposit?
The first thing to do when thinking about getting a mortgage is to decide on how much of the property you can afford to buy outright – this is called the deposit. The remainder is loaned to by a lender who charges interest until it is repaid in full. Check out the developments on HomeViews to get an idea of what your deposit could get you around the country.
What is loan to value?
The portion of the property value that you have paid for with your deposit, compared to the amount that the lender has provided, is called the loan to value (LTV). Here is an example:
Take a property with a value of £200,000If the buyer is able to provide £40,000, that is 20% of the purchase priceTherefore, the LTV is 80% – the percentage of the full price that has been loaned80% of £200,000 is £160,000 – the amount that the lender provides
LTV varies from mortgage to mortgage. The larger the deposit you put down, the less the lender has to put down, and the lower your interest rate will typically be. The best mortgage rates are usually available with a 40% deposit (60% LTV).
How much interest will I pay on a mortgage?
There are two overarching mortgage deals – fixed-rate and variable-rate – and interest rates vary depending on which type of mortgage deal you opt for.
Fixed-rate loans provide an interest rate that does not change over time. Generally, the shorter the agreed term of repayments, the higher the monthly payments are. However, a loan repaid over a longer time frame ultimately means spending more on interest. The typical lifespan of a loan is 25-35 years, and you will be paying interest for the duration of this.
The benefit of getting a mortgage with a fixed rate is that repayments are constant, allowing you to budget. Also, if interest rates rise, the borrower is unaffected. Let’s take our previous example of a £160,000 mortgage:
If you have borrowed £160,000 for 25 years at an interest rate of 3%, you will be charged £67,583 in interest over the lifetime of the mortgageCombine this with the repayments on the capital borrowed, and the total you will repay over the full term is £227,583So, you will be paying back £9,103.32 per year, or £758.61 per month
With variable-rate (or adjustable-rate) loans, the interest paid monthly fluctuates with interest rates. Your interest rate is reviewed and adjusted every six months to every year. For example:
If your interest rate begins at 3% when you take out your £160,000 loan, you will be paying £758.61 interest per monthHowever, if it jumps to 5% the following year, you will be paying £935.68 per monthBut again, if your interest drops to 1.5%, you will only be paying £639.87 per month
Typically, getting a mortgage with a variable rate works out cheaper in the long run. However, the security of a fixed-rate mortgage might be worth the extra cost.
What type of mortgages are there in the UK?
There are many variations on the two types of UK mortgage (fixed-rate and variable-rate). Here are a few examples:
Discount mortgages: With a discount mortgage, interest is pegged at a set rate below the lender’s standard variable rate. Different lenders have different standard variable rates (SVRs), so don’t assume that a bigger discount means a lower interest rate. Let’s think about our £160,000 mortgage again:
Bank A is offering a 2% discount on an SVR of 5%. So you are paying 3% interest, which comes to £758.61 per month
Bank B is offering a 1.5% discount on an SVR of 4%. So you are paying 2.5% interest, which comes to £717.87 per month
Tracker mortgages: Tracker mortgages are a type of adjustable-rate mortgage – they move in line with national interest rates, plus a few percent.Capped rate mortgages: With these deals, your rate of interest moves in line with the lender’s SVR but cannot rise above a certain level. The advantage of this is that the lender is protected from extreme rate jumps. On the other hand, the cap and starting rate tend to be quite high, so it may end up being more expensive long term.Offset mortgages: With an offset mortgage, you can use your savings to make a dent in the capital you owe, therefore reducing the amount of interest that you pay. You will need to open a current or savings account with your lender and link it with the mortgage.
As you can see, there are many types of loans for many different purposes. Make sure that you do a mortgage comparison to find the best mortgage deal for you before committing.
What mortgage deals are there for first-time buyers?
There are plenty of mortgage deals that cater specifically to first-time home buyers. Many of these come with high LTVs for those with less to spend on a deposit. Here are some examples of such loans:
Guarantor mortgage: A guarantor mortgage is designed for people with a small deposit – some of them even have an LTV of 100%. This type of mortgage guarantees repayment through a guarantor – a family member or friend who agrees to their own property or savings being used as collateral should you fall behind on your mortgage repayments.Help to Buy mortgage: Another type of mortgage that can really benefit first time home buyers is a Help to Buy mortgage. Help to Buy is a government scheme designed to help people get their foot on the property ladder, offering equity loans to use towards a deposit. They are for new build homes only and can be used for properties worth up to £600,000 in London (upper limits vary across the country). These mortgages require only a 5% deposit, are interest-free for the first five years, and can cover 20% of the house value (40% in London). Read our Help to Buy Guide here, or take a look at some of the London developments offering the scheme. The Help to Buy scheme is due to finish in March 2023, so read our guide on what’s due to happen after the scheme ends.Shared ownership mortgage: Another way to ease the burden of a deposit is by paying only part of it, in return for part ownership of a home. With a shared ownership property, you buy between 25% and 75%, taking out a mortgage for your share and paying rent on the remainder. As time goes on, you can buy a larger portion of the property until you own all of it.
What repayment term should I opt for?
Another important thing to consider is the period of time over which you want to pay back your loan, which will depend on the monthly repayments you can afford. A mortgage paid back over a longer period means smaller payments. However, it also means paying interest for longer. For example, say you take out a £160,000 mortgage to be paid back over 25 years, with an interest rate of 3%:
You will be paying £6,400 back per year of the amount borrowed, plus £2,703.32 in interest. That comes to £9,103.32 per year, or £758.61 per month.The amount that you will repay (borrowed amount + total interest), comes to £227,583.
Say you take out the same loan with the same interest, but to be paid back over 35 years:
You will be repaying £4,571.42 per year, plus £2,816.05 in interest. That comes to £7,387.48 per year, or £615.62 per month – that is £142.99 less than what you would be paying with the previous deal.However, the total amount that you will repay comes to £258,562 – much more in the long run than the 25-year term.
Bear in mind, this example is discounting extra costs like mortgage insurance, debt, and fees.
How do I apply for a mortgage?
You get a loan from a bank or building society, each of which have their own range of products. You can do a mortgage comparison of specific deals online before approaching your lender.
If the choice is a little overwhelming, a mortgage broker can help you with mortgage comparisons. They can also advise you on special cases such as buy to let mortgages and self-employed mortgages.
What are the stages of a mortgage application?
Getting a mortgage deal usually happens in two stages. When you first meet with your lender, they will ask you questions to determine your financial situation.
During the second stage, the lender will conduct a more thorough check. For this, you will need to provide evidence of salary, outgoings, debts, and credit score. The lender will assess your information and ‘stress test’ your finances to decide how much they want to lend you. To get a mortgage quote, try a free online mortgage calculator.
If your application is accepted, then the lender will provide you with a ‘binding offer’ and documents explaining the terms of your mortgage. You will have seven days to reflect on the offer, during which time the lender cannot alter or withdraw their offer.
So there you have it, getting a mortgage isn’t as scary as your parents would have you believe. True, mortgages are major financial commitments. But most people agree that the joys of home-owning make the commitment thoroughly worthwhile!
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