What is a mortgage?

A mortgage is a loan from a bank or building society that is used to buy a property. It is a secured loan, which means the bank has the right to seize and sell the property if you cannot keep up with your monthly repayments.

How do mortgages work?

Once you take out a mortgage, you pay back the amount you have borrowed, often plus interest, in monthly installments over a set period, usually around 25 years. Some mortgages in the UK have longer or shorter terms. 

The mortgage is secured against your property until you have paid it off in full. The lender could repossess your home if you fail to repay it.

In the UK, you can take out a mortgage on your own or with other people.

What’s the difference between a loan and a mortgage?

A mortgage is essentially a loan that’s secured against your property. A mortgage is a financial agreement between two parties. The lender loans money to the borrower who agrees to repay this amount, often plus interest, in monthly installments over a set term.

What is a mortgage deposit?

A deposit is a down payment; the amount you have to put towards the cost of the property you’re buying. The more you can put down as a deposit, the less you’ll need to borrow as a mortgage. You will usually get a better mortgage rate too. 

A deposit is a percentage of the property’s value, so if you pay £200,000, a 10% deposit would be £20,000. Your mortgage provider will lend you the remaining 90%. 

This is what is known as the Loan-to-Value (LTV). 

Mortgages for specific purposes

Buy to let mortgages

lf you are buying property to let out then you’ll need a buy-to-let mortgage. These often come with high interest rates and can require a large deposit. Affordability checks and repayment schedules are usually different for buy-to-let mortgages.

Second mortgages

Second mortgages are often used for items such as home improvement or debt consolidation. Advantages of second mortgages include higher loan amounts, lower interest rates, and potential tax benefits. Disadvantages of second mortgages include the risk of foreclosure, loan costs, and interest costs.

Lifetime and equity release mortgages

A lifetime mortgage is a type of equity release, a loan secured against your home that allows you to release tax-free cash without needing to move out. Lifetime mortgages are available to homeowners aged 55 or over. You can take the money as a lump sum or as a series of lump sums.

Bridging loans

A bridging loan works by giving you the money to proceed with a purchase while you free up money from other assets / investments or secure a long-term finance plan, such as a buy-to-let mortgage. They're a handy way to access short-term cash injection, while you put a more sustainable plan in place or liquidise assets

Where can I find a mortgage?

Financial institutions offer mortgages, such as banks and building societies.

There are two ways you can source your mortgage

  • Direct

You can get a mortgage directly from the lender; use our calculator  to find the right one for you.

  • Through a broker

Alternatively, you could find a mortgage and get advice from a mortgage broker or independent financial adviser. Some are whole-of-market, which means they can offer mortgages from every lender, and some offer exclusive deals.

What type of mortgage do I need?

There are many different types of mortgages. Some are designed specifically for first-time buyers, others are designed for landlords, and others are for remortgaging only.  

What mortgages Are Best For First Time Buyers?

First-time buyer mortgages enable you to buy a home even if with a small deposit. There are also specific mortgages and Government schemes aimed at helping first-time buyers Get on the property ladder, such as:

  • Help to Buy mortgages 

This helps people with a small deposit with help from the government.

  • Right to Buy

This scheme lets you buy your council house at a discounted price, and you can use the discount as part of your deposit. 

  • Guarantor mortgages 

These mortgages could help you buy a property with a small deposit if a relative or friend is willing to be named on the mortgage with you and pay any missed payments.

What other types of mortgage are there?

Bad credit mortgages

Some lenders offer mortgages designed for people with bad credit. But these can include higher interest rates and fees.

Commercial mortgages

A commercial mortgage works the same as a residential mortgage in that you will pay a deposit and then make monthly repayments either made up of capital and interest or interest-only. A commercial mortgage is suitable for long-term borrowing as terms range from one year to 30 years.

100% mortgages

100% mortgages aren’t common these days, but there are some niche lenders out there still offering them. As you won’t need to provide a deposit, most 100% mortgages are guarantor mortgages. This means you’ll usually need a friend or family member to provide the lender with some security by acting as your guarantor.

Mortgages for older borrowers

If you’re planning on paying a mortgage after retirement, you’ll need to prove to your lender that you’ll have enough income for your monthly repayments – whether that’s your pension, investments or savings. However, it’s likely that the amount you can borrow will be capped and you’ll need a substantial deposit.

Self-employed mortgages

If you can provide proof of your income and a mortgage lender is happy you can afford the repayments, you should qualify for the same mortgage rates as someone who is in a permanent, full-time role. The interest rate you will pay on your mortgage will rely on other things – not your employment status.

How much does a mortgage cost?

The monthly repayments and the amount you repay over the life of your mortgage depends on the deal you get and the cost of the property. The main costs include:

Interest 

Interest rates affect how much you repay overall and what you pay each month. It accumulates during the lifetime of the mortgage and is charged as a percentage rate on the amount you owe.

For example, if you took out a £200,000 mortgage with an interest of 4% over 25 years, you could pay interest of £116,702 and repay a total of £316,702.

The mortgage in the above example could cost around:

  • £1,056 per month with an interest rate of 4%
  • £1,289 per month at 5%

Mortgage fees

These may include:

  • Product fees for taking out the mortgage
  • Application fees can be charged when you apply (whether you end up taking it out or not)
  • Valuation fees charged by your lender for valuing your property
  • Higher lending charges if you have a small deposit
  • Telegraphic transfer fees 
  • Broker fees if you take out a mortgage recommended by a broker

You may also have to pay fees on your old mortgage:

  • Early repayment charges if you pay it off before the end of its term
  • Exit fees are charged when you move to a new lender

What are interest only and repayment mortgages?

If you miss a monthly repayment you will likely be charged a late payment fee by your lender. On top of this, the missed payment(s) will be reported to the credit reference agencies which could have a negative impact on your credit score.

If you think you might miss a monthly repayment, or you already have, you MUST speak to your lender as soon as possible. They will work with you to find a solution, whether that’s offering you a payment deferral for a short time, a period of reduced payments or an extension to your mortgage term.

What happens if I miss mortgage repayments?

With a repayment mortgage, you pay back a small part of the loan and the interest each month. You are guaranteed to have paid off your mortgage by the end of the term as long as all payments have been made.

An interest only mortgage is where your monthly payments only cover the cost of the interest and your loan amount will remain the same.  At the end of the term, you would either need to sell the property to repay the mortgage or find another source to repay the loan. We can advise you on the most appropriate type of mortgage for you.

Should I get a fixed or variable rate mortgage?

There are several different ways that mortgages can set their interest rates:

Variable mortgage 

With a variable rate mortgage, your monthly payment can go up or down depending on the terms of the mortgage. There are three main types of variable rate mortgages – tracker rate mortgages, discount rate mortgages, and the standard variable rate set by your lender.

Fixed rate mortgages  

A type of mortgage where the interest rate on your mortgage stays the same, for the duration of your deal.

Tracker mortgages have variable rates that follow the Bank of England base rate exactly.

Discount mortgages offer a rate set at around one or two percent less than the lender’s standard variable rate. This will rise and fall with the lender’s standard variable rate, and the discount will last for a set period of a year or more.