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Why are you looking for a mortgage?

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

What is a mortgage?

A mortgage is a loan from a bank, building society or other lender that you can use to buy property. You will typically repay the mortgage with interest, each month, usually over a long period of time (the mortgage term).

This type of loan is secured on the property you’re buying, meaning that if you default on payments (fail to repay the loan), the lender could potentially repossess (take it back). This is usually a last resort, but it's important to understand that you won't own the property outright until the entire loan has been repaid.

You can use a property bought with a mortgage as soon as the purchase has been completed, however, being able to continue doing so depends on you keeping up with the repayments each month.

How long is a mortgage term in the UK?

The average length of a mortgages in the UK is around 25 years, but the term can be shorter or longer, depending on your preference, income and age.

A longer term mortgage will allow you to keep your monthly costs lower, as it will spread out the repayments over a longer duration. It's important to acknowledge, however, that this will also mean that it takes you longer to repay the mortgage, and you’ll pay more interest overall as a result.

What is loan to value (LTV)?

The LTV, or loan to value is the ratio between the value of your property and the amount you're borrowing. For example, on a if you take out £112,500 mortgage on a £150,000 property, then the loan would be 75% LTV. You would therefore need a deposit of £37,500.

All mortgages have a maximum LTV that it's possible to borrow with that product, and typically, the higher the LTV (the more your borrow compared to the cost of the property), the higher interest rate you’ll pay.

First-time buyers tend to need to borrow a higher percentage of the property’s value than existing homeowners. This is because if you already have a home, you typically build up equity in their property as you repay the loan and when house prices rise. Equity can typically be used as a deposit when you remortgage or move home.

What is the APRC?

APRC stands for Annual Percentage Rate of Charge and is a way of comparing different mortgages. It takes the overall rate charged over the lifetime of the mortgage, including any fees, and gives you a baseline comparison rate.

Mortgages generally offer a lower interest rate for the first two to 10 years then revert to the lender’s standard variable rate (SVR). Every lender has their own SVR and this is typically (but not always) the most expensive rate available.

The APRC uses both of these interest rates to show the real cost over the whole term of the mortgage. This helps you to find out whether the deal with the lowest initial rate is really the cheapest overall.

As this assumes you’ll keep the same mortgage for the whole term, it’s not always a useful way to compare deals, however. Looking at the total cost over the deal period can be a better way to find the cheapest option, if you're planning to switch mortgages when each deal period ends.

Last updated: 2 November 2022

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How to compare mortgages

One of the most important factors for people buying a home is working out how much the monthly mortgage payments will be. This will depend on the amount you need to borrow and how much your deposit is, as both will determine the interest rate you are offered. 

A mortgage broker can compare mortgages across the whole market very quickly for you, and help to find the deal that is most suited to your individual circumstances.

Important questions to consider when choosing a mortgage are:

  • How much will my monthly mortgage payments be? 

  • What arrangement fees will I need to pay?

  • If I choose a variable-rate mortgage, what happens when interest rates rise?

Always factor in the fees as well as the interest rate when you're deciding which is the most affordable option overall. The easiest way to do this is to look at the total cost over the deal period.

The mortgage market is incredibly dynamic and it's a good idea to stay ahead of any major changes, whether you're buying your first home, or have had a mortgage for many years. Checking out the latest mortgage statistics and following mortgage market news will help you stay in the know.

How can I get personalised mortgage deals?

Uswitch can help you to find the most competitive mortgage deals available in three simple steps:

  • Let us know what you need and what your preferences are - we'll need to know the property price, your deposit amount and whether you're looking to live in the home or rent it out

  • We'll compare mortgage deals and make recommendations based on the information you provided

  • Secure your mortgage with our broker partner Mojo

How much of a mortgage can I afford?

When lenders calculate affordability, they generally take income, and outgoings into account, as they will want to be sure that you can afford the repayments each month.

Our mortgage affordability calculator can give you an idea of what you may be able to afford, however, it's important to understand that your version of affordable may not always align with the lender's.

As well as proof of income, lenders will typically want to see three to six months of bank statements - this may be higher if you're self-employed. This is so that they can get an idea of your monthly spending habits.

If you spend a large amount of your monthly income you may be seen as a riskier prospect by the lender. Especially if you are using your income to repay lots of other debts

Before applying for a mortgage it’s a good idea to have a look at your finance and make sure you are budgeting sensibly. Perhaps there are areas where you could cut back or debts that you could repay prior to making an application.

Getting a mortgage in principle

To make the home buying process smoother, you should consider getting a mortgage in principle. This is commonly known as a decision in principle (DIP) or an agreement in principle (AIP), with lenders

This gives you a theoretical mortgage offer, assuming you are able to meet the full criteria when you go through the application process.

An AIP is useful when looking at properties, as it gives the impression that you are a serious buyer. It's also a good indicator that you will be approved for a mortgage down the line, so long as the information you provide when you apply for it is as accurate as possible.

Last updated: 2 November 2022

What is mortgage interest?

Mortgage interest works in a similar way to interest on any other loan product. When you borrow money, you pay it back with interest (extra money on top of the amount you borrowed), as this is how the lender makes money.

On a mortgage, because it’s likely you’ll be paying it off for a long time – it's important to get the most competitive rate available to you.

Most residential purchases are repaid on what's known as a repayment basis, which means that each month you will pay a small amount of the capital (loan amount) back and the interest chargeable on that chunk of the loan.

Interest-only mortgages are similar in length, but you only repay the interest each month and pay off the full capital at the end of the term. This is typically only used for buy-to-let mortgages, but may be used for residential homes in some circumstances.

If you’re on a variable rate of interest, the rate you’re paying can go up or down depending on the Bank of England base rate or your mortgage lender's SVR (standard variable rate). A fixed-rate, on the other hand, won't change at all until the deal ends.

Most people switch to a new deal when their current one has ended to avoid paying the lender’s SVR, which is generally higher.

How do mortgage interest rates work?

Mortgage interest rates are usually lower for people with higher deposits as this is less risky for the lender. Rates have been rising recently across the entire mortgage market, and deals are changing quickly as a result. If you're applying for a mortgage, you might find that the rate you initially look at is no longer available by the time you're ready to apply.

Dean Wickett, Mortgage Expert at Mojo Mortgages, said: "Once you’ve found a rate you’re happy with, move quickly in order to secure it. In some cases lenders are only providing a couple of hours’ notice before increasing rates, so have your documents ready and get them to your broker as soon as possible.”

Our best mortgage rates

The table below shows some of our cheapest fixed-rate mortgage deals available right now.

LTV2-year fixed (initial rate)5-year fixed (initial rate)
90%Leeds Building Society - 5.29%HSBC - 4.81%
80%Leeds Building Society - 4.94%Leeds Building Society - 4.64%
70%Leeds Building Society - 4.67%Leeds Building Society - 4.36%
60%Barclays Bank - 4.68%Leeds Building Society - 4.36%

Next update due: 24 November 2022

Table excludes mortgage deals for existing borrowers or customers only, for first-time buyers only, remortgages, those available in branch or via lender only, those only available in specific areas and shared equity mortgages.

Please note that mortgage rates and deals may have changed since this table was last updated. THESE DEALS MAY NOT BE AVAILABLE AT THE POINT AT WHICH YOU ARE READY TO SUBMIT AN APPLICATION.

The Bank of England base rate explained

With a mortgage, your interest rate is dependent on a few factors, including the Bank of England bank rate, which is often referred to as the “base rate”.

The bank rate is the interest rate the Bank of England (BoE) – the UK’s central bank – charges when lending to other banks. The base rate is set according to the demands of the wider economy. 

As a general rule, the lower the BoE base rate, the lower the cost of borrowing and returns on savings will be and vice versa. The Bank of England has raised the base rate several times in 2022, resulting in increasing mortgage interest rates.

Types of mortgage interest rate

There are several mortgage interest rate options that determine whether your rate changes in line with the Bank of England base rate.

The two key types are fixed-rate mortgages and variable-rate mortgages. As the names imply, fixed-rate mortgages give you an interest rate that is fixed for a set number of years, while variable-rate mortgages give you interest rates that are subject to change.

How to get the best mortgage rates in the UK

Mortgage rates in the UK depend on market competition and the base rate of interest set by the Bank of England.

Rates also vary according to your circumstances and how much deposit you can put down. The best rates will generally only be available to those with the largest deposits.

Mortgage representative example

Based on borrowing£170,000 over 25 years
Initial rate5.44% fixed for 2 years (24 instalments of £1174.37pm)
Lender fee£556
The overall cost of comparison6.41% APRC Representative
Subsequent rate (SVR)6.69% variable for the remaining 23 years (276 instalments of £1135.60pm)
Total amount payable£342,166.74

Mortgage repayment types

There are two different mortgage repayment types: repayment and interest-only.

Repayment mortgages

Most residential mortgages are repayment mortgages - where you pay back some of the capital (the loan) and some of the interest each month.

Using this type of mortgage you will pay back the full capital and interest owed by the end of the mortgage term, when you will own the property outright. 

Interest-only mortgages

With interest-only mortgages, you only pay the interest on the mortgage each month – you don’t pay anything to clear the capital until the end of your mortgage term. At this point your will then repay the full amount of capital owed.

For this reason, interest-only mortgages are typically used to buy investment properties with a buy-to-let mortgage, as landlords are usually more happy to sell off the property at the end of the mortgage term in order to repay the loan.

You end up paying back more interest overall with an interest-only mortgage, even though the monthly repayments are lower, as you’re paying interest on the full capital amount for the entire mortgage term - as it doesn't reduce. 

For example, if you had a mortgage of £200,000 at 5% over 20 years, the interest would be a total of around £116,876 if you took out the mortgage on a repayment basis. If you took it out on an interest-only basis, however, you would end up paying £200,146 in interest and would still owe £200,000 capital at the end.

If you paid off the capital and interest together, as you would with a repayment mortgage, you would have higher monthly repayments but would have paid the mortgage off by the end.

What are the different mortgage types?

Fixed-rate mortgages

Fixed-rate mortgages cement your interest rate for a set period of time, usually two to five years, but some deals are available for 10 or more years. Your rate won’t go up if the Bank of England base rate does but you won’t benefit if it goes down either.

Variable-rate mortgages

Standard variable rate (SVR)

This is the lender’s standard rate that your mortgage will revert to once your initial deal has ended. As it’s usually higher than the rate you were previously paying, so it’s best to switch to a new deal as soon as your existing one ends. It's possible to set this up up to six months ahead of the end date.

Discount mortgages

With discount mortgages, you get a discount on the lender’s SVR for an initial period. Your rate can go up or down depending on when the lender decides to change their SVR, but there is no guarantee that this will happen or by how much.

Tracker mortgages

During the initial deal period, your mortgage rate is pegged at a certain level above the Bank of England base rate and follows its movements, matching it as it rises and falls.

Offset mortgages

With offset mortgages, you can use your savings to offset the amount of your mortgage that you pay interest on. For example, if you have a mortgage of £200,000 and savings of £50,000 you only pay interest on £150,000. You won’t earn any interest on offset savings, but often the money you save is more than you would earn in a standard savings account

Last updated: 2 November 2022

How do I get a property valuation?

Each mortgage lender will want a property valuation to be carried out before offering you a mortgage. If you opt for a valuation to be included in your survey, this should provide a good indication of what the lender's valuation will be.

Whilst some mortgage providers still use a surveyor to do their valuations, a drive-by valuation or desktop valuation is common these days. Your mortgage provider will combine this with Land Registry data, information about recent sales in the area, macroeconomic data and house price indices.

Should I take out mortgage protection insurance?

Mortgage protection insurance can be helpful, as if you lose your job or fall ill, it can help you to keep on top of your repayments, especially if you don't have enough savings or someone who is able to help you cover bills for a few months.

You may have income protection insurance or some other form of protection that will cover this already in place, or perhaps through your employer, however, so be sure not to pay out more than you need to.

If you feel this would be useful, compare mortgage protection insurance policies carefully. Some policies may not cover everything that you would expect, so read the details closely to see find the right cover for your circumstances and needs.

How much is mortgage protection insurance?

Generally, premiums tend to range from £15 to £50 per month, although the price depends on:

  • The cost of your mortgage repayments

  • How long the policy pays out for

  • Your age and medical history

There are also many other factors at play when comparing mortgage protection insurance.

Last updated: 2 November 2022

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