Why are you looking for a mortgage?
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
A mortgage is essentially a loan from a bank specifically provided for the purchase of property. The reason it's called a mortgage and not a loan is due to a subtle yet significant difference between the two.
So what is the difference between a mortgage and a loan? If you miss a payment or have trouble repaying a loan, the provider of the loan will chase you for it in the same way as they might for most other types of credit. However if you were behind on your mortgage repayments and were close to being unable to afford them, the bank could take (repossess) your home.
A mortgage also allows you to start using the property immediately, so you would not need to repay the amount in full to start living in it or renting it out to a tenant. You could start using the property as soon as the sale has completed, but being able to continue doing so would obviously depend on you keeping up with repayments every month.
Mortgages are typically taken out for 25 years but the term can be shorter or longer. The longer your term the more spread out your costs, so the lower the monthly repayments, but the longer it will take to repay the mortgage and the more interest you’ll pay overall.
The LTV, or loan to value, is the ratio between the value of your property and the amount you're looking to borrow. All mortgages have a maximum LTV – that is the maximum percentage of borrowing in relation to the property value that is allowed.
Typically the higher the LTV the higher the interest rate of the mortgage. Mortgages for first-time buyers tend to have higher maximum LTVs, and hence higher rates, compared to a remortgage for existing homeowners or a mortgage for people moving home, who may have built up equity in their property by this point.
The APRC is a way of comparing different mortgages. It takes the overall rate charged over the lifetime of the mortgage, incorporating any fees, and gives you a baseline comparison rate.
While some mortgages may offer a low rate for the first two years, for instance, once they revert to the lender’s standard variable rate, they may prove to be more expensive over the full term than mortgages with a higher initial rate.
Or, a deal may have a lower rate but have high fees associated with it. The APRC allows you to compare these mortgages and see which is the best overall product for you.
However, as it assumes you’ll have the mortgage for the whole term it’s not always a useful way to compare deals.
It’s usually best to switch to a new deal at the end of the initial period to avoid paying your lender’s standard variable rate, which is likely to be higher. For this reason, looking at the total cost over the deal period can be a better way to find the cheapest option.
Last updated: 21 December 2021
One of the most common and important factors for people buying a home is working out how much the monthly mortgage payments will be. The payments will depend on the budget you've set according to the property type and area you want to buy in, as well as your income and deposit.
Once you have a figure in mind, you can start to compare UK mortgage rates by using a comparison site. You can also speak to a mortgage broker to find the right mortgage for your price range and circumstances.
You will also need to compare the various aspects of each mortgage type. Ask yourself:
How much will my monthly mortgage payments be?
How much will my mortgage cost if interest rates rise?
If you want to switch to a better deal later, how much would the penalty be to leave your current mortgage provider?
It's important to think about the answers to these questions as early as possible in the home buying process, ideally when you start comparing mortgages, so you can have a better idea of the kind of mortgage that will work for you. You can use our comparison tool to see a wide range of mortgages from many of the country's leading mortgage providers.
Once you know what mortgage type you're after just answer some questions and we'll find deals personalised to you.
Tell us your estimated property value, your deposit figure, the term over which you want to repay your mortgage, and how long you want to fix your interest rate for.
Even if you have the necessary income and deposit available, lending criteria have been tightened in recent years. You can get an idea of what you could afford by using our affordability calculator above.
Mortgage lenders will usually want to see up to six months' of bank statements. They want proof of income coming in regularly, and they may look at your recurring expenses to get an idea of how much of your income you are spending each month. If you spend a large amount of your monthly income you may be seen as riskier to the lender.
In the run up to applying for a mortgage make sure you budget properly. Look at all your spending habits before you even start comparing mortgages. Are there any standing orders or direct debits you have been paying for years that you could do without? Can you cut down on your weekly shopping spend or minimise how much you spend on nights out?
Begin with a budget of your regular outgoings – the more you monitor your spending the more likely you are to cut back on the little things.
To make the home buying process smoother, you should consider getting a mortgage decision or agreement in principle (AIP).
Getting an AIP means that the lender or broker has assessed your circumstances and credit rating and would in theory approve you for a mortgage of a certain value.
Rather than going through the entire mortgage application process once your offer has been accepted, an AIP usually means that your application is at a more advanced stage at this point and your mortgage is more likely to be approved, so there's less chance of finding problems further down the line.
Last updated: 21 December 2021
|LTV||2 years||5 years|
|95% LTV||HSBC - 2.69%||NatWest - 3.08%|
|90% LTV||HSBC - 1.94%||HSBC - 2.39%|
|80% LTV||HSBC - 1.74%||NatWest - 1.9%|
|75% LTV||NatWest - 1.63%||NatWest - 1.73%|
|60% LTV||HSBC - 1.59%||HSBC - 1.64%|
Mortgage interest is similar to interest on any other loan product. When you borrow money, you have to pay it back with interest. However, the interest rate is even more important on a mortgage because it is likely you will be paying it off for many years, often as long as 25 to 30 years.
So how is interest calculated on a mortgage loan? Mortgage interest rates are calculated quite differently than for other types of credit and loans. If you take out a credit card, you would have the annual percentage rate (APR) as a guide to how much you would pay once you start borrowing outside of the interest-free period. On a loan, you are more likely to have a fixed amount to pay each month for three to five years.
With a mortgage you have interest to start paying immediately, and the value of this can go up or down depending on the interest type you're on, the Bank of England base rate and the mortgage lender.
Generally, the first rule of UK mortgage interest rates is that they're usually lower for people with higher deposits as this is less risky for the lender. So, if you've saved up a decent chunk of the property value, you will be rewarded with lower interest rates.
If you're remortgaging it’s likely you’ll have more equity built up in your home, so your interest rate is likely to be lower. On the other hand, if you have a lower deposit, as many first-time buyers do, you're likely to have to pay more interest.
With a mortgage, your interest rate is dependent on a few factors, including the Bank of England 'bank rate' or 'interest rate'. The bank rate is the rate the Bank of England (BoE), the central bank of the United Kingdom, charges other banks to borrow from it. It does this according to the demands of the wider economy.
As a general rule, the lower the BoE base rate, the lower the cost of borrowing, but also the lower your return on savings will be. When the BoE interest rate goes up, so does the likelihood of getting a better return on your savings but, similarly, the cost of borrowing will be higher.
There are several types of mortgage giving you different interest rate options that mean your rate may or may not change according to the Bank of England base rate.
The two key types are . 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.
Mortgage rates in the UK vary with market competition and the base rate of interest set by the Bank of England.
The best UK mortgage rates you can get will vary according to your circumstances and how much deposit you can put down. The best rates will only be available to those with the largest deposits (typically 40% or more).
Last updated: 21 December 2021
There are two different mortgage types; repayment and interest only. The one you go for will determine how you repay your mortgage.
Most residential mortgages nowadays are repayment mortgages. With a repayment mortgage, you pay back some of the capital (the amount your borrowed from the lender) and some of the interest every month. By the end of the mortgage term, which is usually 25 years, you will have paid back both the capital and the interest in its entirety.
Interest-only mortgages allow you to only pay off the interest portion of the mortgage.
For example, if you had a mortgage of £200,000 at 5%, over 20 years, the interest would be a total of around £116,779. Instead of paying back the capital and the interest together, you would only pay back the £116,779 interest so you would still owe £200,000 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.
However, with an interest-only mortgage you still need to repay the capital at the end of the mortgage term. As it can be hard to raise enough to pay back the capital, interest-only mortgages are not as widely available as they used to be due to the extra risk posed to lenders.
This fixes your interest rate for a set period of time, usually two to five 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.
Your rate tracks the Bank of England base rate by a set amount above it for the period of the initial deal. This means it’s guaranteed to go up or down with the base rate.
You get a discount from the lender’s standard variable rate for an initial period. Your rate can go up or down with the base rate but there is no guarantee that this will happen or by how much.
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 it’s best to switch to a new deal at this point.
Your savings are offset against your mortgage amount so you pay interest on less. For example, if you have a mortgage of £200,000 and savings of £50,000 you’ll only pay interest on £150,000. You won’t get any interest on your savings though.
Last updated: 21 December 2021
A mortgage lender will need to do its own property valuation before offering you a mortgage, but you can get a good indication by using the value quoted by the surveyor if you get a survey done that includes a valuation.
Whilst some mortgage providers use a surveyor to do their valuations a drive-by valuation or desktop survey is more common these days. Your mortgage provider will combine this with Land Registry data, recent sales in the area, macroeconomic data and house price indices.
Before you take out mortgage protection insurance, ask yourself if you really need it. If you lose your job or fall ill and find yourself unable to pay your mortgage, do you have enough savings or a spouse or family member able to help cover bills for a few months? Or do you have another safety net, such as income protection insurance?
If you feel it’s worth having, make sure you compare mortgage protection insurance policies effectively. Some policies may be useless depending on your personal circumstances, so read policies closely to see exactly what’s covered and what the exclusions are to weigh up which is the right cover for you.
Generally, premiums can cost anywhere between around £20 to £50 a month or more. Prices vary depending on how much of your repayments you want covered, after how long you want the policy to pay out, your general health and wellbeing and your age and medical history.
There are many other factors at play when comparing mortgage protection insurance so read our guide to learn more.
Last updated: 21 December 2021
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