Mortgages UK

How do mortgages in the UK work? Who are the biggest lenders and what do you need to know about the British mortgage market?

The majority of households in the UK are owner-occupier, which means either owning a home outright, or owning a home with a mortgage.

A mortgage is a loan to buy a house, it’s typically the largest loan you will ever have, however the rates are relatively low and you will repay it over several decades.

How mortgages in the UK work

In the UK, mortgages are large loans secured against the home and repaid gradually over the period of about twenty five years.

Gradually as the mortgage debt is paid down in monthly installments, the borrower’s share of the home’s value (equity) increases, until the borrower is mortgage free and owns the home outright.

Being secured against the home means that if a borrower defaults on the mortgage, the lender can repossess the home to recover their money. However, this is rare and usually only the last resort.

How to get a UK mortgage

To a get a mortgage you must meet the minimum eligibility criteria (the mortgage you can get will be based on your credit score, income and existing financial commitments) and be able to put a down a deposit that’s at least 10% of the value of the home you are buying.

Although, it is possible to get mortgages with deposits under 5% and some lenders are more flexible than others with their eligibility criteria.

UK mortgage rates

The interest rate of the mortgage is how much the mortgage will cost you. You should consider both introductory rates and APR (which is the average overall cost of the mortgage).

Typically, you want to aim for the lowest rate when choosing a mortgage, but be sure to look out for introductory offer rares that spike up after a few years, and high arrangement fees.

Also importantly, the larger your deposit, the your lower Loan to Value ratio (LTV), and the lower this is, the cheaper your available mortgage rates will be.

You can choose to have your mortgage rate as a:

• Fixed rate mortgage – gives you set monthly repayments for a number of years, typically between 2 to 5 years, but sometimes as long as 10 years. But be careful, as whether fixing a rate will leave you better or worse off depends on your timing.
• Tracker mortgage  -This is pegged to the Bank of England’s base rate with a set mark-up, for example, your mortgage could be the base rate +2%, so currently you would be paying interest of 2.5%.
• Variable rate mortgage – Your interest rates will vary at your lender’s discretion. However, increases are  unlikely to be severe, as market competition and fear of bad publicity tend to stop rate hikes.

Repayments

UK mortgages have fixed monthly payments you must meet. There are two ways of arranging these payments:

• Capital repayment – you repay a portion of your debt off each month, as well as the interest charges, at end of the term you should have entirely repaid your mortgage.
• Interest only – these are typically cheaper, but you are only paying your interest charges, not paying down your debt, so at the end of the mortgage you will still owe the full debt.

UK Mortgage types

There are a wide variety of mortgage types, which one is right for you depends on your circumstances.

Residential mortgages

Residential mortgages are used to buy a home for the borrower to live in. They are the most common type of mortgage in the UK.

The home must be used as a residence by the borrowers, and cannot be rented out or used for exclusively for business purposes.

Help-to-Buy mortgages

Help to Buy is a government scheme to help first time buyers get a bigger deposit – if you can produce a 5% deposit you can receive a government loan worth up to 20% of the property’s value.

To be eligible you need:

• To be a UK resident buying your first home to live in
• Buying a home worth less than £600,000
• A clean credit history and proof you can afford repayments
• Not use other government home ownership schemes

Shared-ownership & rent to buy

The shared ownership scheme lets you buy a share of a home between 25% and 75%, and pay rent on the remaining share to your local authority.

It’s designed to help families on lower incomes to become home owners, so the scheme is only open to to first-time buyers, or those who used to own a home but can’t afford one anymore, on salaries lower than £60,000 per year.

You need a mortgage to help buy your share of the property, typically at least 5% of the property’s value.

Buy-to-let mortgages

Buy to let mortgages in the UK are secured loans designed for landlords to borrow money specifically to buy a property to rent out.

They are very similar to residential mortgages, but are considered commercial rather than a personal financial arrangement, this can make deposits and rates higher than with residential mortgages.

Also, potential rental income is considered as a lending criteria, rather than just your personal income and credit score.

Who are the major mortgage lenders in the UK?

Banks

The UK financial market is dominated by the ‘Big Four’ banks: Barclays, HSBC, RBS and Lloyds. All have always offered mortgages alongside their other financial products.

There are also many new small domestic and larger international banks that have entered the UK mortgage market, notably:

• First Direct
• Santander
• Aldermore
• Metro Bank
• Co-operative Bank
• Post Office
• Virgin Money
• Natwest
• Al Rayan Bank
• Tesco Bank
• Bank of China (UK)

Take a look at all mortgage companies to see more.

Building societies

Traditionally regional building societies provided mortgages to their local members, but since the 1980s many have effectively become banks. But they’ve kept their principles of responsible and flexible lending.

Notable building societies include:

• Nationwide Building Society
• Yorkshire Building Society
• Family Building Society
• Skipton Building Society

But there are many other smaller regional building societies across the UK,  see our mortgage companies pages for more.

Local credit Unions

Many communities in the UK have credit unions that offer credit to local people, typically those who have been refused credit elsewhere. If you are struggling to get a mortgage, your local credit union may be able to help.

Read more…

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