Learn all about the largest and most common form of credit in the UK - a residential mortgage, helping millions of us buy homes.
Residential mortgages are the largest, and one of the most common, forms of credit in the UK, and make it possible for millions of us to buy our homes.
According to gov.uk the average property in the England currently costs around £247,355, but there are big regional variations – in London the average is over £400,000.
Wherever you're buying, unless you’re lucky enough to have hundreds of thousands of pounds in savings, you will need to borrow a great deal of money. This is where a residential mortgage comes in.
Compare mortgages if you're remortgaging, a first-time buyer, looking for a buy-to-let or moving home
A residential mortgage is a large long term loan taken out by one or more individuals to buy a home to live in.
Whether you are a first time buyer, moving home or remortgaging, this is the type of mortgage you will need. Depending on what is best for your circumstances you can chose between fixed rate, variable or tracker mortgages.
With a residential mortgage the home must be used as a residence by the borrowers, not rented out to tenants or used for commercial purposes.
Residential mortgages require a cash deposit, typically between 10-30% of a home’s value.
For example, a mortgage for a £200,000 home would likely require an upfront deposit of anything between £20,000 and £60,000.
Some residential lenders could ask for less than a 10% deposit to entice first-time buyers, and the government’s Help to Buy scheme means those who qualify only need to stump up as little as 5% of the value of your home.
Your loan to value is the amount borrowed set against the value of the property.
If you have a deposit of £40,000, you will need £160,000 to be able to afford a £200,000 property. Borrowing £160,000 for a £200,000 home gives you an 80% loan to value ratio, with your £40,000 deposit accounting for the remaining 20%.
Loan to value ratios of 80% and lower are typically seen as low LTV ratios, whereas LTVs over 90% are considered higher. The lower the ratio, the smaller the risk for the lender and the better the interest rates offered to the borrower.
The best rates come with 60% LTV mortgages which are the lowest available LTV mortgages.
In the middle there are 80%75% LTV mortgages, 70% LTV mortgages and offer very competitive rates with manageable monthly repayments.
95% LTV mortgages, 90% LTV mortgages and 85% LTV mortgages are all at the high end of available LTVs. These may have more expensive rates, but offer a way for first time buyers to buy a home.
The highest LTV you can is with a 100% LTV mortgage but these are rare. They requires no deposit but often charge very high rates of interest and require guarantors.
Interest will be charged on the value of the mortgage owed. Interest is the cost of money, or the ‘fee’ a lender charges for providing the service of lending you money. It is charged as an annual percentage rate against the value of your debt.
This means you will have to repay the value of your mortgage plus interest. For example if you were charged 5% interest on a £160,000 mortgage you would still owe £156,776 at the end of a year, which is £160,000 + £8,000 (5% interest) – £11,224 (monthly repayment of £935 x 12).
However, you are very unlikely to enjoy a fixed interest rate for a lifetime of a mortgage although it can be managed in three ways:
There will be monthly repayments that will need to be met until the mortgage is repaid. Not being able to meet these repayments could result in losing your home. These repayments will increase or decrease with the amount of interest being charged.
The repayment schedule on a typical residential mortgage is around 25 years. The longer the repayment schedule the smaller the monthly repayments and vice versa. You can remortgage if your circumstances have changed and you want to pay back the debt faster or slower.
Many lenders have an upper age limit of 75 at the end of the mortgage agreement. So, for example a 65-year-old would typically have to agree to repay a mortgage within 10 years.
There are two types of repayments:
Both options have pros and cons, which one you chose depends on whether you want cheaper monthly repayments or to work towards being mortgage free faster.
A residential mortgage is secured against the home to protect the lender’s money. This means that if repayments are consistently not met and a borrower defaults on paying the mortgage the lender has a claim on the home.
To recoup the money lent the lender may evict the residents and sell the house, using the income from the sale to clear the mortgage debt. This is known as foreclosure and is usually the final resort.
If you are concerned about defaulting on a mortgage read our managing debt guide for more information.
Residential mortgages can be tailored to fit the needs of different home buyers.
If you wish to take out a variable or tracker mortgage make sure you’ve budgeted for potential rate rises. To know you can afford your repayments it could be sensible to use a fixed rate mortgage until you’re secure.