Everything you need to know
Mortgage comparisons made easy. Get essential information on which mortgage products work for you, as well as how to begin a mortgage application.
Which mortgage product do I need?
For most of us, buying a home is the largest purchase we will ever make. It doesn’t matter if you’re a first-time buyer, or a property ladder veteran, the process is filled with challenging steps. Getting a mortgage is one of those steps and can be especially challenging for people without previous mortgage experience. We want to help clear the fog surrounding mortgages with a comprehensive guide on understanding mortgages, how to get one, and the different types of mortgages available.
To understand mortgages, first cast your mind back to their humble origins: Medieval England. Back then, mortgages were more literally tied to their etymology, coming from the Old French ‘mort’ (death) and ‘gage’ (pledge). It was a debt paid to the mortgage lender until the borrower died, which then passed onto relatives. If the debt wasn’t paid, then the lender would have the right to repossess the borrower’s assets (property for example). This isn’t so different from how mortgages work today, although the modern mortgage isn’t quite so strict.
The modern mortgage
Modern mortgages (20th century) appeared when more and more people starting moving from rented accommodation to purchase their own homes. They helped and continue to help people unable to outright purchase property, by covering the cost through a repayable loan. These loans come with an interest rate, which changes depending on different factors such as the length of the mortgage period, whether you’re a first time buyer, how much you need to borrow, your credit score, etc. Mortgages are paid for in instalments that you, the borrower, generally pay each month.
How to get a mortgage
You can get a mortgage by first completing a mortgage calculator, which is a way of working out how much of a loan you can get. OneDome can help you get a mortgage through our online tool, the Mortgage Passport. It is a fast and convenient way to not only calculate how much you can borrow, but also to get a Mortgage in Principle.
What is a Mortgage in Principle?
A Mortgage in Principle is where the mortgage lender states what they may be able to lend you if you were to buy a property. Having a Mortgage in Principle means you can show sellers that you’re in a genuine position to buy, which will help you stand out from other buyers. Sellers usually deal with numerous buyers at the same time, all vying for their property, so securing a Mortgage in Principle should be near the top of your priorities.
One thing to keep in mind is that a Mortgage in Principle is exactly that, a mortgage offered in principle. This means that the lender is well within their rights to offer you a different amount when it comes to formally applying for the mortgage itself. Another factor that can change the final mortgage amount, is the period of time you leave between getting a Mortgage in Principle and applying for a mortgage. Taking a long time to formally apply could see the interest rates increase, which might mean you’ll have to look elsewhere for a better deal.
The majority of mortgages taken out are by people moving home from one they’ve bought previously. They’ve potentially paid off the mortgage from their previous home and now need to get a new one to help cover the property they’re looking to buy. Or, they’ve not yet paid off their previous mortgage, which can bring some challenges, though not any that aren’t insurmountable.
If you fall into the latter category, one option is to include using cash from your home sale to pay off your existing mortgage. You can use any remaining cash (equity) to contribute to a new mortgage. There is the potential for early exit fees when you pay off a mortgage earlier, which can be frustrating but at the end of the day, the lender is losing out on money made from interest rates.
Equity is important in getting a mortgage and it’s something first time buyers don’t have. This might seem like a huge problem, but it isn’t actually as bad as you might think, with plenty of other ways to still get a mortgage. In fact, first time buyers have access to specialised mortgages that are only available to people who have never owned a property before. You can secure these mortgages with an easily managed deposit of between 5-10%, though be aware that high loan-to-value (LTV) mortgages can come with increased interest rates.
Help to Buy scheme
The UK government provides help to first time buyers through their Help to Buy scheme. It provides equity loans of up to 20% of a property’s total value; Londoners get up to 40% (such are the house prices in the capital). Whilst Help to Buy isn’t exclusive to first time buyers, its interest-free (for five years) equity loans are particularly helpful for people starting on the property ladder. They can access mortgages with lower interest rates and lower loan-to-value percentages. If you’re a first time buyer, definitely consider checking if your eligible to qualify for Help to Buy. We’ve also created a guide on Help to Buy here, which covers everything you need to know.
Sometimes you might think you can save money on your current mortgage with a mortgage from a different lender. This is called remortgaging your home, which is the process of taking out a second mortgage on the value of your home that has yet to be paid off. Your new mortgage will be used to pay off the remaining equity of the previous one.
You might be thinking, why not just stick with the initial mortgage? People remortgage homes because many mortgage providers usually offer some form of promotional interest rates, which inevitably run out after a few years. When the lower interest rates end, it makes sense to switch to a mortgage provider offering a similar promotion, meaning you can take advantage of the new deal’s lower interest rates. Please note, you may have to pay an early repayment charge to your existing lender if you remortgage.
Early repayment charges
Keep in mind that you may be faced with an early repayment charge, a penalty applied if you repay your initial mortgage during a tie-in period. Lenders charge this because they’re effectively losing out on revenue generated by the interest rates, so they need to recoup a portion of the losses. Make sure you shop around for mortgage deals with much lower monthly payments, because otherwise remortgaging might not be worth it.
If you intend to rent out a property you’re purchasing, you will need to get a buy-to-let mortgage. The people living in your rented property will cover the monthly repayments through their rent, with you ideally making some profit. As a general rule, buy-to-let mortgages are interest only, which means your monthly payments will only cover interest on the loan. This means the amount borrowed doesn’t go down throughout the mortgage term; instead you will likely pay the mortgage back when you sell the property.
You might want to outright keep the property at the end of the mortgage term. If so, a repayment mortgage is your best option because it allows you to pay back both the principal loan and the interest, leaving you as the legal owner of the property. Fair warning however, monthly payments on a repayment mortgage are higher than interest only mortgages. Don’t get a repayment mortgage if you can’t cover the monthly costs with the generated rent.
There are a lot of different mortgage types, some of which only work for very specific circumstances. This makes getting an understanding of which mortgage works for your specific needs an important step in the application process. Having this knowledge means you’ll be better placed to make an informed decision.
This is where a lender offers you a mortgage rate with a fixed interest rate, meaning the interest will not rise for a guaranteed period of time. It could be anywhere between 1-10 years, though one-year fixed-rate mortgages aren’t as common. Fixed-rate mortgages are by far the most popular type of mortgage to get, simply because it provides the security of knowing your interest rate will never go up regardless of what happens.
Whilst the interest rate is the same throughout the designated time frame, the fixed fee you pay increases if the mortgage is long term. This is due to the fact that the lender has a harder time predicting how the market will change over a longer time scale.
Variable rate mortgages
The antithesis to fixed-rate mortgages. Variable rate mortgages have interest rates that fluctuate according to market changes, so if you have a keen eye for the market, you could save money. This is far from a reliable strategy though, making fixed-rate mortgages a better option if you require stability.
One thing to be said for variable rate mortgages is that their interest rates are traditionally lower than fixed-rate mortgages. ‘Traditionally lower’ isn’t a guarantee and there are introductory offers on some fixed-rate mortgages rivalling variable mortgages. Keep this in mind when comparing mortgages and don’t jump on the first variable rate mortgage with a low interest rate, because they might just skyrocket in a few months.
Standard variable rate mortgage
Where variable rate mortgages are impacted by the market, a standard variable rate (SVR) mortgage has an interest rate determined by the lender. They can shift and change this rate as and when they please. Many people find themselves on an SVR mortgage after their fixed-rate mortgage expires, which often leads people to remortgage rather than increase their interest rate payments.
Interest-only mortgages work for people looking to let a property. They’re usually pretty affordable, but the caveat is that you don’t actually end up owning the property at the end of the mortgage term. Instead, you generally sell the property at the end of the term to cover the remainder of the mortgage.
With these types of mortgages, you have the option to overpay and underpay, as well as take a ‘payment holiday’ (where you miss monthly payment). Although this might sound like the most ideal option, flexible mortgages often come with higher interest rates.
However, if you’re a mortgage savvy individual, you could try for an offset mortgage. This is where you use your savings to reduce the interest you pay on your mortgage. For example, you might have £10,000 worth of savings and a £100,000 mortgage; with an offset mortgage you only pay interest on £90,000 of your mortgage (with the £10,000 used to reduce the amount you pay interest on).
How can OneDome help me get a mortgage?
As the UK’s first transactional property portal, we cover every step of the home moving journey, including mortgages. We make pre-qualifying for a mortgage a simple experience, thanks to our convenient tool, the Mortgage Passport. As well as get an instant mortgage quote, you can use your Mortgage Passport to stand out from other buyers, by showing the seller that you’re in a genuine position to buy. You can also connect with our team of mortgage advisors, who can help you decide which mortgage product works for you.
If you have any questions about mortgages, give us a call on 0203 8686 262 between 09:00 and 17:00.
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If you’d prefer to talk to a mortgage advisor directly, you can call 0203 8686 262 between 09:00 and 17:00
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