A Comprehensive Guide to Mortgages: Everything You Need to Know

A mortgage is a type of loan specifically designed to assist you in purchasing a property. To obtain a mortgage, you typically must provide a down payment of at least 5% of the property’s value. The remaining amount can then be borrowed from a lender.

After you borrow money through a mortgage, you must make monthly payments to pay it back over several years. Most mortgages have a 25-year term, but some lenders offer shorter or longer terms. Additionally, you must pay interest on the borrowed amount each month. The interest rate may be fixed or variable, depending on the type of mortgage deal you select.

Your property will be collateral for the loan until you fully repay it.

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How does the interest on a mortgage work?

The mortgage deal you choose affects the amount of interest you pay. If you select a fixed rate mortgage for a specific period, your monthly interest payment will remain constant.

Once the fixed rate period ends, your lender will most likely transfer you to their standard variable rate, which is usually higher than the special deal you were on. As a result, your interest payments will increase. However, you can consider remortgaging to a new deal to help keep your payments down.

Opting for a variable-rate mortgage means that the interest you pay may change over time. If interest rates decrease, you may benefit from this decrease, as it could reflect lower monthly payments.

If the interest rates on mortgages go up, it becomes more expensive for lenders to lend money, and they usually pass on these higher costs to homeowners. As a result, your monthly payments would increase. Therefore, many homebuyers choose fixed rate mortgages to ensure that their interest rate and monthly payments remain the same, providing them with peace of mind.

At the beginning of your mortgage, most of your monthly payment goes towards paying interest, with only a small amount going towards reducing the principal. Over time, as your debt decreases, you’ll pay off more of the principal amount and less towards interest.

How do mortgages work when selling or moving house?

There are usually multiple mortgage options when you decide to sell your property or relocate.

If you’re planning to move to a new house, you might be able to transfer your current mortgage to the new property through a process called ‘porting.’ However, remember that you’ll need to apply for your mortgage again and convince your lender that you can still afford your monthly payments. The lender will decide whether you can transfer your current deal to the new property. Additionally, there may be fees associated with moving your mortgage.

If you’re planning to move to a new home and require a larger mortgage, you can transfer your current deal first and then inquire with your lender about borrowing the additional funds. Remember that if you choose to do this, the interest rate on the extra amount may differ from your current rate.

If your current mortgage does not have an Early Repayment Charge and you are not bound by it, you can consider switching to a different lender and remortgage for the amount needed to purchase your new property.

Make sure you can afford your new mortgage before applying because lending criteria are more stringent nowadays. Lenders will thoroughly review your finances to ensure you can handle the monthly payments.

If there is a time between selling your current home and buying a new one, you may consider applying for a ‘bridging loan’. This loan allows you to move into your new home before your current one is sold. However, remember that these loans should only be used as a last option, as they often come with higher interest rates and fees. If you are unsure, seek professional advice. Also, remember that you will essentially own two properties for a while, so make sure you are comfortable with the risks involved.

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Frequently Asked Questions

1. What is a mortgage?

A mortgage is a loan that you take out to buy a property. The loan is secured against the property, which means that if you don’t keep up with your repayments, the lender can repossess your home¹.

2. How do mortgages work?

Once you get a mortgage, you pay back the amount you have borrowed, plus interest, in monthly instalments over a set period, usually around 25 years. Some mortgages in the UK have longer or shorter terms. The mortgage is secured against your property until you have paid it off in full ^{1, 2}.

3. What are the eligibility criteria for a mortgage?

To be eligible for a mortgage, you must have permanent full-time employment—meaning that freelancers and the self-employed have slimmer chances of being approved due to the lack of job security. The mortgage process in the UK is speedier for those who have lower monthly expenses or no dependents⁴.

4. What documents do I need to apply for a mortgage?

You’ll need to provide several documents such as payslips from the last three months, proof of your UK residency status (if applicable), a P60 (annual UK tax summary) form from your employer, three to six months of bank statements, proof of any UK pension or insurance benefits received, two to three years of accounts if you’re self-employed.

5. How do I apply for a mortgage?

You can apply for a mortgage through a lender’s website or contact their customer service teams directly. You’ll need to provide several documents such as payslips from the last three months, proof of your UK residency status (if applicable), a P60 (annual UK tax summary) form from your employer, three to six months of bank statements, proof of any UK pension or insurance benefits received, two to three years of accounts if you’re self-employed.

6. What is an agreement in principle?

An agreement in principle, is a document that shows how much money a lender is willing to lend you based on your income and credit score. It’s not legally binding but can help you understand how much you can afford to borrow.

7. What is an interest rate?

An interest rate is the money you’ll pay on top of your loan over time. It’s usually expressed as an annual percentage rate (APR). The interest rate depends on several factors such as the type of mortgage you choose and your credit score³.

8. What is a fixed-rate mortgage?

A fixed-rate mortgage is a type of mortgage where the interest rate stays the same for an agreed period (usually two to five years). This means that your monthly repayments will stay the same during this period regardless of any changes in interest rates³.

9. What is a variable-rate mortgage?

A variable-rate mortgage is a type where the interest rate can change over time depending on market conditions. This means that your monthly repayments can go up or down depending on any changes in interest rates³.

10. What are mortgage brokers?

Mortgage brokers are professionals who help people find and apply for mortgages. They work with several lenders and can help you find the best deal based on your circumstances⁴.

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