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Buying a house is always stressful. It's not easy making a decision on where you want to live, or uprooting all your possessions and making a move.
But arranging the mortgage makes things even more fraught.
Are you feeling stressed out?
We've developed this guide to explain everything you need to know about mortgages and make your life easier. Let's cut through the jargon, and get started!
Table of Contents
Why do I need a mortgage?
You might need to get a mortgage because you want to buy a house. The average house price is now over £230,000, and very few people have enough money to buy a property for cash. Whether you're buying a house for the first time or moving up the ladder, you'll need mortgage.
You might also want to remortgage, for a number of reasons. You won't be moving house but you'll be changing your mortgage terms and conditions - maybe borrowing more, or at a better rate.
What is a mortgage in principle?
A mortgage in principle is a statement from a lender that they are prepared to lend you a certain amount. It's not binding, as it will depend on your successfully completing a full application. It might also not apply if the property you want to buy doesn't tick your lender's boxes.
You might also hear the terms 'agreement in principle' or 'decision in principle', or 'mortgage promise' - they all mean the same thing.
In Scotland, you'll actually need a mortgage in principle before you can put an offer on a house. In England and Wales, you don't need to have one - but it's a great negotiating point, particularly if there are other potential buyers who haven't got an agreement beforehand.
How do you get a mortgage?
To get a mortgage you'll need to either go to lenders directly or use a broker. You'll need information on your income and outgoings, such as payslips, and on the property you want to buy.
The process will be slightly different depending on whether you want:
- a mortgage for buying a property, or
- a remortgage.
How to get a mortgage when buying a property?
If you're buying a property, you should get a mortgage agreement in principle, which will be valid for 30 or 90 days (different lenders have different rules). You can often arrange an agreement in principle (AIP) in just a couple of hours - though it doesn't absolutely guarantee you will get the mortgage you want, it's a good first step on the way.
You don't need to have had an offer accepted on a property to get an AIP - so it's a good idea to put it in place once you've narrowed down your property choice and are getting close to making an offer. It may help you convince the seller's agent that yours is the best offer.
Once your offer has been accepted you'll need to convert this to a full application, providing backup evidence such as your payslips, and getting an independent valuation of the property you want to buy. This will be arranged by your lender, though you'll pay for it (unless your lender covers it under a special offer or promotion).
The full application process can take between three weeks and a month and a half. There's a lot of checking and double-checking to do, as well as the valuation to arrange. An offer is usually valid for six months, so unless you have very bad luck it will take you all the way to completion.
What happens if you’re remortgaging?
When you remortgage, you take out a new loan on your existing property to repay the existing loan. Basically you're refinancing - changing the amount or the terms and conditions on your loan.
You might remortgage for a number of reasons:
- your fixed mortgage term has come to an end and your mortgage is moving to a higher SVR;
- you might want to increase the amount of the mortgage, perhaps to fund home improvements;
- you might be able to find a cheaper deal, particularly if you have a lower amount outstanding or a better credit record than when you took out your mortgage;
- your property has increased in value so your mortgage represents a lower proportion of its value - giving you a chance to find a better rate.
Before you remortgage, find your original paperwork and check what penalties (if any) you have to pay, and whether you need to pay an exit fee. Even if there are penalties, it could still be worth your while remortgaging, but you need to get your sums right.
It's always worth checking with your existing lender to see if they can offer you a better deal,. If they do, you won't need a solicitor to handle the deal, and some of the fees may be waived.
If you've found a deal somewhere else, you'll go through pretty much the same steps as for your original mortgage, including the valuation, and you'll need a conveyancer or solicitor to ensure all the legal work is correctly carried out.
Smart tip - save your arrangement fee if the deal falls through.Many lenders give you the choice of paying the arrangement fee up front or adding it to your mortgage. If you add it to the mortgage, and for some reason the deal falls through, you won't have to pay up - and with fees sometimes more than £2,000, that's a big saving.
However, if you add the fee to the mortgage, of course you'll end up paying interest to it. So borrow the arrangement fee, but (assuming your mortgage lets you do it) make an overpayment in the first few months to pay it off. That way, you've insured against losing the deal, and it costs you practically nothing!
What are the best remortgage deals?
The best remortgage deals keep changing as banks and building societies launch new products or tweak existing deals. The table below shows some of the best when we wrote this piece - but check our comparators to keep track of the market.
|Bank||Type of loan||Interest rates|
|2 year fix||1.16%|
|3 year fix||1.44%|
|2 year fix||1.14%|
|2 year discount||1.4%|
|2 year tracker||1.49%|
|10 year fix||2.19%|
Remember that with fixed rate mortgages, the rate will transfer to the SVR once your fixed term period expires.
You might also want to take a look at the remortgage calculator UK to see whether a remortgage will save you money or enable you to borrow the extra amount you want.
How much can I borrow for a mortgage?
The amount you can borrow will depend primarily on your income, but lenders nowadays will also look at your outgoings to make sure your monthly payments won't stretch you too much financially.
Lenders generally allow a loan to income ratio of between 3.2 and 4.5 times your annual salary. If you are relatively young and working in an area where career progression can be fast, you might get a higher multiple; if your employment record is patchy, and you rely on overtime that's not guaranteed, lenders might offer a lower multiple.
You can use a mortgage borrowing calculator to answer the question "How much mortgage can I get?" This will give you a rough answer. But remember a mortgage calculator is only indicative - different lenders will make up their own minds.
You may be fortunate enough to be able to access the government's Help to Buy scheme for first time buyers. If so, use the help to buy mortgage calculator to see what you can borrow and how much it will cost.
Lenders will look at other factors besides your income when they're assessing how much to lend. These might include:
- your credit record
- your outgoings (eg car loans and child support payments, as well as household expenses)
- the size of the deposit you are putting down
- how much you have in savings
- whether you have any supplementary income.
New regulations brought in by the Financial Conduct Authority in 2014 force lenders to assess mortgage affordability, by looking at your living expenses.
Lenders are also choosy about what types of earnings they include. If your bonus is guaranteed, it can be included in the calculation - if not, it will probably not count. Agency workers and contractors can also have problems getting a mortgage, though like the self-employed, they'll find there are specialized options available.
Some lenders may also consider other types of income in the calculation; for instance, they might look at child benefit, investment income, rental income, or maintenance payments. But not all lenders are this flexible, and they may only take a percentage of that income into consideration.
How much would a mortgage cost?
Mortgage rates are set by lenders for each individual mortgage reflecting the creditworthiness of the borrower and the percentage of the property value borrowed. So there's no hard and fast rule for how much a mortgage costs.
You'll also have to pay some up-front fees including an arrangement fee and valuation fee. Some lenders charge arrangement fees in excess of £2,000.
However, we do know what most lenders are offering as an APR ('Annual Percentage Rate'). This helps address both these problems, because
- at least 51% of borrowers have to be given terms no worse than the APR, so we know over half the new borrowers with that lender are paying the stated rate; and
- the APR rolls up all the fees with the interest payable to give you a feeling for the total cost over the life of the loan.
Interest rates will also depend on whether you have a fixed or variable rate mortgage, and on the length of time you fix the rate for. So we've shown some typical mortgage rates in the table below for different types of mortgage and levels of deposit.
|Type of loan||LTV*||Interest rate*|
|Two year fixed||95%||2.89%|
|Two year fixed||75%||1.42%|
|Three year fixed||95%||2.46%|
|Three year fixed||75%||1.55%|
|Five year fixed||-||1.66%|
|Standard variable rate||-||4.31%|
*H2 2019 averages
All fixed rate mortgages end up on the standard variable rate (SVR) when the fix expires. However, if you want a variable rate mortgage, trackers (which follow the Bank of England base rate) and capped rate mortgages are also available, as well as discounted rates (which follow the lender's SVR, but at a discount).
Interest-only mortgages were very common before the credit crunch. They are rarer now, but are still available if you can show that you have a definite plan for repayment, such as an investment portfolio, a business that you will sell at some point, or a rental property that you can sell.
Of course interest rates only tell part of the story. If your question is "What mortgage can I afford?" you'll want to look at monthly payments, and those will depend on the length of the mortgage term as well as the interest rate. Try the loan repayment calculator UK to find out if you can cover the monthly payments on a particular mortgage easily - or if you'll find yourself financially challenged.
What are mortgage interest rates?
Mortgage interest rates are set by each lender on their own account. The rate you see advertised will be given to most customers, but those with adverse credit, or putting down lower deposits, may end up paying more.
You will see various fixed and variable rates advertised. You will also see that each lender has a Standard Variable Rate (SVR). This is the default rate to which mortgages revert once any fixed term period expires. Take good note of the SVR, as it is usually a lot higher than the advertised rates for new mortgages.
You should also note the APR that's given. This Annual Percentage Rate includes all the fees charged over the course of the mortgage, as well as interest paid, so it's a way of comparing mortgages that may have very different fees or promotional offers attached.
While the interest rate is important, it's not the only factor to consider - the length of the loan will also affect your monthly payments, so make sure you use a mortgage payment calculator to see how that could affect your repayments.
What are the factors the lenders consider when getting a mortgage?
Lenders think about two major factors when they assess you for a mortgage ; your own creditworthiness, and how much of the value of the property you want to borrow. So are you eligible for a mortgage?
Your own creditworthiness can be assessed in several ways ;
- the multiple of your annual salary that the loan represents,
- the amount of your monthly income that your mortgage repayment will represent ("mortgage affordability")
- your credit report.
If you are on PAYE then lenders will consider your annual salary as the income on which they will base the multiple they're prepared to lend. Normally, they will include any guaranteed bonus, but overtime, discretionary bonuses, commissions and tips might not be included. Sometimes, overtime or commissions will be included based on the average of your last three payslips.
If you are self-employed life can be more complicated and you may find fewer lenders ready to extend you a mortgage. If you own a company, though, lenders will consider both your salary and any dividends that you pay yourself. Contractors and agency workers can also find getting a mortgage difficult.
Because a mortgage is secured on your property, a lender also thinks about the loan to value (LTV) ratio when making a lending decision. Even if you have a good job and a good credit record, if you want a mortgage for 95% of the value of the property you're buying, some lenders might not be keen. It's worth noting, too, that many lenders exclude certain types of property, such as non-typical construction, flats above commercial premises, former council flats, live/work units, or even eco-homes.
What will the monthly payment be on my mortgage?
Your monthly payment will include two parts, a repayment of part of the sum you borrowed (except for interest-only mortgages), and interest on the amount outstanding. The best way to find out your likely monthly outgoings is to use our mortgage repayment calculator.
You may find it useful to use the calculator to look at the impact of different decisions on your monthly repayments. For instance.
- If you take out a longer term mortgage, for instance 30 years instead of 15 years, your monthly payments will fall.
- If you manage to secure a lower interest rate, how big a change will it make?
- If you pay a bigger deposit, how much will it reduce your payments?
Most people ask "How much can I borrow for a mortgage?" and hope the answer will come out as high as possible. But it's also important to ask "How much mortgage can I afford?" so that you know you won't get into financial trouble - or end up missing out on enjoying your life because you've got no money left after you pay your mortgage!
What are banks’ rates when taking out a mortgage?
Banks and building societies set their mortgage rates by reference to the Bank of England base rate. Since base rates are currently at historic lows, mortgage rates are also in low single figures.
Mortgage rates are usually lower than the rates for other loans. This is because they are secured on the property; if you don't pay your mortgage, the bank can take the house and sell it to cover the money owning. (This is normally only done in very serious cases - if you simply miss a month or two because of redundancy or sickness, particularly if you've been upfront with your lender, you shouldn't lose your house.) That makes the loan a lower risk for the bank so it can afford to quote a lower spread (difference between the loan rate and base rate).
Right now, you can get a mortgage at rates as low as 1.42% - if your credit is good enough.
What is the UK average mortgage?
The average mortgage in the UK is around £111,000 according to our calculations.
According to data from the Financial Conduct Authority, outstanding mortgages amounted to £1,499 billion at the end of 2019. This covers 13.4 million individual loans. If we divide £1,499 billion by 13.4 million, we get £111,578.
However, this includes all mortgages. For instance, it includes people who are coming to the end of their mortgage term and have paid nearly all of it off. It includes buy-to-let mortgages, too.
Looking at figures from UK Finance lets us see the average amounts for new mortgages. First-time buyers took out 29,490 new mortgages in December 2019, worth £5.1 billion - that's £172,000 each. Home moves took out 29,400 mortgages worth £.6.8 billion - that's £231,000 each.
What is mortgage life insurance?
Mortgage life insurance is designed to repay the mortgage if you die. If you have a family and want them to carry on being able to live in your home if anything happens to you, this insurance will give you peace of mind.
Unlike most insurance, the amount covered will decrease over the years as you repay your mortgage and the amount outstanding falls.
Some lenders will want you to put a policy in place in order for them to give you a mortgage, particularly if you're borrowing a high LTV,
You might also consider a general life insurance policy. You could take this out for a sum that would not only cover your mortgage, but also leave your family enough money to help ensure they can maintain their lifestyle.
Why is it a good idea to take out life insurance when having a mortgage?
If you die and your mortgage has not been paid off, your lender could insist on your home being sold in order to pay off the mortgage. Your family would have to move. Life insurance will pay out if anything happens to you, so your family would be able to carry on living in your home. This other solution is to get a mortgage insurance (the "assurance de prêt" is for example very popular in France) and the bank is payed out by the insurance company if anything happened to you.
If you're a single person with no dependents, this may not worry you. But your lender might want you to have a life insurance, particularly if you've borrowed a high LTV, so that if anything happens to you they know the mortgage will be paid off. For your own sake, though, you might want to look at a mortgage life insurance policy that includes critical illness cover. This will also pay out if you have a long term health condition that prevents your working.
Your lender may propose a life insurance from their product range. You don't have to take it. You should definitely shop around to make sure that if you do, you're getting a good deal.