How do mortgages work?
When you get a mortgage, the mortgage provider lends you money to buy property. This money is called the capital and the lender will charge interest on the capital you borrow until the whole amount is repaid.
There are two different ways you can repay your mortgage capital:
- Through a repayment mortgage:
Each month your mortgage payment will cover the interest you owe and repay a portion of the capital. At the end of the mortgage term, the capital should have been repaid in full and you will own your home outright.
- Through an interest-only mortgage:
Your monthly mortgage payments will only cover the interest you owe on the capital you have borrowed, unless you choose to pay off some of the capital. You will pay the interest element of the loan every month for the duration of the mortgage term and, at the end of the mortgage, most borrowers make a one-off capital repayment, usually through a separate repayment vehicle or by selling the property.
How to get a mortgage
When you apply for a mortgage, lenders will be looking at your age, how you earn your income, the type of property you want to buy and the deposit you have.
They calculate your mortgage affordability, factoring all these things into the equation to decide whether they are able to lend to you and on what terms.
There are various ways to make your mortgage application:
- Apply directly through a bank or building society; this will mean you can only select the products they offer
- Apply through a mortgage broker; they will compare all the different mortgages on the market and help make sure you get a mortgage with the best interest rate, which could save you money both in the short, and the long term. Whole-of-market brokers, in particular, may have access to mortgages which aren’t typically offered directly to customers
- You can get execution-only mortgages but you would need experience of financial matters. Execution-only means you make all the decisions without taking any advice, so this is not something suitable for most borrowers, and almost certainly not for you, if you’re reading this!
We work with whole-of-market mortgage brokers who will be happy to answer any questions you have and advise you of how much you could borrow and what type of mortgage might be most suited to your individual circumstances.
Mortgage types explained
The first mortgage decision you’ll make is deciding between a repayment mortgage and an interest-only mortgage. Your next choice might be more tricky because there are multiple types of mortgage products available from hundreds of different lenders.
In a bid to keep things simple, here’s a list and brief explanation of all the different types of mortgage:
- Fixed-rate mortgage: rate of interest charged is fixed for a set number of years. The rate is usually fixed for between two and five years, but some lenders offer fixed-rate mortgages of 10 or 15 years and longer. These mortgages can be good if you want certainty over how much your mortgage will cost as the amount of money you spend on your mortgage during the specified fixed-rate period won’t fluctuate.
- Standard variable rate (SVR) mortgage: pay the standard rate of interest charged by the mortgage provider. Interest rates can fluctuate at any time during the mortgage term, usually in line with the Bank of England base rate. The benefit of SVR mortgages is the freedom you have to switch to a better deal at any time due to there being no fixed-rate tie-in period.
- Tracker mortgage: a variation of a variable rate mortgage where the interest will track the movement of, say, the Bank of England base rate but with predetermined margins applied. For example, the Bank of England base rate is currently 0.75%, if your tracker mortgage is the Base Rate +2%, you will pay 2.75% interest.
- Discount mortgage: mortgage lender applies a discount off their standard variable rate (SVR) for a certain length of time, generally two or three years.
- Capped rate mortgage: similar to variable rate mortgages but the provider places a cap on the highest rate of interest you can be charged and, sometimes, a collar on the lowest rate.
- Offset mortgage: link your mortgage account to a current account and use the money you have in savings to reduce the interest you pay on your mortgage. They work by offsetting the interest of your savings against your mortgage, you pay interest on the mortgage balance minus the amount of money you have in savings.
- Cashback mortgage: get a cash incentive for taking out a mortgage. Lenders apply different rules and conditions about how much cashback you can get and when it will be paid. Some lenders will give you the cash upfront while others may not release the payment until they start receiving your monthly mortgage repayments.
- Flexible mortgage: enjoy a greater degree of flexibility with how you repay your mortgage. Flexibility will vary by provider and product, but usually you can change your monthly payment amount, repay early, take back cash you have paid in or take a payment holiday. All without penalty.
- Remortgages: when you have one mortgage and transfer it to a different mortgage product with the same lender, or switch lenders and mortgages, usually in pursuit of better terms, a lower interest rate or to borrow more.
First-time buyer mortgages
If you’re a first-time buyer, you’ll be inundated by offers from high street lenders keen to get your business. If you’re new to mortgages and the ways they work, it can be wise to get independent help from a whole-of-market mortgage advisor. They will be able to assess your situation and make sure you get the best available deal.
The mortgage types we have explained above will be available to you but, depending on your circumstances, you may want to consider other ways you can get on the property ladder. Many lenders require a minimum of between 10 to 25% deposit when you apply for a mortgage, but if you haven’t got this cash available there are alternatives you could consider:
- Low deposit mortgage: in the right circumstance, some lenders may offer you a 95% mortgage, which would only require a 5% deposit
- Low start mortgage: allows for lower repayments at the beginning of the term, leaving more spare income to pay for other moving and possible renovation costs
- Gifted deposit mortgage: a close family member, usually your parents, gift the money you need to put down a deposit, it’s important that the money is truly gifted; the person gifting the money will need to sign to say they don’t expect the money to be repaid
- Guarantor mortgage: a family member acts as a guarantor for the mortgage, which means they must agree to step in and make mortgage payments if, for any reason, you can’t
- Help to Buy: made up of a number of schemes, this is a UK government funded initiative which offers financial assistance to people who could use some help securing a mortgage for their first home
- Shared Ownership mortgages: a cross between buying and renting, you can use the government’s shared ownership scheme to buy a percentage of a property you’re planning to live in. You own some of the property and rent the rest. Not all lenders offer home loans to customers who are applying through the government scheme, but an expert shared ownership broker will know which lenders to approach.
If you’re self-employed, have got bad credit or an unusual deposit source, you might need a specialist mortgage. We work with whole-of-market mortgage brokers who specialise in the following areas:
Bad credit mortgages
It can still be possible to get a mortgage, even if you have bad credit on your file. Many high-street mortgage lenders and brokers have little experience of being able to offer assistance to people looking for a mortgage when they have a history of adverse credit, but we work with brokers who specialise in helping customers with bad credit.
As well as knowing the right specialist brokers, we also work hard to keep our articles up to date so anyone who wants a mortgage with bad credit in the UK will have a good idea about what might be possible.
Read more about how you could get a mortgage with bad credit or make an enquiry for a free, no-obligation chat and we’ll match you with a broker experienced in helping customers in similar circumstances.
It’s possible to get a self-employed mortgage even if you’ve previously been turned down due to a lack of accounts or for having adverse credit. The experts we work with know which lenders are most likely to be able to lend to you, whatever the circumstances of your employment.
If you want to buy a property to rent out and you need to borrow money, you’ll need a buy-to-let mortgage. Most buy-to-let mortgages are offered on an interest-only basis, with the intention that you meet the monthly interest payments using the rental income generated by the property.
You can read everything you ever wanted to know about buy-to-let mortgages, or get in touch and speak to one of the expert buy-to-let brokers we work with for some free, bespoke advice.
Second home mortgages
If you live in a home with a mortgage on it and want to buy a second home, you’ll need a second home mortgage. When you apply for a second home mortgage, lenders will carry out all the same affordability and eligibility checks that they would make on a first mortgage.
Due to the additional affordability issues of maintaining more than one mortgage repayment each month, UK mortgage providers tend to be stricter than they might have been first time around. Depending on your circumstances, lenders may require higher deposit amounts and may apply higher interest rates to the new mortgage loan.
A commercial mortgage is the type of loan you need to buy a business premises (either to work from or rent out), for buying a business itself or when you want to raise capital on a commercial premises you already own. Borrowers who take out commercial mortgages are usually businesses, business owners or people looking to borrow more than they can get through business loans.
We work with brokers who specialise in arranging commercial mortgages, if you’d like to know what kind of terms they could help you find on your commercial borrowing, make an enquiry and we’ll connect you with a whole-of-market expert.
The term ‘development finance’ is used to describe loans for property development, although it is also a product category in its own right. Development finance is generally offered as a short term, interest-only loan.
While similar to a bridging loan, the way development finance is paid out differs; capital borrowed through development finance is released in staged drawdowns in line with project progress. Most lenders will carry out inspections, and re-inspections, of the site before issuing each capital instalment, to ensure the schedule of work is progressing as planned.
Bridging finance loans are interest-only, short term loans you can use to bridge the gap between an incoming debt and a mainline of credit becoming available. They can also be a useful way to borrow capital to fund a project when timing is crucial.
While interest rates are generally higher than other types of loan, bridging loans are often quicker to arrange and the terms more flexible. If you want approval for a bridging loan, you’ll need a strong exit strategy and a reliable time-frame which, ideally, you’ll have a way to prove when applying for the loan.
We work with a team of experts who are experienced bridging loan brokers, get in touch and let them help you organise your bridging finance. Whole-of-market brokers, they’ll find you the best deal and, because they understand the value of your time, they’ll make sure you get the best available loan ASAP.
Large mortgage loans
If you need a large loan, it can be hard to find a lender willing to let you borrow the amount you need. You may encounter issues surrounding affordability or meet difficulty with loan to value criteria, most likely your struggles will be due to limitations of how much a lender may be willing to lend to an individual.
For many lenders, a large mortgage loan to one person can present far more risk than several smaller loans of the same value to multiple applicants. If something goes wrong the entire debt is at stake and smaller loans spread the risk.
That being said, there are lenders who don’t baulk when a customer wants to borrow more and the whole-of-market brokers we work with know who they are. Get in touch and we’ll match you with a broker who can help you get the lending you need.
Designed to meet the specific needs of someone who is looking for financing to build a house rather than buying a property that is already built and ready to move into. Self-build mortgages will release money at key stages of construction.
Lenders will generally want assurance that you have either enough experience to build the property yourself, or have the required skill to project manage and supervise construction. If you cannot reassure lenders of this, you would need to hire a contractor or building expert to manage the build on your behalf.
New build mortgages
Although there have been new build estates appearing around the country for several years now, getting a mortgage for a new build can be more complicated than for a standard already-built-and-lived-in property. You’ll likely have a limited choice of lenders too. Mortgage providers all take a slightly different view, but some prefer to steer clear of new builds altogether.
The concern for many mortgage providers is that new build homes can be difficult to value: buyers tend to pay more for a brand new home, which will usually drop when the property changes hands – but the exact amount of value it loses can be unpredictable. Therefore mortgages on new builds can end up being more expensive, with higher interest rates and requiring bigger deposits.
If you want to buy a property overseas you might want to consider using an overseas mortgage. You can use this kind of mortgage to purchase a holiday home or a place to retire.
Some people choose to leave the UK and use an overseas mortgage to fund the buying of a new home in a cheaper country with the intention of making a permanent move. They can also be useful for funding buy-to-let investments.
We work with international mortgage brokers who know the lenders who provide this kind of mortgage and understand the criteria requirement you’ll need to meet to get approval.
Expat mortgages are for people who are living overseas and want to buy a property in either their country of origin or the one they currently reside in.
Although expat mortgages work in exactly the same way as a standard mortgage, some lenders view them as being higher risk, so they can sometimes be more difficult to get. Therefore, checks and eligibility requirements might be more stringent.
There are expert brokers who specialise in arranging expat mortgages and we know who they are. Make an enquiry and we’ll match you with an expert with experience of helping other customers arrange similar mortgages.
They’ll know the criteria you need to meet, depending on where you are living and where you intend to buy, and will help you find the lenders worth applying to, saving you a whole heap of time and hassle.
Second charge mortgages
A second charge mortgage is when you take out additional lending via a lender who isn’t providing your main mortgage. It is money you borrow in addition to your original, first charge, mortgage.
A second charge mortgage is still secured against your property. If an event occurs which requires a lender to sell the property, the first mortgage takes precedence over any second charge lending you have in place.
Regarded as a viable alternative to remortgaging, with a second charge mortgage you take on two mortgage loans, each a stand alone product and two completely separate lines of credit. A remortgage simply adds an additional amount of borrowing to your original mortgage loan.
If you’d like to speak to a second charge mortgage broker, make an enquiry and we’ll introduce you to one of the whole-of-market experts we work with.
If you’re retired and living on pension income, this doesn’t prevent you from being able to get a mortgage. You may want to take out one of the mortgages explained above which some lenders will be willing to offer to pensioners looking for a mortgage.
Alternatively, you can take advantage of the home you own by using an equity release mortgage.
- A Lifetime mortgage which allows you to unlock a proportion of money from the value of your property.
Using your home as security for the loan, a lender will give you money which does not need to be repaid until you either die or go into long-term care.
Lifetime mortgages are available to homeowners aged 55 or older. The money raised can be used for anything you wish; holidays, medical care, family gifts or home improvements are just a few examples.
- Retirement interest-only (RIO) mortgage which is a loan secured against your home.
You pay the interest of the loan on a monthly basis, which ensures that the balance of the loan remains level.
The remaining balance on a retirement interest-only mortgage is usually paid back from the sale of your property when you die or move into long-term care. If there’s any money left over after paying your loan, this is inherited by your beneficiaries.
Speak to an expert broker
If you have found the information here useful but would like to talk to someone about your specific requirements, get in touch or call 0808 189 2301 for a free, no-obligation chat. We work with expert whole-of-market brokers who can help you find the mortgage you want.
Whether you’re a professional with a reliable income stream, a self-employed contractor or you have a history of bad credit, we know the experts who can help you find the right mortgage at the best available rate.
Should you want to do some additional research before making a call, there are a series of mortgage calculators you can use to find out how much you can borrow or how much borrowing may cost you before talking to a broker. If you still have questions and have more time to read, this article provides other mortgage information which you may find useful.