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A Beginner’s Guide to Mortgages

Applying for a mortgage is one of the most expensive (and daunting) commitments a person can make in their lifetime. For aspiring first-time buyers, it can be difficult to navigate which mortgage is right for you or how to get a better deal when considering a remortgage or selling your property. Our guide covers the most frequently asked mortgage questions:

1. What types of mortgages are available in the UK?

When you considering mortgage products from various banks and building societies, the two main mortgage products are:

Repayment Mortgages

A Repayment Mortgage means you pay a monthly sum to your mortgage lender that pays off part of the capital you owe for your property (actual price of the mortgage sum) and the interest accrued. For example, if you set your mortgage term for a set-time of 25 years, you will gradually reduce the debt you owe and the amount of interest paid will decrease. If you keep up with your payments for the entire mortgage term, you will have no outstanding mortgage debt to pay and you will own your property outright. If you choose to re-mortgage, you should have a lower loan to value ratio (LTV) and therefore could have less to pay in mortgage costs per month.

Interest-only mortgages

An Interest-only mortgage means you only pay off the interest accrued on your mortgage each month and not the capital. Your monthly payments will only cover the costs of borrowing the money from your mortgage lender and does not go towards paying off the property. At the end of the mortgage term, you will have to pay off the capital money you owe on the property in one lump sum.

2. What is a mortgage rate and how does this affect what mortgage product I choose?

A mortgage rate is the interest rate charged when you take out a mortgage. When choosing a mortgage product, you will often find that you can get fixed rate mortgages which offer a set interest rate for a length of time (i.e. 2 years, 5 years) or a variable interest rate which can go up and down dependent on benchmark interest rate (determined by the Bank of England Base Rate or the lender). A fixed rate mortgage offers certainty to mortgage payers that their monthly interest payments will stay the same even if the benchmark interest rate rises or falls.  A variable interest mortgage will follow the standard variable rate of the bank which has made the loan which can fluctuate, meaning your monthly payments can change dependent on if the interest rate rises or lowers. Tracker mortgages also work in a similar fashion but the interest rate is determined by the Bank of England Base Rate.

3. How much will my mortgage payments be?

Monthly mortgage payments are calculated by the amount you wish to borrow, the term over which you intend to pay it off and the interest rate on your mortgage product. When looking around for mortgage deals, there are free mortgage calculators online which can work out how much you are likely to pay per month (including any mortgage fees).

4. What is an LTV ratio?

The ‘Loan to Value’ ratio is a percentage which is calculated by amount you need to borrow, divided by the value of the property and then multiply the result by 100 in order to get its percentage value. The amount of money that you put down on a property as a deposit will help to lower your loan to value ratio.

5. How much deposit do I need to secure a first-time mortgage?

There is no set rule on how much deposit is needed to secure a first-time mortgage. The more you can set aside for a deposit in savings will put your mortgage application in good standing for the best interest rate deals. Deposits in excess of 25% of the property value will generally allow for better mortgage interest rate deals, so if you have a property valued at £200,000 a 25% deposit would be £50,000. If you have a low deposit, there are ways to help you secure a mortgage including special family mortgages whereby you put in a smaller deposit amount (i.e. 10%) and a family member/guarantor adds in savings to make up the rest of the deposit. There are 95% mortgages deals which only need a 5% deposit, however, be prepared to pay a higher interest rate.

6. Family members are helping me contribute to a property deposit – does this mean I will be automatically approved for a mortgage?

A gifted deposit does not automatically entitle applicants to a mortgage agreement. Banks and building societies take many factors into account when processing a mortgage application including age, employment status, affordability tests, consideration of any existing debt (including credit cards), monetary commitments (including any children/dependents within a household) and credit scores.

7. How does my credit score affect mortgage eligibility?

A credit score is an indication to lenders as to whether you are likely to pay credit back and whether there are any risk implications in lending money to you. If you have a good credit score, you are more likely to have access to better mortgage rate deals. If you have a poor credit history (i.e. any missed credit card payments, late bill payments etc.) this could lead to some lenders refusing you credit. There are free services online including Experian and Noddle where you can check your credit score online and check your credit history to make sure there are no mistakes on your file.

8. What should I do to make sure my mortgage/remortgage application is successful?

Pay your bills on time – if you miss a payment this will be recorded as a negative on your credit file and can stay there for up to 6 years.

Keep your accounts in good standing – make sure you close any unnecessary bank or credit card accounts that are not in use.

Add your rent history to your credit file – if you are renting and always make sure you pay your rent on time, you can request that your rent payments are counted towards your credit report, meaning you could potentially improve your credit score by showing you are a good tenant.

Don’t splash out on unnecessary purchases – mortgage lenders will examine your bank statement history and will question any purchases that are deemed excessive or wasteful. Try to keep to within your living means for at least 3 months before you apply for a mortgage.

9. I already have a mortgage on a property, but would like to sell my current property to buy a bigger/smaller property – what will happen to my current mortgage and how do I secure a new one?

If you plan to sell your property, you can either adjust your current mortgage to the property which you plan to move to or you can remortgage with a new lender, which may offer you a better deal. It is worth speaking with a qualified mortgage broker or directly to your lender to see how moving will affect your mortgage. It is worth noting if there are any exit fees associated with leaving your current lender as you may be penalised for moving to a new lender.

10. Can I ‘overpay’ my mortgage?

Overpayments can be extremely beneficial in reducing the amount you owe on a mortgage. Some mortgages allow for overpayments if you have some extra money that you wish to put towards your mortgage. This can either be in the form of a lump sum or raising the amount you pay monthly. There may be penalties or payment limits which you will need to take into consideration before making any overpayments to your account.

11. Where should I go for mortgage advice?

At Limestone, we have an exclusive relationship with Lewis Christopher Ltd who are able to access 1000’s of mortgage products. Their experience and knowledge of the market is second to none and you can be assured of impartial, whole of market advice. To book a Personal Mortgage Review or find out more information, please visit our Services page.

12. What happens if I do not keep up with my mortgage payments?

If you are experiencing financial difficulty and cannot keep up with your mortgage payments, you need to get in touch with your mortgage lender as soon as possible to discuss your options. Failure to do so could lead to your home being repossessed if you do not keep up with repayments on your mortgage.