The Nested guide to mortgages

The word mortgage means ‘death pledge’ in French, but we promise that securing a home loan is much less grisly. Of course, with so many types of mortgage to consider, not to mention product fees and interest rates, where do you start? Whether you’re a first-time buyer or a seasoned homeowner, our guide will help you navigate the mortgage minefield.

How do mortgages work?

There are two main types of mortgage you need to know about. A repayment mortgage is the most common form of loan you take out from a bank or building society in order to buy your home. You own the property so long as you make the monthly repayments plus interest, usually for a period of 25 years, at which point the balance is paid off.

This is distinct from an interest-only mortgage, where your repayments simply cover the interest you owe, and the balance remains the same until it’s due to be repaid at the end of the term.

You can take out a repayment or interest-only mortgage either in your name or jointly with another person. Later, we’ll take a look at the different mortgage product types, but one thing at a time eh?

How much deposit do I need?

In order to get a mortgage, you’ll need a deposit of at least 5% of the property’s value. So if you’re looking to buy a £300,000 home, you’ll need to find a minimum of £15,000 down the back of the sofa.

No-deposit mortgages do exist, but many lenders will be reluctant to let you borrow without a guarantor as your financial back-up. When it comes to deposits, bigger is better. The greater your deposit — say, 10 or 20% — the greater your access to the cheapest mortgage deals.

The Bank of Mum & Dad offer some of the best interest rates around, but for many people, the dreaded ‘D’ word — ‘deposit’, not ‘dad’ — is one of the biggest barriers to getting a mortgage. Short of marrying an oligarch, your best bet is to scrimp and save, or consider government schemes like Help to Buy, which give you a 20% equity loan (interest-free for five years) so long as you can raise a 5% deposit.

Do I need a mortgage broker to buy a house?

If you’re looking to take out a mortgage, there is no rule that says you have to use a broker. The alternative is to apply directly to your bank or building society, who will advertise their specific range of products. However, using a broker can be a smart move for many reasons.

But first, what does a broker do? Informally speaking, they are the middle-men (and women) between you and the lender. Brokers offer an advantage as they can survey the whole mortgage market to find the deal that’s right for you, rather than the narrow pool offered by each lender. We know what you’re thinking. ‘Buying property is already expensive. Do I really want to flush more money down the sinkhole?’ See the thing is, a broker works for you, not the lender.

A good broker will know the industry inside out, with a wealth of knowledge about how each lender works. They offer impartial advice based on your individual circumstances, rather than a cookie-cutter approach (without the cream). Your mortgage broker can also recommend insurance to make sure you’re covered in the event of death, critical illness or redundancy. Naturally, brokers aren’t broke, and you can expect to pay a one-off fee (which may also cover advice at a later date), and they may earn commission through your lender.

Realistically, unless you’re a true expert in the world of mortgages, you should seek professional advice either from a broker, or a specialist adviser at a high street lender.

How much can I borrow?

Before you start swiping on Rightmove, dreaming of that detached home with a duck house, you’ll need to know how much money you can borrow. And as each lender uses different criteria, there’s no short answer.

As a rule of thumb, you can expect to borrow up to four-and-a-half times your household income. So if you earn £60,000 combined, you should be able to borrow £270,000, with your spending power topped up by your deposit. But that doesn’t tell the whole picture, because your lender will carry out an affordability assessment which will take into account other criteria too:

• Your employment status — permanent full-time workers are deemed a safer bet than freewheeling freelancers.
• Your outgoings — lenders can pore over your bank statements, and often bills such as water, gas and broadband, to assess your spending habits. If you’re self-employed, you may have to share your self-assessment return.
• Your deposit — the greater your deposit, the less risky you’ll seem to your lender.
• Your age — if you’re approaching retirement, you may be offered shorter terms on a mortgage, and some lenders impose maximum age limits.
• Your credit history — your lender will want to see that you’ve managed debt responsibly, or they may limit your borrowing potential.
• Other debts — while student loans won’t prevent you from getting a mortgage, your debt-to-income ratio and any existing credit agreements will be a factor.

How do interest rates work?

In simple terms, an interest rate is a charge for the privilege of borrowing (or indeed saving, in which case the money is owed to you). The interest rate is a percentage charged on the amount you borrow, otherwise known as the capital.

The Bank of England sets monetary policy independently of the government, and decides on the Bank Base Rate eight times a year, which has a big influence on the mortgage market.

In terms of interest rates, you’ll see many mortgage products advertised as a percentage on top of the Bank Rate. So depending on which type of mortgage you take out, an increase in interest rates can affect your ability to repay your home loan. If the Bank Rate increases, the cost of borrowing rises and your lender may charge more. Or in other words, when the Bank sneezes, your mortgage catches a cold.

Choosing your mortgage

There’s more than one way to skin a cat — not recommended, by the way — and there’s more than one type of mortgage product you can take out. In essence, you’ll either get a fixed rate or variable rate mortgage, and whichever you choose depends on your outlook and circumstances. Allow us to explain…

Fixed-rate mortgages

If you’re a steady Eddy, a fixed-rate deal provides the certainty that your interest payments will stay the same, typically from two to five years. If you’re keen to stick to a strict budget for the years ahead, a fixed rate deal has the benefit of stability, though usually at a higher cost in terms of product fees and interest rates; and of course, if interest rates stay low, you’ll be over-spending.

Variable rate mortgages

With a variable rate mortgage, your interest rates can change with the wind, which means you can win big or suffer losses. If you’re feeling confident that low-interest rates are here to stay, a standard variable rate (SVR) deal gives you the flexibility to leave when you like, and follows a variable rate set by the lender, which is influenced by (but not directly linked to) the Bank of England Base Rate, unlike the other option: a tracker mortgage, which follows the Base Rate plus an agreed percentage.

You may also come across discount mortgages, which offer money-off the lender’s SVR for a time-limited period, and capped rate mortgages, where, you guessed it, the rate is capped at a certain level.

A guarantor mortgage is designed to help you get a home loan if you have insufficient funds for a deposit, or if your financial history has deterred lenders from letting you borrow. In this scenario, your guarantor — often a parent or grandparent — is someone who commits to covering the mortgage repayments in the event you’re unable to.

Lastly, offset mortgages are linked to your savings account and can reduce your interest payments as your savings effectively become an overpayment.

How long does it take to get a mortgage offer?

Once you’ve found the right deal, getting your full mortgage offer can take around a month or longer. This is because there is tons of paperwork to wade through, including your bank statements, proof of address, and verifying your solicitors’ details.

But fear not, because you can apply for a ‘mortgage in principle’ before that, which can take less than 24 hours. Your lender will perform a few cursory credit checks and assess your income and expenditure before giving you a ballpark figure.

While you can theoretically view properties any time you like, a mortgage in principle means you’ll have a decent understanding of your budget before you start making bids. It will also mark you out as a serious buyer in the eyes of estate agents and sellers; they’ll feel reassured that you’re ready to move when the time comes.

However, a mortgage in principle is not the real deal, as the lender will still need to carry out the full credit checks before they can guarantee whether — and exactly how much — you can borrow. You can also use this time to shop around for other mortgage deals and assess your search criteria against your budget.

Why would a mortgage offer be withdrawn?

Not every mortgage story comes with a happy ending. And as we’ve touched upon, the lender will need to be satisfied with your personal finance situation before they rubber-stamp the mortgage. Some details of your credit history may only become apparent during the lender’s checks, which could deter them from making the full mortgage offer. But remember, if you don’t meet the eligibility criteria, that doesn’t mean every lender will come to the same conclusion. Your broker can advise you on your next steps and find a deal that works for you. Ultimately, it’s in everyone’s interest that you can comfortably meet the mortgage repayments and keep a roof over your head.

There are other factors beyond your control that could lead to the withdrawal of a mortgage offer. Your lender will carry out a mortgage valuation survey, which advises them of the property’s value, so any defects that appear could render the asset too risky in your lender’s eyes.

What happens after my mortgage offer is issued?

Once your full mortgage offer has been confirmed, the finish line is almost in sight. Your lender will have completed their credit checks and property valuation, and you and your solicitors should receive copies of the offer in writing.

At this stage, if your circumstances have changed — such as your employment status or the seller upping the purchase price — you still have an opportunity to withdraw or revise your plans. If you’re ready to proceed, your mortgage offer is usually valid for up to 6 months, which should hopefully give you enough time to secure your new home.

Your lender may have a completion deadline, after which your circumstances will need to be reassessed, so if the seller is dragging their feet, you should make them aware of your pressing timeline.

How much are mortgage repayments compared to renting?

Buying can often be cheaper than renting, as, over the long term, your payments go towards paying off the home, rather than funding a landlord’s bank balance.

There’s no exact answer as to how much your mortgage repayments will cost as everyone has different circumstances. Some of the factors that determine your monthly repayments include the amount you borrow, the interest rate and the term length of the mortgage.

And of course, the greater the deposit you put down, the less you’ll have to pay each month. What’s more, your house price could increase over time, giving you a profit which can offset some of the money you’ve ploughed into the property.

But that doesn’t mean buying is always cheaper than renting. There are costs every time you buy a property — from stamp duty to solicitors’ fees — so generally it pays to stick around for the long-term. You’ll also foot the bill every time the boiler breaks, unlike renters whose landlords are ultimately responsible for repairs and maintenance.

Renting can be cost-effective if you’re living somewhere for the short-term, and you can always up sticks without too much notice, which is useful if your circumstances change and you need to move quickly.

What happens to my mortgage when I sell my house?

The short answer is that most mortgages are ‘portable’ and can be transferred against your new property should you wish. Bear in mind that you’ll need to speak to your lender as you may have to borrow more money to finance the move. They’ll also want to value the new property, which may come with a pesky valuation fee (sometimes a few hundred pounds).

You can alternatively apply for a completely new mortgage, in which case your existing loan is ‘redeemed’ (paid off) at the point of sale. There is often an early repayment charge, and your solicitors will manage the payment of the outstanding debt to the lender. It’s worth speaking to your broker, who can advise on the product options for a new mortgage.

You can potentially save money by porting your current deal, but remember, there is no guarantee that you will still meet the bank or building society’s lending criteria, and if your employment status has changed, you may have to undertake an affordability assessment.

Should I remortgage?

Once you’re comfortably settled into your new home, your days of haggling with lenders are over, right? Well, not quite.

Your mortgage will typically carry a time-limited offer — often for two to five years — which locks you into low or low-ish interest rates. After this period expires, you’ll need to dip your toes into the remortgaging market in order to avoid being placed on the typically higher SVR (standard variable rate in case you’ve forgotten!) Essentially, remortgaging your home allows you to move to a cheaper interest rate once your current deal has expired.

There are other good reasons to remortgage. When house prices are rising, remortgaging can help you release equity to pay off debts or finance home improvements, rather than spend the money on moving house. If you anticipate that the Bank of England Base Rate may increase, you may wish to remortgage in order to swerve an existing tracker deal and secure better terms.

However, it’s usually sensible to wait until your current deal is close to expiration before remortgaging, as you can be hit with an early repayment charge or early exit penalty.

If you’re looking to remortgage, it’s a good idea to speak to a broker to identify the best deals on the market, though you can also approach a high street lender directly.

So, that wasn’t too hard was it? Whether you’re buying, remortgaging or simply swiping on Zoopla, we promise that mortgages are much less mysterious than you think.

Nested puts homeowners in control of their sale. Our agents provide you with smarter insights so you achieve the best price for your home on your timeframe. When you’ve found your new home, you have the power to move chain free, while we take care of your sale. Our buying agent will even negotiate up to 5% saving on your new home, so you get more home for your money.

If you’re interested in selling smarter, get in touch today. Nested.com - The modern way to move.