Our specialist team have tackled some of the most common questions regarding securing a mortgage and purchasing your new home or property. If you can’t find the answer to your question, please contact us and we’ll do our best to help.
How do mortgages work?
The best way to think of a mortgage is as a loan on a property. Historically, the literal translation of ‘mortgage’ in Latin is ‘death-binding’. Nowadays it’s not so daunting! A mortgage is simply a long-term loan taken out on a property. Usually it’s for 15 to 25 years, however, it’s becoming increasingly common to find 30-year mortgages.
The first steps to getting a mortgage
The first steps are to save for a deposit on the mortgage. This is a lump sum which is put towards the total value of a property. How much of a deposit you’ll require depends on the value of the property you’re looking to purchase, your earnings and credit history. In most cases, the minimum deposit amount a bank will consider is 5%. Considering a new build property? Banks consider these higher risk and often require a minimum of 20% for a flat and 15% for a house.
Once you’ve worked out how much deposit you are able to save, you can work out the ‘Loan to Value’ ratio or ‘LTV’ as it’s commonly abbreviated. This is jargon for the percentage of deposit against the property. For example a 90% LTV ratio would mean you’ve got a 10% deposit saved. The higher the LTV, the lower the deposit and vice versa. Banks love higher deposit (it usually means less risk for them!), so may offer you preferable interest rates on a lower LTV ratio.
Deposit saved, what’s the next step?
The next steps after saving for a deposit are to find the best deals. There are lots of options to assist you with finding a competitive deal:
- Contact high street banks directly
- Visit an independent mortgage broker
- Search online using comparison tools
- Use our instant mortgage calculator
If you’re using a broker, make sure they are independent. This means that they are not given an unbalanced incentive to promote or up-sell a particular product.
Getting an ‘Agreement in Principal’
After you’ve found a suitable deal, you’ll need to agree on the upfront terms with the lender. Once this is agreed, they’ll provide you with an Agreement in Principal, Decision in Principal or “AIP”. After the lender has completed background and credit checks, they will agree to lend you a certain sum based on your circumstances. AIPs are often required by an estate agent to put forward an offer if you require a mortgage to buy a property.
For further information on how a mortgage works, you may wish to visit the Money Advice Service.
How much can you borrow on a mortgage?
If you’re looking to find out how much of a mortgage you could get, you’ll need to consider a number of factors. Every lender has different criteria for determining your “affordability”. As a general rule, if you have no special circumstances and a good credit rating, you may find lenders will offer up to 5x your annual salary. The best way to find out is to use our instant mortgage calculator. This usually excludes any bonus or commission payments. If you’re self-employed or have multiple sources of income, you are recommended to look for a broker who specialises in this field.
Most high-street lenders in the UK are able to offer mortgages of up to £3 million. If you’re looking in excess of this, you may wish to look at private banks.
How much of a deposit do you need?
To answer this question, you will need to work out roughly how much a mortgage lender is willing to lend you. Although there are some exceptional circumstances, usually the minimum deposit amount is 5%. Typically, new build properties require a much higher deposit as it’s considered high risk. This may be anywhere between 15-25% depending on the lender. With the introduction of the Help to Buy Scheme, this can make new-build homes more affordable, particularly for first-time buyers.
How long does a mortgage last for?
Although there is no set rule, a residential mortgage is often for 25 years. More recently, banks have begun to offer 30-year mortgages. This helps to reduce the monthly repayments. In most cases, the longer the mortgage duration, the higher the overall cost of the borrowing will be.
How do buy to let mortgages work?
A buy to let mortgage is designed for anyone who is looking to purchase a property for the sole purpose of renting/leasing it out to a tenant. They are very similar to normal mortgages, however the interest rates are usually higher. In most cases, the minimum deposit for a buy to let mortgage is 25%. Investing in property is risky and you shouldn’t consider a buy to let mortgage unless you can afford to take the risk.
In the vast majority of buy to let mortgages, the loan is interest only. This means that you don’t make repayments towards the property itself, but at the end of the agreement, you repay the capital in full.
How many buy to let mortgages can you have?
The answer to this depends on how much rental income you expect to receive from the property. Most buy to let mortgage lenders will look to see an expected rental income which is 25-30% higher than the cost of the mortgage payment.
You’ll need to have an outstanding credit history and if you’re looking to purchase additional BTL properties, a solid track record. Find out what the best deals are with our buy to let mortgage calculator.