Mortgages are not that complex – A guide for UK homebuyers & homeowners

The UK mortgage market is one of the largest in the world, with recent data showing the value of residential mortgage loans was £1,657 trillion.

The industry, however, is as dynamic as it is lucrative, with mortgages influenced by regulatory changes, economic conditions, and ever-shifting consumer preferences.

Faced with these factors, it’s only natural to feel intimidated and uncertain.

What type of mortgage do I need? What are some of the obvious and not-so-obvious expenses? And what is LTV, anyway?

In this guide, we’ll shine a light on the key aspects of obtaining a mortgage in the UK to increase your chances of success.

Mortgage readiness

Let’s start with mortgage readiness – a foundational element of the whole process.

Mortgage readiness refers to how prepared you are before you apply for a mortgage.

Being mortgage-ready encompasses various financial and practical considerations that determine how much you can borrow and how favourable the terms of a potential mortgage loan are.

First and foremost, it’s imperative you analyse your financial situation in detail. What are your financial habits, and can some habits be improved (or eliminated) to save extra money? What are your levels of income, expenditure, and debt? Do you know your credit score?

Once you've done that, it's time to think about mortgage deposits and how lenders assess your creditworthiness.

How important is a Mortgage deposit?

While it’s possible to secure a mortgage with 0% deposit or as little as 5% deposit. The fact remains that typically the more you can save for a deposit, the better and the less you will have to eventually repay on your mortgage.

To understand why this is so, let's back up a little and explain a concept known as the loan-to-value (LTV) ratio.

Think of the LTV ratio as a percentage derived from the relationship between how much you need to borrow (the mortgage) and the value of the home you want to purchase.

Say you have a £40,000 deposit and the home is valued at £200,000. This means the mortgage you require is £160,000.

Next, take that £160,000 and divide it by £200,000 to arrive at 0.8.

Since LTV is expressed as a percentage, multiply 0.8 by 100. Thus, the LTV ratio on the home you want to buy is 80%.

In short, lower LTV ratios are associated with lower interest rates, while higher values are associated with higher interest rates.

As a general rule of thumb, opt for an LTV of 80% or lower.

In other words, get saving!

Creditworthiness - Are you ready for a mortgage?

One common misconception is that a minimum credit score is required to secure a mortgage.

While higher credit scores do equate with an increased likelihood of securing a loan, the reality is that each lender has its own system for assessing your creditworthiness.

The three credit reporting agencies in the UK (Experian, Equifax and TransUnion) also use their own systems to calculate your credit score. In short, this means they see creditworthiness differently.

TransUnion, for example, has five "rating" bands on a scale of 0 to 710, while Experian's scale runs to 999.

While it’s up to the lender to decide which agency they use, you can increase the chances of securing a loan by building an exemplary credit history that positions you as a trustworthy borrower.

The mortgage application process

Before you start the mortgage application process, shop around!

Speak directly with a bank or mortgage lender. But also you can use a financial expert (link to expert page). What most customers may not be aware of is that there is a vast array of mortgage lenders which offer

mortgages only through financial experts or brokers. It is good to speak! So speak directly to a mortgage lender and but also speak to a financial expert

Understand the different types of mortgages (more on this later) and use affordability tools to discover how much you could realistically borrow.

Advice can also be sought from certified financial expert or mortgage brokers who will search for the best deals and help with administrative tasks such as paperwork.

Mortgage - Agreement in Principle

You can also speak to lenders directly or you can use a financial expert (link to expert page). What most customers may not be aware of is that there is a vast array of mortgage lenders which offer mortgages only through financial experts or brokers. It is good to speak! So speak directly to a mortgage lender and but also speak to a financial expert

Most will ask basic questions about your financial status and credit score to determine what sort of mortgage may be right for your circumstances.

If they’re willing to lend you money, you can apply for an Agreement in Principle (AIP).

The AIP is a preliminary indication that you’re approved for a mortgage of a specific amount. Note, however, that it does not guarantee a binding mortgage offer will be made.

You can apply for an AIP as soon as you’re ready to start viewing properties, and with the agreement in hand, you show sellers and real estate agents that you’re responsible and ready to buy.

Mortgage application

Once you’ve made an offer on a home and it has been accepted, you can then make a formal mortgage application. Though beyond the scope of this article, it’s also vital to complete a survey of the home to evaluate its condition.

The lender will comprehensively analyse your financial situation, and if satisfied, grant you a binding mortgage offer.

This usually occurs in two to six weeks.

What Mortgage fees will I have to pay?

In addition to mortgage repayments, numerous expenses are also potentially applicable. However the fees may not be required depending upon the mortgage you choose. Take the time to read up on them as many are misunderstood or underestimated by borrowers.

The main fees you need to be aware of include:

Arrangement fees – the fee for the mortgage product itself.
Valuation fees – the valuation fee pays for the lender to value the property and ensure it is worth the amount you’re asking to borrow.
Mortgage account fees – this covers the cost of administering the mortgage.
Mortgage broker fees – some brokers may collect a fee for arranging the mortgage.
Booking fees – a smaller fee that depends on the size of the mortgage. It may be incorporated into the arrangement fee or charged separately, and
Telegraphic transfer fees – otherwise known as CHAPS (Clearing House Automated Payment System), this fee pays for the lender to transfer money to the solicitor.

Other mortgage-related expenses

Aside from obvious expenses like removalists, you also need to consider:

Stamp duty (England and Northern Ireland) – buyers must pay Stamp Duty Land Tax (SDLT) for homes over £250,000. However, first-home buyers only need to pay SDLT for homes over £425,000.
Land Transaction Tax (LTT) – in Wales, this tax replaced SDLT in 2018 and applies to properties over £225,000.
Land and Buildings Transaction Tax (LBTT) – the equivalent tax in Scotland but with a lower threshold. LBTT applies for any residential property over £145,000.
Legal and survey-related fees – in Scotland, these constitute a Home Report.

Mortgage types

There are a few different mortgage types in the UK, but the two you’re most likely to come across are:

Fixed-rate – where interest is fixed for 2-5 years before the loan moves to a standard variable rate. Approximately 83% of all mortgages granted are fixed rate.
Variable rate – where the interest rate depends on the general interest rate set by the Monetary Policy Committee (MPC). These tend to be riskier than fixed-rate mortgages but can be cheaper to service if the general interest rate drops significantly.

Other less common mortgage types are listed below.

Discount mortgages

Discount mortgages are a form of standard variable rate (SVR) mortgage where a discount is applied over a certain period (typically 2-3 years).

Capped rate mortgages

Here, the interest rate is capped which means it cannot be raised above a certain amount.

Do note however that many capped-rate mortgages are offered at a higher rate than comparable variable-rate options.

Offset mortgages

Offset mortgages have enjoyed a renaissance in recent years as borrowers look to reduce their repayments.

Essentially, offset mortgages require you to deposit savings into an account linked to the mortgage. Your savings are then used to offset the mortgage such that interest is calculated on the mortgage minus the cash deposited.

Remortgaging

Remortgaging is a way to save money when the mortgage market changes.

Interest rates may fluctuate or deal news may become available, and the good news is that you don’t necessarily need to change lenders to benefit.

While you can remortgage at any time, it is best to do so at the end of a fixed-rate term when the loan switches to a higher standard variable rate.

Waiting until the end of the term also avoids fees known as early repayment charges.

Before you contemplate remortgaging, use an Annual Percentage Rate of Charge (ARPC) calculator to compare deals and determine whether you’d actually save money by switching lenders.

What is a mortgage product transfer?

Leading mortgage providers

There are more than 100 mortgage providers in the UK, with the sheer amount of options adding further complexity to the mortgage process.

Let’s try and simplify your options somewhat.

Traditional lenders

Most mortgage providers are traditional lenders such as banks and building societies. Some of the more well-known include Lloyds, Nationwide and Santander.

In general, they cater to a broader range of “typical” borrowers with standardised lending criteria.

Specialist lenders

Specialist lenders, on the other hand, offer bespoke solutions to borrowers with more unique circumstances. These tend to be self-employed individuals or those with lower credit scores.

Pepper Money is an award-winning mortgage provider with products to suit imperfect credit histories and irregular income.

Kensington Mortgages may also be a good fit if you’re self-employed or receive income from multiple sources (known as complex income). In addition, Kensington specialises in:

First-time buyers
Buy to let
Help to buy
New builds

Mortgage repayment options

The most common mortgage repayment option is the capital and repayment mortgage.

In this scenario, monthly repayments are made over an agreed-upon period (known as the "term") until both the capital (the money you borrowed) and the interest are paid back.

At the end of the loan term – typically 25-30 years – the mortgage is paid off and you’ll own the home outright.

Interest-only mortgages

If you have an interest-only mortgage, you only pay off the interest each month.

While you could save a significant amount on repayments with this type of mortgage, there are several drawbacks.

The first and most obvious is that you never pay off the principle. Taking out a £250,000 mortgage, for instance, and only paying interest means you still owe £250,000 at the end of the term.

They’re also hard to secure – particularly for older borrowers who may have less capacity to pay the money back.

To obtain one, you'll generally need a good repayment history and a significant amount of equity. Barclays, for example, restricts interest-only deals to borrowers with equity of at least £300,000.

Mortgage insurance

Mortgage insurance works exactly the way you think it would.

If you can’t pay your mortgage because of illness, injury or redundancy, insurance can help you meet your obligations while you’re off work.

Insurance is not compulsory. But if the worst was to happen and you lose your income, it’s important to determine whether you could continue to service the loan.

Insurance for lenders

Lenders may also attach a Mortgage Indemnity Guarantee (MIG) to mortgages with LTV ratios on the higher end of the spectrum.

This insurance protects the bank in case you default. But as the borrower, it is an expense you must absorb in the form of a Higher Lending Charge.

What government support is available?

If you need extra help to get a mortgage application over the line, know that Government assistance may be available.

Under the First Homes scheme, buyers who have never owned property before may be able to acquire a home for 30-50% less than market value.

Conditions apply, and in most cases, you can only sell the property to someone who also qualifies for the scheme.

Shared ownership is another option. Here, you can buy a share of the property and "rent" the remaining share from a landlord.

Some loans will also help with the expense of new home construction in England, Scotland and Wales.

Buying a home is one of the most important decisions you will likely ever make.

The mortgage market may seem complex and can be tricky to navigate – especially if you're a first-time buyer, self-employed, or someone that has had issues with credit in the past. But with the right research and guidance from a financial expert (link to expert page) it can be easy than you first thought.

First you must ensure you are mortgage ready. Then, ensure you understand the different types of mortgages, their associated fees, and who provides them to find a solution that best caters to your needs.

Armed with this knowledge, you can make smarter financial decisions that benefit you and your family over the long-term.