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

Getting on the ladder is a highly sought after desire for the UK population. However, turning the aspiration into a reality and obtaining a mortgage remains a daunting prospect. 

The UK mortgage market is one of the largest in the world, with the value of residential mortgage loan transactions over a trillion pounds. The industry is as dynamic as it is lucrative, with mortgages influenced by regulatory changes, economic conditions, and ever-shifting consumer preferences. These factors mean there are a vast variety of mortgage options designed and available  to meet the demand and needs of consumers.

Whether a first time buyer with a bad credit score, recently self-employed, have more than one income, approaching retirement, or simply have little to no deposit there is a mortgage lender that may be able to help. However, depending on the uniqueness of your circumstance, you may have to look beyond your typical high street banks for a mortgage solution that suits your needs.

Faced with these factors, it’s only natural to feel intimidated and uncertain. But this is why we would be encouraged to speak to an expert or other customers which may have recently gone through the mortgage process.

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.

Are you mortgage ready?

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, typically 75% LTV is the most common option across mortgage lenders. However it is important to explore all options and calculate and secure the best option to suit your needs.

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.