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Should you get a tracker mortgage or a fixed rate mortgage? What are LTV, APR, SVR, base rate and early repayment charges? Getting a mortgage can be daunting, and the amounts of money huge. This mortgage guide outlines the basics about mortgages, to help you with this important step when buying a home
The amount you can borrow on a mortgage depends upon your annual income, your debt levels and credit rating, and fixed outgoings like child-care. However, different banks can agree to lend you different amounts.
An easy way to find out how much you can borrow is to discuss your finances with a mortgage broker. You can also use a mortgage calculator to get a rough understanding of how much you can borrow, although it doesn’t take into account your specific household expenditure items.
As a general guide as to what you can afford to borrow, some lenders may lend up to 4.5 times income, while others may offer higher or lower multiples depending on your circumstances.
Use this mortgage affordability calculator to find out how much you could borrow
The length of the mortgage is called a the mortgage term, and the most common mortgage term is 25 years. However, mortgages can last for more or less than this. A mortgage of less than 20 years is a short term mortgage and a mortgage of 30 years or more is a long term mortgage.
The mortgage term that you choose will affect your monthly repayments: a shorter term means higher repayments, because you have less time to repay the loan. However, if you can afford the higher repayments, a shorter-term mortgage will be cheaper overall because you’ll pay less in interest in total.
See how your mortgage term affects your monthly repayments with our mortgage cost calculator
When you buy your first home, you need to pay for part of the property upfront, which is called putting down a deposit. In terms of how much deposit you need to buy a house, you’ll usually need at least a 5% deposit, although some lenders do offer 100% mortgages.
But, according to Halifax, the average deposit first time buyers paid in 2022 was almost £62,500. A larger deposit can give you access to a wider choice of mortgage deals and potentially lower rates. See this month’s best first time buyer mortgage rates by percentage of deposit.
Given the size of the typical deposit, it isn’t a surprise so many first time buyers look for financial help. If parents are able to help, gifted deposits can be a helpful way to boost your deposit.
The term LTV stands for loan-to-value, and tells you what percentage of the home’s value is borrowed.
Generally speaking, higher LTVs lead to higher interest rates, because they are seen as riskier for lenders. For example: if you put down 30% of the value of a property as deposit, and borrowed only 70%, your interest rates would probably be lower than if you put down 10% of the value of the property as a deposit and borrowed the other 90%.
A fixed rate mortgage is one that has a set interest rate for a certain period (usually two, three, five or ten years). The most popular are 2 or 5 year fixed rate mortgages.
With a fixed rate mortgage, your repayments won’t go up if interest rates increase. However, if interest rates fall, you won’t benefit from a lower mortgage rate.
At the end of the fixed rate term, you will usually roll onto your lender’s standard variable rate, unless you remortgage onto a new deal.
Get free advice from award-winning mortgage brokers Mortgage Advice Bureau
Get fee-free mortgage advice from the award-winning expert advisers at Mortgage Advice Bureau.
Your home may be repossessed if you do not keep up repayments on your mortgage. Please note some branches of Mortgage Advice Bureau may charge a fee for mortgage advice if you go direct. The fee is up to 1% but a typical fee is 0.3% of the amount borrowed. So make sure you use this site, this form or phone number for fee-free advice.
The majority of residential mortgages on the market today are repayment mortgages, which means that your repayments cover the interest on the loan as well as pay back the original amount borrowed. By the time the mortgage ends, you’ll have repaid the loan and any interest.
An interest only mortgage is when your monthly payments only cover the interest on the loan. The monthly repayments will be lower but you will need to pay back the full amount borrowed at the end of the mortgage. Retirement interest-only mortgages are becoming more popular as an alternative to downsizing or equity release.
A tracker mortgage will track above the Bank of England’s base rate. For example, if the base rate is 4% and the lender’s tracker deal charges 1% above this, the tracker mortgage rate will be 5%.
With a tracker mortgage, the rate you pay will go down if interest rates fall. However, the rate you pay will increase if interest rates are raised.
SVR stands for standard variable rate, and it’s the rate you will usually roll onto when your mortgage deal ends.
Lenders set their SVRs and can increase the interest as and when they want to. If you’re on an SVR mortgage, you may want to speak to a mortgage broker to explore your options.
There are a number of other types of mortgages, which include:
When you apply for a mortgage, the lender will commission a mortgage valuation survey. They do this because your mortgage is secured against your house itself, so they need to make sure the value is correct. It’s for this reason that the lender will usually keep the title deeds of the property as a guarantee, and they will register their interest in the property with the Land Registry.
Furthermore, because the loan is secured against the house, a lender can force you to sell or repossess the property if you fall behind on your repayments.
If you sell your house before you’ve repaid the full mortgage, you will need to use the money from the sale to settle the debt and keep the remaining cash.
The amount of the property you own that is not covered by a mortgage is known as “equity.” For example, if you own a £300,000 home, and you’ve already paid £100,000 with the deposit and mortgage repayments, you will have £100,000 of equity and £200,000 remaining on the mortgage.
Negative equity is when the value of a mortgage is greater than the value of the property. This became a very real problem for many homeowners who bought property with very high mortgages and then house prices fell.
If you’re in negative equity, your options may be more limited because selling your home may not raise enough to repay the mortgage in full. Speak to your lender about the options available to you. Find out more in our guide Negative equity: What it is and how to get out of it.
There are additional costs associated with taking out a mortgage, and these can add many thousands of pounds to the cost. You can expect to pay for things like a valuation survey of the property, legal fees and arrangement fees – but some of these may be paid for by the mortgage lender if they are trying to win your business. See our guide on mortgage fees and costs for a full breakdown of the costs to be aware of.
If you’re taking out a large loan with a very small deposit, you may be charged a mortgage indemnity fee – this covers the lender’s cost of taking out insurance on their loan to you.
You may also be hit with early repayment charges if you pay off part of your mortgage early. The charges can be very high if you have a discounted or fixed rate mortgage.
A mortgage broker can be particularly helpful when it comes to understanding additional costs. If you talk through your circumstances and discuss whether you want to do things like pay off lump sums, they will help you to find the right deal for you. And if you’re a contract worker or self employed and often paid in lump sums, you will probably find a mortgage broker even more useful.
Many people choose to use a mortgage broker to help them compare their options. Brokers can explain the different types of mortgage available, compare deals from the lenders they work with and help you understand which options may suit your circumstances.
A broker can also help you understand the costs and features of different mortgage deals, as well as the eligibility criteria you may need to meet.
Get fee-free mortgage advice from the award-winning expert advisers at Mortgage Advice Bureau.
Your home may be repossessed if you do not keep up repayments on your mortgage. Please note some branches of Mortgage Advice Bureau may charge a fee for mortgage advice if you go direct. The fee is up to 1% but a typical fee is 0.3% of the amount borrowed. So make sure you use this site, this form or phone number for fee-free advice.
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