Mortgages Explained

Getting a mortgage can be overwhelming and we don’t want you to feel that way; we want you to feel excited about buying your new home. That’s why we’ve created this simple guide to mortgages, where we breakdown everything you need to know.

Deposit Sizes

When purchasing a house, you’ll need to put down a deposit to secure a mortgage from a lender. The deposit is subtracted from the overall purchase price of the house to calculate the size of the mortgage you require.

For example, if you want to buy a £150,000 house and have a £15,000 deposit, you will need to borrow £135,000 from the lender and pay it back over an agreed period of time – known as the mortgage term (see mortgage term section below).

 

What is Loan to Value?

Loan to Value (LTV) is the ratio of the loan from the lender to the value of the house. The calculation used for LTV is:

Mortgage size ÷ Property value = % LTV

Using the above figures would give this calculation:

£135,000 ÷ £150,000 = 0.9 (90% LTV)

LTVs are presented as percentages, making the LTV for the example above 90%. You can generally get mortgages up to 95% LTV however this may be lower at the moment as there are fewer mortgages on the market than usual due to coronavirus.

 

Types of Mortgages

  • Fixed Rate
    A fixed rate mortgage has a fixed interest rate, so you pay the same amount towards your mortgage every month.
     
  • Standard Variable Rate
    Standard Variable Rate (SVR) means your payments can go up or down. Unlike base rate tracker mortgages, SVRs do not track above the Bank of England Base Rate, instead the rate you pay on an SVR mortgage will be determined by your mortgage lender. A SVR mortgage is the rate you will likely go on after finishing an introductory fixed, or tracker deal but don’t worry, you can review your mortgage at the end of the initial term.
     
  • Tracker
    The interest rate is linked to, but may not be equivalent to, the Bank of England base rate. It can track below but generally tracks at a percentage above the Bank of England base rate. When there is a change to the Bank of England base rate your mortgage payment rate will reflect this.
     
  • Discounted Variable Rate
    A discounted variable rate mortgage is also a type of SVR mortgage.
    The interest is an agreed percentage lower than the lender’s standard variable interest rate. Your monthly payments will change if your lender’s standard variable interest rate fluctuates, but your interest rate will always be lower than the lender’s main SVR.
     
  • Offset mortgage
    An offset mortgage can be purchased if you also have a savings account with the lender you are borrowing from. Your mortgage balance will then be offset by the amount maintained in your savings account. This may limit how much you can access and withdraw from your savings

 Read our guide to find out more about the various mortgage types.

 

Mortgage Terms

A mortgage term determines over how long you will pay off your entire mortgage. This can span up to 40 years, but typically customers arrange their mortgage term over 25 years.

Shorter mortgage terms:

  • Your mortgage is paid off quicker
  • You will pay less interest over time
  • Your monthly payments will be higher

Longer mortgage terms:

  • Your mortgage takes longer to pay off
  • You will pay more interest over time
  • Your monthly payments will be lower 

 

Types of Repayments

There are three main repayment types for your mortgage:

Repayment mortgages

  • You pay the a portion of the capital amount borrowed plus the added interest each month
  • Your mortgage will be fully paid off by the end of your mortgage term

Interest-only mortgages

  • You only pay the accrued monthly interest
  • You do not pay off any of the original capital amount
  • If you are a first-time buyer, it can be difficult to meet a lender’s criteria. For example, you may need a higher deposit and income.
  • You will need to have in place a repayment vehicle which will be used to repay the outstanding mortgage amount at the end of your term. This is typically in the form of savings, investments, pensions or additional properties which can be sold.

Part & Part mortgages

  • Your mortgage balance is split between repayment and interest-only
  • Part of your mortgage (the balance on a repayment basis) will be fully paid off by the end of your mortgage term
  • The remaining mortgage balance (the proportion on interest-only) will need repaid, usually with the use of repayment vehicle (see above)

 

Mortgage Products

The length of your mortgage product usually falls into two categories:

  • Short term (2-3 years)
  • Long term (5-10 years)

For example, with a 2-year fixed rate mortgage, you will make monthly payments of a fixed amount for two years. After that, you will still owe the lender any outstanding mortgage but can agree a new mortgage product. If you do not agree a new product with your lender, or another lender, it is likely you will be automatically moved onto an SVR mortgage with a higher rate.

Short term mortgage products typically have lower interest rates and thus a lower monthly repayment than long term mortgage products. The product will need to be reviewed more frequently to avoid remaining on SVR and will provide shorter-term certainty over your monthly payments.

Long term mortgage products typically have higher interest rates and thus a higher monthly repayment than short term mortgage products. The product will need to be reviewed less frequently to avoid remaining on SVR and will provide longer-term certainty of your monthly payments.

 

Mortgage Options

Choosing which mortgage works for you will depend on your situation and what your lender is willing to provide. As every case is unique, we always recommend you speak to a mortgage advisor about your options.