How our Guide Can Navigate You Through The UK Mortgage Process
If you haven't had a mortgage before and are about to start searching for a home loan, it can feel daunting. There are lots of types of loan, different options and factors involved in the application process.
Here we'll run through how UK mortgages work and what you need to do before beginning your first application.
For more assistance in finding the mortgage you need and improve your approval chances, give the Revolution team a call on 0330 304 3040, or drop us an email at [email protected].
How Do Mortgages in the UK Work?
In short, a mortgage is a loan to buy a property. They can run for a year or two, or more commonly up to 25 years as a standard term. Brokers can arrange more extended periods, usually up to 40 years as a maximum.
The loan is secured against the property, so if you don't make your repayments, the lender can repossess the home and sell it to recoup their money. Hence why the application process is so thorough, as a lender wants to know you can afford the repayments in the long term to avoid this scenario.
Your capital loan value is the total the lender has loaned you to buy the home - interest is then charged on top.
There are two primary mortgage types:
- Repayment mortgages mean you make a monthly repayment, with a part of it towards the capital balance, plus an interest element. When you reach the end of the mortgage term, all of the capital and interest are paid off.
- Interest-only mortgages are more common on buy to let properties and mean your monthly payment is much lower but only covers the interest and doesn't pay back any of the capital. When the term ends, you still owe the original balance and would typically remortgage or sell the property to pay this back.
Can Anybody Get a Mortgage?
Lenders have to be responsible with mortgage lending, so they will always require a full application and consider several factors when deciding whether to accept an application.
They will look at:
- Your age
- Your income
- The property
- Your deposit
You can apply for a mortgage directly through a bank or a lender, but that does mean you can only choose from the specific products they offer and are stuck with whatever interest rate they are willing to lend at.
Whole-of-market brokers such as the Revolution team look at all the mortgage products on the market from every lender. We then negotiate the terms to make sure you get the most competitive rates.
Brokers make the mortgage process much easier, as we handle much of the paperwork, liaise directly with our recommended lender, and advocate for you to ensure your application is approved.
What are the Different Types of Mortgage?
If you've used an online comparison tool or checked out the mortgage rates on offer from your bank, you'll see a range of products, all with pros and cons.
- Fixed-rate mortgages offer a locked-in interest rate for a static period, usually between two and five years, although sometimes longer.
- Standard variable rate mortgages mean you pay the interest rate every month based on the bank of England base rate, and this can go up and down every month.
- Tracker mortgages also rely on the base rate but use a fixed margin and apply that to the BOE rate - so if the base rate were 0.75% and your tracker mortgage interest charge was base rate plus 2%, you would pay 2.75% interest.
- Discount mortgages apply a fixed discount against the lender's standard variable rate for a specific period, usually two or three years.
- Capped rate mortgages charge interest based on the lender's variable rate but have a cap on the maximum interest rate and sometimes on the lowest rate.
- Offset mortgages link your mortgage account with other savings and bank accounts with the same lender. The balances are offset against your mortgage balance, so you only pay interest on the difference between what you owe and what you own.
- Cashback mortgages offer incentives such as cashback, sometimes upfront, and sometimes after the first repayment.
- Flexible mortgages allow you to increase or decrease your repayments, pause the repayments, or withdraw cash repayments you have already made.
- Remortgages mean switching an existing mortgage for another, usually because another product or lender offers a more competitive rate, or you want to borrow a higher balance.
- Unencumbered mortgages are loans against properties already owned outright with no debt secured against them.
- Joint mortgages mean that two people are applying for the loan together, and both will be named on the deeds.
Is There a Specific First-Time Buyer Mortgage?
First-time buyers are always a sought-after client, and lots of banks advertise deals exclusively for new homeowners - however, lots of these deals are a lot less competitive than they seem. It is highly advisable to seek advice from a broker who will recommend the deals, representing the best value.
Usually, you will need a deposit of at least 10% and sometimes up to 25% depending on your circumstances, but there are multiple alternatives:
- Low deposit mortgages usually require a smaller 5% deposit.
- Low start mortgages require smaller repayments initially, gradually increasing over time.
- Gifted deposit mortgages mean using a gift from a close family member to pay the down payment.
- Guarantor mortgages use a family member to guarantee the debt, and they will be responsible for taking over the repayments if you fall behind.
- Help to Buy is a government scheme to help first-time buyers get onto the property market - they offer an equity loan interest-free for the first five years to bump up your deposit value from 5% to 25%.
- Shared Ownership mortgages mean buying a proportion of a property and then paying rent to the housing authority for the balance they still own.
What are the Different Types of Specialist Mortgage?
Specialist mortgages refer to anything that isn't a standard offering from a high street bank. These aren't necessarily any harder to arrange but are usually available through a broker who can access products that aren't offered on the general lending market directly to the public.
Examples of popular specialist mortgage categories include:
- Bad credit mortgages - available to applicants who have a bad credit history and cannot get a standard mortgage from a mainstream lender.
- Self-employed mortgages - suitable for self-employed business people who have been rejected by a high street bank or offered an uncompetitive rate because they don't have three years of trading history or have some credit issues.
- Buy to let mortgages - for property investments and landlords who want to mortgage property to rent it out. These mortgages are usually interest only, and the rental income pays the mortgage interest, with the balance the landlord's profit.
- Second-home mortgages - designed for people who already have a residence with a mortgage but want a second loan to buy another property, such as a holiday home. The affordability requirements are stricter since a lender needs to know you can afford to keep up with repayments on both loans.
- Commercial mortgages - used by businesses to buy premises to work from or to rent out as a property investment.
- Development finance - loans used to develop a property, whether a refurbishment, conversion, or complete redecoration project. These loans usually run for a short period while the developments works are finished and payout small tranches of cash at each pre-agreed stage of the work. Inspections and valuation are usually required at each stage to verify the work has been completed.
- Bridging loans - short-term loans used to purchase a property where a mortgage won't be available fast enough or isn't yet possible. That might be to buy a property quickly at auction or to purchase an uninhabitable property and pay for restoration works. At this point, the borrower could refinance the bridging loan through a standard mortgage.
- Large mortgages - usually considered anything over £500,000 or sometimes higher. Some lenders have standard caps on the maximum they will lend, so it can be necessary to use an independent broker to borrow a substantial value.
- Self-build mortgages - finance the cost of buying land and building your own property. Like development finance, the cash is paid out in stages following an inspection of the work.
- New-build mortgages - available for newly built properties.
- Overseas mortgages - available to buy a property in another country - whether a second home, holiday home or rental investment.
- Expat mortgages - available for British nationals who live abroad and want to mortgage a property purchase either in the UK or in their new home country.
- Second charge mortgages - used to take out a second loan against property in addition to an existing mortgage. This loan is still secured against the property, although if it were repossessed, the first charge holder would get priority on recouping their funds. This is often used to raise more capital to finance a new outlay or pay for renovation works.
- Retirement mortgages - a way for later life borrowers to raise capital against the equity held in their homes. Some lenders have no higher age caps, so all of the other types of general and specialist mortgages may also be available.
Retirement interest-only mortgages mean that the interest is paid each month, and the property is sold if you pass away or go into care to repay the capital borrowed.
Lifetime mortgages carry no repayments, but the total value of the capital and interest rolled up is recouped by selling the property.
Help with Choosing the Right Mortgage Product for You
There are doubtless lots of decisions to make about what sort of mortgage to apply for, what term to request, which interest structure is best suited, and whether a specialist mortgage would be more affordable.
To help analyse all of the mortgage products and negotiate the best terms and rates available, give Revolution Brokers a call on 0330 304 3040, or drop us a message at [email protected].
