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E@sy Guide to Mortgages
Contents
The Basics
What is a mortgage?
A mortgage is like any other kind of loan – you borrow
money, and you pay it back with interest over a period of time. But it has one key difference: it’s secured against your home. So if for any reason you can’t repay it, the bank or building society can sell your home to recover the loan
How mortgages work
- You take out a loan based on how much you can afford and the value of the property, for a length of time agreed between you and the lender.
- You are charged interest on the loan, usually based on the Bank of England base rate which is reviewed monthly.
- You pay the mortgage back in one of two ways, repayment or interest-only– see the Types of Mortgages’ section.
- You can choose different deals for your interest rate, such as fixed or discounted – see the
‘Types of interest deals’ section.
You can choose to pay your mortgage back in the following ways:
- repayment
- interest-only; or
- a combination of the two.
You'll need to decide which is best for you.
Types of Mortgages
Repayment mortgages
Every month, your payments to the lender go towards reducing
the amount you owe as well as paying the interest they charge.
So each month you're paying off a small part of your mortgage.
The pros
It's a simple, clear approach you can see your loan getting smaller.
The Cons
In the early years your payments will be mainly interest, so if you want to
repay the mortgage or move house in the early years, you'll find that the
amount you owe won't have gone down by very much.
Interest-only mortgages
As the name suggests, your monthly payment only pays the interest charges on your loan - you're not actually reducing the loan itself. This is why it's very important you arrange some other way to repay the loan at the end of the term; for example, through an investment or savings plan.
If you choose this option you will need to check that your investment or savings plan grows accordingly, so that at the end of the term you'll have enough money to pay off the loan. If it doesn't grow as planned, you will have a shortfall and you'll need to think about ways of making this up.
The pros
Because you're only paying off the interest, and not the loan itself, your monthly payments will be lower.
The cons
That debt is not going to go away. Throughout the life of the mortgage, you'll need to check your investment or savings plan is on track to repay your loan at the end of the term. If you can't repay it at the end of the term you could lose your home.
So, choosing a repayment or interest-only mortgage is one decision. The other will be to choose the interest-rate deal. In our ‘Types of interest rate deals’ section we explain the main types of deals available and in ‘Mortgage Features’ we highlight a few things to watch out for.
How much can you borrow?
Lenders should lend responsibly. This means that they should consider whether you can keep up the mortgage repayments now and throughout the term of the mortgage; for example after an initial discount period ends. They should base this on things like your income, expenditure and other circumstances.
Mortgage lenders have traditionally offered to lend up to three-and-a-half times your salary (before tax).
If you’re buying as a couple they would normally include the smaller earner’s salary, multiplied x 1.
Alternatively, many lenders have offered a couple’s total salary x 2.5.
Higher multiples dependant upon affordability have started to appear over the last few years but care should always be taken to ensure that a mortgage remains affordable.
Lenders may take into account
- If you have other money coming in, such as bonuses, overtime or commission. However, since it isn’t guaranteed income, lenders may only take into account half of this money.
- If you already have lots of expenses, such as other loan payments, they will offer you less.
Recently it has become more common for lenders to make an affordability assessment when calculating how much they are prepared to lend you. Each lender will have its own method, but generally they will all try to calculate your disposable income, taking account of:
- your total income;
- any credit commitment such as loans and credit cards; and
- household bills and living expenses.
Whether you receive advice or not, the lender must still lend responsibly. However, it's always worth satisfying yourself that you can afford the monthly payments - use our Budget calculator to make check your affordability
Keep borrowing comfortable
- Work out your budget using our Budget Calculator at the end of this guide to see how much money you’ve got coming in and going out and how much money you’ve got to spare.
- Don’t overstate your income to get a bigger loan. If you lie about your income, you could end up with a loan you can’t afford and possibly lose your home. You’ll also be committing a fraud and could get a criminal record.
In Summary
- Work out your budget first.
- Don't borrow more than you can afford to repay.
- Don't be tempted to overstate your income to get a bigger loan - it's fraud.
How long does a mortgage last?
There is no right length (term) to a mortgage. The standard term is around 25 years, and most of us tend to have a mortgage throughout our working lifetime. With the large sums involved, this spreads the cost and makes your monthly payments more manageable.
However, you can choose a different term if it suits you and the lender agrees that you can afford it. If you can afford a shorter term you may have higher monthly payments but pay less in total (see table below). With a longer term, you may pay less each month but more in total.
Ask for ‘Key facts about this mortgage’ documents showing different mortgage terms and use Section 5 to compare the total cost of a mortgage over different terms. Try not to make financial commitments that go past the age you retire unless you're sure you'll be able to afford the payments.
Example of how the term alters the cost of a repayment mortgage if interest is 6% a year
Mortgage Term in Years |
Monthly Payment for a £100,000 repayment loan |
Total amount you'll repay, including the amount you borrowed |
10 |
£1,110 |
£133,200 |
15 |
£843 |
£151,740 |
20 |
£716 |
£171,840 |
25 |
£644 |
£193,200 |
30 |
£600 |
£216,000 |
| Interest Calculated Monthly |
In Summary
- Remember that a mortgage should fit comfortably with your earnings and your commitments.
- Don't take out a mortgage that runs past your retirement, if you're not certain you will be able to afford it
New to mortgages?
There are three important things to think about when you take out a mortgage:
- find the mortgage that suits you and your circumstances;
- borrow an amount you can comfortably afford; and
- plan for changes – interest rates can go up, your income can fall, or you could lose your job.
There are lots of banks, building societies and specialist lenders offering mortgages. Many also offer special deals for first-time buyers. You can usually go to these lenders directly, although they will only tell you about their own products. Or you can go to a mortgage broker who will be able to look at a wider selection of products for you.
Generally, firms selling mortgages have to be regulated by the FSA, or be the agent of a regulated firm. There are some exceptions, for example sales of buy-to-let and second charge mortgages are not regulated by the FSA. Regulated firms and their agents are put on the FSA Register and have to meet certain standards. Always make sure that the firm you use is on the FSA Register and is allowed to sell or advise on mortgages before handing over your money. If they aren’t regulated by the FSA and things go wrong, you won't have access to complaints and compensation procedures.
The FSA require firms to give you some documents called Key Facts which set out important information for you. They are:
- Key Facts about our mortgage services – which will tell you:
- whose mortgages they offer;
- whether they offer advice or just information; and
- how much you’ll have to pay for the service.
- Key Facts about this mortgage – which will be tailored for you
based on how much you want to borrow and the type of mortgage. It will tell you:
- the overall cost;
- what you’ll pay each month;
- what fees you need to pay;
- if there are any special features of the mortgage; and
- what happens if you don’t want it any more.
Do read them and ask questions if you don’t understand anything
Fees and costs
While all the mortgage-related costs will be set out clearly in the Key Facts about this mortgage document that the lender or mortgage broker gives you, there'll be other costs you'll need to budget for. These include stamp duty, estate agency fees and lawyers' fees.
Often you can add certain fees charged by the broker or lender to the mortgage and pay them back over time with your monthly payments. But if you do this, remember that they will cost a lot more in the long run because of the interest.
Mortgage costs
| Fee or Charge |
What's it for? |
How Much? |
| Mortgage Broker Fee (if you use one) |
For arranging the mortgage or giving you advice. |
This depends on the broker, but if they charge (some don't) they must tell you in the Key Facts about our mortgage services document. |
| Mortgage booking fee or arrangement fee |
Lenders usually make a charge to reserve your mortgage funds for you or to cover the administration costs of processing your mortgage. |
This varies, but £100-£500 is typical. |
| Valuation fee |
The fee a lender charges for a valuation of the property to assess whether it is appropriate security for the mortgage. |
This varies from lender to lender, and on the value of the property. |
| Higher lending charge |
If you're borrowing a high percentage of the value of the property, the lender may charge a fee to take out insurance cover. This protects them in case you can't pay back your loan and they have to sell your house at a loss. |
This will depend on how much you borrow, and how much you're contributing as a deposit. |
| Fee for making your own buildings insurance arrangements |
A fee charged by a lender for the administration costs of checking there is sufficient buildings insurance cover if you do not insure your property through the lender. |
Typically £25 but may be payable yearly or each time you change insurer. |
| Telegraphic transfer fee |
A possible charge from your lender if you need them to transfer the mortgage funds to your solicitor on the same day. |
Typically £40-£50. |
| Re-inspection fee |
Sometimes a lender will need to re-inspect the property after the original valuation, usually to check if you've made agreed repairs. |
Typically £50-£100. |
| Early repayment charge |
If you repay all or part of your mortgage earlier than the agreed term. |
This may not always apply, but section 10 of the Key Facts about this mortgage document will give an explanation of when it applies and cash examples. Check the terms and conditions of the mortgage for full details. |
| Fees to repay the mortgage |
A fee to your lender when you repay your mortgage, even if you are not repaying it early. |
Typically £75-£300 (plus any early repayment charge, if applicable). |
General moving costs
These won't be listed in the Key Facts documents.
| Fee or charge |
What's it for? |
How much? |
| Estate agency fee |
Marketing and selling your home. |
Typically 1-3% of the selling price; ask for a quote and shop around. |
| Stamp duty land tax (known simply as stamp duty) |
Tax payable to the government when you buy a home.Make sure this is in your budget if it applies to you - the cost can be high. It is the buyer who pays stamp duty, not the seller. |
Up to £125,000 - 0%
£125,000 to £250,000 - 1%
£250,000 or over - 1% |
| Legal fees |
Paid to your solicitor to represent you, negotiate for you, and carry out the necessary searches, land registry and so on. This is also known as conveyancing. |
This will vary according to the firm. Budget for at least £400 and possibly more. Ask for quotes. |
| Survey fee |
Your lender will carry out a valuation visit (see above), but this is only a very basic inspection. You may want a Homebuyers report or a structural survey if you want a detailed report on the condition of the property. |
This will vary according to the surveyor, the size of property and the type of report you need. Ask for quotes. |
| Removal costs |
Moving all your belongings from your old home to your new one. |
Costs will vary, although you can save money by packing up everything yourself. Ask for quotes. |
In Summary
- Look at your Key Facts about this mortgage document for fees you must pay.
- Use the checklist so you are aware of the costs involved.
- Shop around for quotes – you can often save money.
Remortgaging – moving your mortgage, not your home
Once you've gone through the process of finding your mortgage,
you probably won't be in a great hurry to do it all again!
However, a year or two on, it can be an expensive mistake not to
look around the mortgage market to see what's on offer. Lenders
work hard to attract new customers, but often aren't so good at
making sure their current borrowers continue to get the best deal.
Should you look around now?
- If you're already on a special deal, probably not. The penalties
you'd have to pay to break the deal, and the other costs involved
may mean there's no point.
- But if you're paying your lender's standard variable rate and
there are no penalties involved you should certainly look at what else is on offer.
Find your most recent mortgage statement - your lender sends you one at least once a year - which will tell you what you're paying now, and how much you still owe. It will also tell you where early repayment charges apply and the date they stop.
What will it cost you?
- Even if there are no early repayment charges, your current lender might make an administration charge.
- If you're switching to a new lender, they will insist on the same legal work your old lender did, to make sure the property offers proper security for them.
- Lenders may also want an up-to-date valuation on your property.
With some deals the lender may pay some of these as an incentive to get your custom. But bear in mind you may have to pay back their value if you pay off your mortgage early.
In Summary
- Check your annual mortgage statement to see what you've paid and what's outstanding.
- Review your mortgage whenever a special deal ends.
- Don't assume that your current lender will keep you up-to-date with their best deals.
Types of interest rate deals
| Type of interest rate deals |
How does it work |
Early repayment charges |
What does it mean for you? |
| Standard variable rate |
Your payments move up or down with the lender's own mortgage rate, which is usually driven by the Bank of England's base rate. |
Not usually, but check and see. |
Usually you can leave your lender without any penalties or problems.
You're in control. You can usually pay back extra amounts (and cut your interest costs) without a penalty.
It moves with interest rates. So if interest rates go up, so will your monthly payment.
It will almost certainly be expensive compared to other deals.
The lender may not reduce, or may delay reducing, their variable rate even if the Bank of England rate goes down. |
| Tracker rate |
A variable rate loan with an interest rate that's at a set amount above or below the Bank of England or some other base rate, set independently from the lender. It tracks (moves up or down with) that rate. |
Sometimes during any special deal period and maybe even after the period too. |
It can pay to go for a tracker if you can afford to pay more when interest rates go up, in exchange for benefiting when they go down.
It's not a good choice if your budget won't stretch to higher monthly payments. |
| Discounted interest rate |
Your monthly payments can go up or down, but you get a discount on the lender's standard variable rate for a set period of time. At the end of the deal, you usually change over to the standard variable rate. |
During the special deal: yes, almost always. They can apply even after the end of the special deal period as well. |
It gives you a gentler start to your mortgage, at a time when money may well be tight. But you must be confident you can afford the payments when the discount ends.
The discount period is limited, so don't get used to those early low repayments.
You may not be able to make overpayments and pay off the loan early without penalties
The lender may not reduce, or may delay reducing their variable rate even if the Bank of England rate goes down. |
| Fixed interest rate |
Your payments are set at a certain level for an agreed period. At the end of that period, they'll usually switch you to the standard variable rate. |
During the special deal period: yes, almost always. They can apply even after the special deal period, too. |
Your payments will stay the same in that period, even if interest rates go up.
This gives you the security of knowing that you can afford your payments and will make it easier for you to budget.
If rates go down, you won't benefit. Your payments will stay at the higher rate.
You may not be able to make overpayments and pay off the loan early without penalties. |
| Capped rate |
Your payments are variable and often linked to a base rate, but fixed not to go above a set level (the 'ceiling' or 'cap') during the period of the deal. At the end of the period, you are usually charged the lender's standard variable rate. |
During the special deal: yes, almost always. They can apply even after the end of the special deal period as well. |
You know the maximum you will pay for a set period of time.
Useful if you want the security of knowing that your payments can't rise above the set level, but still benefit if rates fall. |
| Collared rate |
May be used in conjunction with a capped rate and/or a tracker. Your payments are variable but will not fall below a set level (the 'collar'). |
Not usually, unless it is used in conjunction with a capped rate and/or a special deal tracker rate. But check and see. |
It may be part of another interest-rate deal which otherwise appears attractive. But note that if the rate payable is only just above the 'collar' and you think rates will fall, you may not get the full benefit of a reduced payment. |
Mortgage features
Mortgages can have different features. For example, you'll find:
- Cashback mortgages;
- Flexible mortgages;
- Offset mortgages; and
- Current account mortgages.
Look at Sections 4 and 12 of the Key Facts about this mortgage which will explain the features of the mortgage.
Cashback mortgage
This may be offered with an interest-rate deal. The lender pays
you a substantial sum (for example 3-5% of the amount you
borrow) shortly after you take up the loan. If you move to another
lender in the early years you'll have to repay some or all of the
cashback received.
Is it right for you?
Possibly yes, if you need a large cash sum - for example, to buy
furniture, or you expect the sum to more than compensate for any
interest-rate rises during the penalty period.
Possibly not, if you can manage without the cashback now and
can get a better overall deal elsewhere.
Flexible mortgage
A flexible mortgage gives you some scope to change your
monthly payments to suit your ability to pay. It's also useful if
you want to pay off your loan more quickly. Several flexible
features are becoming common and they aren't limited to
mortgages with 'flexible' in their name. Here are some flexible
features:
- Overpayments - you can pay more than your normal
monthly mortgage payment or pay off a lump sum, or both.
- Underpayments and payment holidays - you pay less than the normal monthly payment for a limited period (say six or twelve months). You may even be able to stop making payments altogether. This could be useful if, say, you lose your job or take time off to care for a child.
- Borrow extra (loan drawdown) - you can borrow extra without further approval from your lender, provided the total loan does not go above an overall limit. Alternatively you may be able to 'borrow back' against earlier overpayments.
Is it right for you?
Possibly yes, if you are likely to use these features, for example if you're self-employed and have a variable income.
Possibly not, if you are unlikely to use these features. A less flexible mortgage may be cheaper or more suitable for you.
Offset mortgage
With an offset mortgage, your main current account or savings account
(or both) are linked to your mortgage and are usually, but not always,
held with the mortgage lender. Each month, the amount you owe on
your mortgage is reduced by the amount in these accounts before
working out the interest due on the loan.
So as your current account and savings balances go up, you pay less
on your mortgage. As they go down, you pay more.
Current account mortgage
A current account mortgage is similar to an offset mortgage
in that it offsets the balance of your savings against your
mortgage. However, in this case, rather than your mortgage
and current account being separate pots of money, they are
usually combined into one account. This means that the
account acts like one big overdraft.
Look at Section 4 of the Key Facts about this mortgage
document to see whether it is a current account or offset mortgage and whether you have to take a current account offered by the lender as a condition of the mortgage.
Are these right for you?
Possibly, yes, - if you are a higher rate taxpayer, have substantial savings to offset and like the idea of built-in flexibility to make overpayments and underpayments.
Possibly not, if after paying your deposit you don't have much left in savings and if other mortgages have a lower interest rate or other features that are more important to you.
In Summary
- Read the Key facts document and use it to compare costs and features of other mortgages available.
- Look for the APR figure alongside the interest rate.
- Don't forget that discounts and special deals are temporary, and rates can go up when they end
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Finding the right mortgage quote from over 8500 available is not easy. Hanson Wealth mortgage brokers use comprehensive research tools to sift through the maze and then use their knowledge and experience to make their final recommendations. All in all this will save you money and time. 
