Your complete guide to mortgages

Most of us will need a mortgage in order to purchase a home, but they come in all sorts of different forms which can make a big difference to how much the loan will cost you.

There are a couple of typical forms of mortgage, based on the way the interest is handled.

For example, the most common sort of mortgage is a fixed-rate mortgage. As the name suggests, with this sort of mortgage the interest rate is fixed for a set period.

That could be as little as a couple of years or as long as a decade.

The big plus point of a fixed-rate mortgage is that because the interest isn’t changing, you know exactly what your repayments are going to be for a set period.

You do pay a premium for that certainty though ‒ the longer the fixed-rate, the higher the interest charged on your loan is likely to be.

For more, check out our comprehensive guide to how fixed-rate mortgages work.

Then there are variable-rate mortgages. Again the name is a big clue here ‒ the interest rate on your loan can change over time.

For example, you might go for a tracker mortgage. The interest rate on a tracker mortgage follows movements in the Bank of England’s base rate for a specific period.

So when the base rate goes up, so too does your mortgage interest rate, and when it falls your interest rate follows suit.

And as your interest rate changes, so too does the size of your monthly mortgage bill.

For more, check out our guide to tracker rate mortgages.

There are other kinds of variable mortgages though. For example, there is a discount mortgage, which runs at a discount from your lender’s standard variable rate (SVR).

Lenders can set their SVR at whatever level they like and can hike or cut them whenever they like too, so it can be an unpredictable product to opt for.

A crucial element of any mortgage deal is the term.

That’s how long the loan runs for and can run from a year or two to as long as 35 years. 

Longer terms have become more common, particularly among first-time buyers, in recent years as a way of coping with rising interest rates.

That’s because longer terms mean smaller monthly repayments.

However, the downside is that because you are taking longer in order to pay off the loan, it ends up costing you more overall. 

Let’s take an example of a £200,000 mortgage with a 3% interest rate.

If I took that loan out over a 25-year term, my monthly repayments would be £948, and the loan would cost me a total of £284, 527 overall to pay off.

But if I went for a longer 30-year term, those monthly repayments would drop to £843, potentially making them more affordable.

The downside though is that those extra five years of repayments would mean I paid a total of £303,555 ‒ around £18,000 more.

The interest rate is only one consideration when it comes to looking into how much a mortgage is going to cost you.

You also need to look at any additional fees that you’ll have to pay.

The big one is the product fee, which can also be referred to as the mortgage fee or arrangement fee.

This is effectively a fee you have to pay in order to take out that specific product and often costs around £1,000.

You can add the fee to the balance of your mortgage, but as you’ll be charged interest on it ‒ likely over a couple of decades ‒ then it will end up costing you far more than if you simply pay it upfront.

Lenders often provide fee-free mortgages too, which don’t come with this initial fee, though they will boast a higher interest rate. As a result, it’s a good idea to do your sums to see which will actually work out the best value for you.

If you have a significant pile of savings, then one type of mortgage well worth considering is an offset mortgage.

With this type of product you offset the balance of your savings against your outstanding mortgage and only pay interest on the remainder.

For example, let’s say that you have a £100,000 mortgage but £30,000 in savings.

By going for an offset mortgage, you will only pay interest on £70,000 of that mortgage, meaning a smaller monthly bill. 

Of course, the downside is that you have to keep the savings in an account with your mortgage lender, and you won’t earn any interest on those savings, but in the current environment that may not be a huge sacrifice.

We’ve dug into offset mortgages deeper in our lengthy guide. 

Another form of fee that’s important to note before taking out a mortgage is the early repayment charge (ERC).

This is a fee that you’ll often have to pay if you remortgage to a new deal during the initial fixed or variable period of your mortgage.

For example, if I take out a five-year fixed-rate mortgage, then my lender will likely charge an ERC for remortgaging during those five years.

This is calculated as a percentage of the outstanding loan, so it can work out as a massive sum.

It’s a good idea to think carefully about the ERCs on any mortgage you’re considering, and how likely you are to fall foul of them.

For example, if you are likely to move in the next couple of years, it’s not a great idea to sign up for a five-year mortgage, knowing that your move will likely mean you have to pay off the mortgage and therefore will incur those fees.

Again, some mortgage lenders offer ERC-free deals, meaning you can leave them even during that initial fixed or variable period, without any additional charges.

However, these may come with a higher interest rate so you are paying for the privilege of that added flexibility. 

Most mortgages allow overpayments of up to 10% of the outstanding mortgage balance, before they will levy ERCs.

This is well worth considering if you can afford to do so, as it means the mortgage will be paid off quicker.

Not only does this mean that you will then have that money to spend elsewhere each month rather than on your mortgage repayment, but it will also save you a significant amount in interest costs.

Mortgage overpayments: the lesson we should all take from the under-25s

Traditionally some lenders have offered borrowers the option of a payment holiday, where the borrower can take a couple of months off making mortgage repayments.

Usually, this has been reserved for borrowers who have previously made overpayments on their loan, however, payment holidays have become far more prevalent following the Coronavirus pandemic.

While a payment holiday can provide some badly needed breathing space, it’s worth remembering that it is only a holiday from those repayments ‒ they will still need to be made, just at a later date.

We’ve put together a thorough guide covering everything you need to know about payment holidays. 

There is likely to be a significant distinction between the length of your initial fixed or variable rate, and the length of your mortgage term.

For example, your fixed rate might only last for two years, but your mortgage term runs for 25 years. So what happens when that fixed rate finishes?

After the initial rate ends, you’ll move onto your lender’s SVR. As we’ve highlighted, this is a rate set by the lender and can be changed at any time.

It’s worth remembering that the SVR is usually far higher than the best rates on offer from new mortgages ‒ in other words, moving onto your SVR likely means a significant jump in the size of your mortgage repayments. 

That’s why it’s a good idea to think about remortgaging when your rate ends, moving to a new product ‒ and potentially a new lender ‒ in order to secure a new fixed or variable deal. 

We’ve got a comprehensive guide to remortgaging that runs through everything you need to think about.

The size of the mortgage you take out will determine the budget at your disposal for purchasing a property.

But there is no easy answer to how much you can borrow, as different lenders will have their own criteria for working out what they are willing to lend you.

For a full run-through of what will influence the size of any mortgage you might be able to borrow, check out our guide. 

Mortgage lenders want to be confident that you can cope with the repayments before they will give you a mortgage, and your job will be a big factor in their calculations.

Having a steady job with a regular, predictable income is going to be more attractive than if you have an income that can fluctuate wildly, for example, if you are self-employed.

That said, self-employed workers can still get a mortgage, though they may face a more limited range of options or have to go through an intermediary. For more, check out our guide to self-employed mortgages. 

The best mortgage deals are reserved for borrowers with excellent credit scores. After all, lenders can feel most comfortable that they know how to handle credit responsibly.

However, even if you have a patchy credit record ‒ perhaps because of a late or missed payment on your energy or mobile phone bill ‒ then you can still get a mortgage, though the range of options is likely to be more limited.

The interest rates are typically higher too.

Read How to get a mortgage when you have bad credit.

There are plenty of reasons why you might want a mortgage as an older borrower, yet actually getting one can prove more challenging.

Lenders all have their own criteria covering the maximum ages they will lend to and what sort of income they will consider in retirement.

Check out our guide on mortgages for older borrowers.

If you are hoping to tap into some of the value you have built up in your home, then equity release is also an option.

This is a type of mortgage product which allows you to stay in the property, often with no monthly repayments, with the loan instead paid off when the property is sold on after you die or move into long-term care. Read our guide to equity release.

Lots of mortgage borrowers make use of a broker when taking out a mortgage. 

There are all sorts of benefits to doing so.

If you’re a first-time buyer and you’ve not been through the mortgage process before, it can be really useful to have an expert on hand to guide you through it.

Similarly, brokers are well placed to see precisely which lenders are most likely to accept an application from a borrower in your position, and which lenders may be wary.

It’s also worth remembering that some lenders only offer their products through these intermediaries.

As a result, finding a quality independent broker will mean you have more options in terms of individual mortgage deals from which to choose.

However, brokers often charge for their advice. So it’s worth ensuring you understand precisely what that advice will cost from the outset.

We’ve gone into more detail in our guide to mortgage brokers here.

There are all sorts of schemes in place which can help people purchase a property, particularly if you are a first-time buyer.

For example, there is the Help to Buy scheme which allows you to purchase a property with a deposit of just 5%, supplemented by an equity loan from the Government worth up to 20% of the property’s value and a mortgage making up the rest.

Check out the loveMONEY guide to Help to Buy mortgages. 

And then there is shared ownership, where you purchase a portion of the property and share ownership with a housing association.

You pay rent on the portion of the property that you don’t own, alongside your mortgage repayments for the loan you’ve taken out to cover your share of the property.

We’ve broken down just how it works in our shared ownership guide. 

If you are buying a property that you are going to live in yourself, then you need to take out a residential mortgage.

However, if you’re buying a property as an investment and plan to let it out, then you need to take out a dedicated buy-to-let mortgage.

Failure to do so would be breaking the terms of the mortgage and leave you at risk of having the loan voided.

Buy-to-let loans tend to have slightly higher interest rates, while lenders will have different criteria in place, for example over how the size of the predicted rent will need to exceed the size of the mortgage repayment. 

Some buy-to-let lenders only offer their products through intermediaries, so that’s something else to consider as you will likely have to pay a fee for their advice. 

Another type of property loan is a second charge mortgage, which is also known as a second mortgage or a secured loan.

These work a little differently, in that they are secured against the equity you own in the property rather than the value of the property itself.

So if you have a property worth £200,000 and have £50,000 left on your mortgage, then you have £150,000 equity.

If you need to borrow more and don’t want to touch your existing mortgage ‒ perhaps because you’ve got a great interest rate or would incur ERCs ‒ then a second charge mortgage could be the answer.

For more, read our guide to second charge mortgages.