Understanding the Basics of Getting a Mortgage

Buying a property is a big deal. In fact, for many of us, it is the largest financial investment we’ll ever make. And, unless you’re sitting on a sweet pile of cash, you’ll probably need a mortgage to purchase your home.

Getting a mortgage can be daunting at first, and you may not know where to start. If you’re someone who hates talking transactions, you’ve come to the right place. We’ve put together this handy guide, giving you an overview of mortgages so that you are prepared for all the ins and outs of borrowing to buy your home. 

What is a mortgage?

Firstly, what is it and how does a mortgage work? A mortgage is essentially a (large) loan that you take out to help you buy a home. Because most of us will never have the means to buy a property outright, lenders agree to give us a loan to pay back, with interest. The loan is secured against the value of your home until it’s paid off. Even though you typically borrow this money from a bank or building society (‘the lender’), they are not the owner of the property – you are. 

In order to secure a mortgage, you’ll need a deposit. This is subtracted from the overall purchase price of the house to calculate the size of the mortgage you need. For example, if you want to buy a £200,000 house and have a £20,000 deposit (10%), you will need to borrow £180,000 from the lender. And what deposit do you need for a house? That depends. Generally, you need at least 5% of the purchase price, but deposits can go as high as 40%. 

Most mortgages have a repayment term of 25 years, but they can be longer or shorter depending on your circumstances and personal preferences. The shorter the mortgage term, the higher the repayments. However, this means you pay off the debt in a shorter amount of time.

What are the different types of mortgages?

When you’re looking to buy a home, you’ll need to apply for a mortgage – but there are many different types.

There are two main types to choose from – a fixed or variable mortgage:

• Fixed-rate: The interest you pay remains the same for a number of years (typically between 2 and 5). 
• Variable-rate: The interest you pay can change.

Next, consider your repayment structure within the mortgage you choose. 

• Repayment: This is the traditional mortgage type, where you make monthly payments that cover both the amount you borrowed and any interest on top. Essentially, you’re repaying the loan until it’s paid off. 
• Interest-only: With this type of mortgage, you’re only paying off the interest accrued. You are not repaying the initial amount borrowed or purchasing the home outright.

If you’re getting a mortgage for an investment property, rather than to live in the house, your available mortgages will look slightly different:

• Buy-to-Let: If you’re looking for a mortgage to purchase a property to rent out, you may want to consider a buy-to-let mortgage, whether you’re investing in your first property or building up your portfolio.
• Let-to-Buy: A let-to-buy mortgage is for those who want to rent out their existing home while buying a new one to live in. You’ll end up with two mortgages, one on your previous home that is being rented and one on the new property you’re living in.

Hoping to buy your first property? While there are no specific first-time buyer mortgages, you can get government support to help you secure a property, especially if you have a tight budget or a small deposit. 

• Help to Buy Equity Loan: Under this scheme, the government will give you a loan on eligible new-build properties. You can borrow up to 20% of the price (40% in London) with just a 5% deposit. Find out more here.
• Shared Ownership: This scheme enables you to buy a portion of a home (usually between 25% and 75%) and pay rent on the remaining share. If you can’t afford to purchase an entire property, this is a great way to start building equity. Check out more about the Shared Ownership Scheme.
• Lifetime ISAs: Start saving for a house in a Lifetime ISA and you could save up to £4,000 a year tax-free. What’s more, the government will top up your savings by 25%. The money must go toward your first home or retirement – learn more about the conditions.

Getting a mortgage

‘Getting a mortgage’ is a neatly packaged phrase, but when it comes to the requirements, there’s a lot to unpack. Firstly, you need to be preapproved for a mortgage. The lender will look at your credit score, debts, deposit size, typical expenditures, income and income history. 

And if you’re asking yourself ‘How much mortgage can I afford?', that depends on your financial landscape. There’s no doubt that your income (or combined salaries if you’re buying with someone else) is the single biggest factor when getting approved for a mortgage. Most lenders will loan you around 3.5 to 4.5 times your income. 

The history of your employment and income will be looked at, too. If you’re self-employed, you may be wondering how to get approved for a mortgage. You’ll need at least 3 years of books. There is no specific self-employed mortgage, which means you will need to prove to the lender you have a solid financial history.

Should I use a mortgage broker?

There are so many different mortgages out there, so it’s worth shopping around for the right one.

Consider using a mortgage broker. This is a person (or company) that has an in-depth knowledge of the market. They seek out the best deals for you (so you don’t have to trawl through comparison figures) and help arrange a mortgage between you and the lender. If you find the many types of mortgages difficult to understand or are self-employed with more hoops to jump through, a broker may offer peace of mind.

Manage my mortgage

Arranging a mortgage is a large milestone in the house-buying process. Take a moment to celebrate and breathe a sigh of relief, but don’t forget to pay it on time every month.

If you can’t keep up with your payments, the lender can repossess the property and sell it to get their money back. Your credit rating will also nosedive, making it harder to take out a mortgage again.

In some instances, you may choose to use your bonus or a windfall to pay towards your mortgage. However, most banks only allow you to overpay your mortgage slightly – usually around 10% a year. Any more and you may face early repayment fees. Before you decide on a mortgage overpayment, read the fine print and talk to your lender or broker first.

Your home search starts here

See something you like? Book viewings 24/7 and receive instant confirmation. Start your search today.

As a friendly reminder, this blog post is intended for educational purposes and should not be considered legal advice. For mortgage assistance, please reach out to an adviser. Your home may be repossessed if you do not keep up repayments on your mortgage.

Faye deGavre

Content Writer