The Basics of a Mortgage UK: The Beginning

So, you’ve decided it's time to get your own place—your very own home in the UK! Before you dive into those Pinterest boards and start planning your dream decor, there’s one crucial step to tackle first: mortgages. But don’t worry, we’re here to make it easy and fun!

 

What is a Mortgage, Anyway?

A mortgage is a loan you take out to buy a house. It’s like borrowing money from a friend, but in this case, your “friend” is a bank or a building society, and you’ll be paying them back over a long time—anywhere from 5 to 40 years. Think of it as renting money so you can own your home.

 

What are Mortgage Rates?

A mortgage rate is the interest rate a lender charges on your mortgage loan. This rate determines your monthly payments and the total interest you’ll pay over the loan's life. Mortgage rates depend on a variety of factors, including the size of your deposit, the duration of your mortgage, and whether you opt for a fixed-rate or variable-rate plan.

 

How Does It Work?

When you take out a mortgage, you agree to pay back the loan in monthly instalments. These payments cover both the money you borrowed (the principal) and the interest (the fee the lender charges for letting you use their money). It’s a bit like paying rent, but instead of your landlord benefitting, you’re gradually owning more of your home. There are options to only pay the interest only although these are not overly common for homes you want to live in.

 

The Mortgage Deposit

Before you get your mortgage, you’ll need a deposit. This is a chunk of money you pay upfront. In the UK, the typical deposit is about 5% to 40% of the property’s price, with the average first-time buyer budget being around 24%. The bigger your deposit, the less you need to borrow, and the better the mortgage deals you’ll likely get. It’s like putting an upfront payment on a car — only this time, it’s for your new pad.

 

The Different Types of Mortgages

Here are the most common types:

• Fixed-Rate Mortgages: The interest rate stays the same for a set period, usually 2 to 10 years. This means your monthly payments won’t change during this time. It’s like fixing your phone contract for 2 years - no surprises!

• Variable-Rate Mortgages: The interest rate can go up or down, depending on changes in the Bank of England’s base rate or the lender’s rate. This can make your payments a bit unpredictable. However, if you think interest rates are likely to fall and you think fixed-rate mortgages are currently high they could be a good idea.

• Tracker Mortgages: These follow the Bank of England’s base rate, plus an additional percentage. If the base rate increases, so do your payments, and vice versa. It’s a version of a variable rate mortgage, again if you think the base rate is likely to come down and the fixed rates aren’t taking this into account they could be a good idea. However, some people prefer the certainty of a fixed rate.

For all these types of mortgages, you will likely have an initial rate period, which takes advantage of a fixed rate, or lower variable rate. At the end of the fixed or initial period, you will likely move onto a variable rate which may be higher than the available rates in the open market and therefore could be a good idea to switch or re-mortgage with your current provider.

 

How to pay back the original principal borrowed

• Capital & Repayment: This is the most common type of mortgage for owner-occupier mortgages (mortgage for a house you will live in). Over time both the interest on what you have borrowed and the original amount you borrow are paid off. This is done so that at the end of the full term of your mortgage you will no longer owe anything and own the property outright.

• Interest Only: In this type of mortgage only the interest on the capital is paid back to the lender, at the end of the full mortgage term you would still owe the lender their original capital back. For example you borrow £200,000 you would just pay back the interest on this each month, then at the end of the full term, you would owe the lender their £200,000. Mostly common in the buy-to-let market, but can be done on an owner-occupier basis. Although you will have to evidence you can pay back this amount and there may be further restrictions.

• Part & Part: In this type of mortgage you pay back the interest on the full sum borrowed and then also pay back part of the capital borrowed over time. For example, if you borrow £200,000, with a 50/50 split on interest only and capital repayment at the end of the full mortgage term you would still owe £100,000 back to the lender.

 

The Mortgage Process

• Getting a Mortgage Agreement in Principle (AIP): This is a statement from a lender saying how much they’re likely to lend you. It’s not a guarantee but it gives you an idea of your budget.

• Finding Your Dream Home: Now comes the fun part—house hunting! Once you find the perfect place, make an offer.

• Applying for the Mortgage: If your offer is accepted, you’ll formally apply for mortgage. The lender will check your finances thoroughly. We would recommend using a mortgage broker to find you the best deals, there are both free and paid-for brokers, both of which have their positives and negatives.

• Instruct Solicitors: At this point you will likely have to confirm solicitor details to your mortgage provider and the sales agents. Having someone in mind already can be useful, there are a large number of solicitors and conveyancers to carry out the work; take your time and read reviews to decide on the best option for you. We recommend getting quotes from several firms to gauge the cost.

• Valuation and Survey: The lender will value the property to ensure it’s worth what you’re paying. You might also get a survey to check for hidden problems, like dodgy wiring or a leaky roof. We recommend getting a valuation report on any property purchase. You can usually do this through the lender you’re applying with, or you can find your own suitable independent valuer.

• Mortgage Offer: If everything checks out, you’ll get a formal mortgage offer. Which should get provided automatically to your solicitor, the lender may ask your solicitor to review certain things.

• Exchange Contracts: Your solicitor should be busy carrying searches regarding the property and investigating everything that is relevant regarding the land, property, yourself and your seller. ****Once everything set, you’ll exchange contracts with the seller, making the deal legally binding.

• Completion: On the big day, known as completion, the money is transferred, and you get the keys to your new home. Pop the champagne!

The list above makes it seem simple and quick, but the time these steps take can vary widely. Each transaction is unique, and unexpected issues can arise even when you think you know everything. If you’re ever confused or lost speak to your broker, estate agent, or solicitor they should be able to provide you with guidance and help if needed. Additionally, we’re also happy to answer any questions you have.

 

Repaying Your Mortgage

Each month, you’ll make a payment towards your mortgage. This will include both the interest and a bit of the principal. Over time, you’ll owe less and less, and eventually, you’ll own your home outright. Mortgage repayment calculator.

Be cautious of when any initial term is due to end, as it could be beneficial to find a new mortgage that’s available at that time rather than moving onto your current provider’s variable rates.

 

The Final Word

Mortgages might seem daunting, but they’re just a part of the home-buying journey. With a bit of understanding and some careful planning, you’ll navigate the process like a pro. And remember, the end goal is worth it—having a place to call your own!

Now, get out there and start your adventure towards homeownership. Good luck, future homeowner!