Everything you need to know about mortgages

In this guide we’ll cover everything from what a mortgage is, what you need to consider and how you can find the best mortgage for you.

What is a mortgage?

A mortgage is where a lender, such as a bank or building society, lends you money to specifically buy a property. They will charge you interest for lending you the funds, and you will pay back the loan in monthly repayments that you are legally obliged to pay. The amount you borrow is secured against your home, meaning your home may be repossessed if you do not keep up repayments on your mortgage. This is known as repossession.

Typically, most people will need a mortgage when they purchase a property. The maximum mortgage a lender will currently lend is 95% of the purchase price. You will need a minimum of 5% of the purchase price to put down as a deposit.

What do I need to consider when getting a mortgage?

Getting a mortgage is often a long commitment, with some mortgage agreements lasting up to 40 years. When you buy a property and take out a mortgage, you have to consider if you can afford the repayments now and in future. What do you expect your new bills to be? Do you need to spend money on doing it up? Do you want to grow your family? Ultimately, what is the maximum you want to commit to spending each month?

To help you, we’ve built a comprehensive budget planner so that we can show you the maximum you should budget for your mortgage repayments. You can then select a repayment that feels comfortable, and we will show you what mortgage term is right for you. Don’t panic if this ends up longer than you wanted. You can overpay with most mortgage deals and also look at reducing your mortgage term again when you remortgage.

You also need to think about whether you have enough in savings, after paying your deposit, solicitors fees, and furnishing your new home, to cover your outgoings for at least three months? Paying your monthly mortgage repayments is a legal obligation, so it is important to have an emergency fund in case something unexpected happened, like being made redundant.

There are useful insurances to replace your income if you’re too ill to work and to repay the mortgage in full if you become seriously ill or pass away. If you do ever find yourself in financial difficulty, the first thing you should do is let your mortgage lender know and they can talk you through the options.

How do I find the best mortgage for me?

It is strongly recommended that you seek advice from a qualified mortgage broker, rather than find your own mortgage. OpenMoney offers advice for free, so it doesn’t have to be an extra expense.

Traditional brokers offer in-person or phone appointments, and typically you would need two quite hefty appointments to talk through all of your finances and personal circumstances. They often charge a flat fee for their services, as well as making commission on the mortgage deal they offer you.

We exist to revolutionise the industry, because we offer our advice for free. We have access to 50 first time buyer mortgage lenders and thousands of mortgage deals. We earn our money through commission paid to us from the lender and insurance providers. We only get paid once everything has gone through, and none of this affects what deal you are recommended. Our advisers are salaried, they themselves do not earn this commission so you can be sure their advice has not been influenced by personal gain.  

Whole of market: When someone has access to mortgage products and lenders which are representative of the whole of the market

There are also comparison sites where you can look at different mortgages yourself, but bear in mind, that a mortgage broker would also have access to these mortgage deals and will be able to tell you which one is the best for your personal circumstances. There can be hidden fees, or what we call ‘honey trap mortgages’, where the interest rates very low but the mortgage fees you pay mean that it doesn’t end up being the cheapest deal, so it’s not always clear on the surface which deal is most cost effective.

Getting mortgage advice will involve filling in details about your monthly budget, your savings, the property you’re looking to buy, and your attitudes towards risk (which will determine what type of interest rate you are recommended, such as a fixed rate or a variable rate).

Interest rate: In terms of mortgages, your interest rate is what the mortgage lender charges you for borrowing money. It is how they make money back on the loan.
Fixed rate: A fixed interest rate is where the rate of interest does not change for a fixed period. This means if the lender puts their interest rates up, they cannot increase yours for an agreed amount of time. It also means if they lower their interest rates, you cannot take advantage of the lower charges.
Variable rate: A variable interest rate is where the rate of interest can fluctuate up or down, depending on the standard interest rates your lender wants to set. This means you can take advantage of lower interest rates when they fluctuate downwards, but when they increase, so will your mortgage repayments. Some deals come with a discount applied to the variable rate for a period of time.  
Tracker rate: A tracker interest rate is very similar to a variable interest rate, but instead of fluctuating up and down based on the lenders set rates, it follows the Bank of England’s rates.

What's an agreement in principle or a mortgage in principle?

When you start looking for a property to buy, the estate agents may ask you for a mortgage in principle, or otherwise known as an agreement in principle. A mortgage in principle is a certificate from a mortgage lender confirming how much they will lend you based on your income and outgoings, your credit history and if you meet their lending criteria. Whilst it doesn’t guarantee that a full mortgage application will be approved, it does give an indication that you should be accepted, and it shows that you are serious about buying and ready to start the process.

What's a good mortgage term?

A mortgage term is the number of years that you and the mortgage lender have agreed that you will pay back the loan over. The longest mortgage term available is 40 years and the best mortgage term for you is dependent on how much you wish to pay each month and how much you want to borrow in total.

It is important to complete a realistic budget so you can work out how much money you can put towards your mortgage repayments each month. Some people prioritise keeping their monthly payments low to help them pay for other commitments which might mean a longer mortgage term suits them better. Just remember, the longer you take your mortgage term for, the more interest you will pay as you’re paying your debt back at a slower rate.

Should I overpay my mortgage?

When savings rates are very low, overpaying on your mortgage can be a good idea because it’s an easy way to save money on interest charges. But it's not right for everyone – you'll lose access to the cash for your day to day spending and some mortgage agreements have restrictions on how much you can overpay, meaning you may occur a fee if you overpay more than the limit. Here are some pros and cons for overpaying:  

Pros

  • You'll pay the mortgage off quicker.
  • You don’t pay any interest on the amount you overpay  
  • The money you save on interest charges is likely to beat the interest you would earn keeping that money in a savings account  

Cons

  • Some mortgage agreements have terms which cap how much you can overpay, and will charge you fees if you go over this  
  • It will mean you have less money to spend day-to-day  
  • If you also have other debts, you’re better paying those off first because they are likely to be more expensive

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