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Mortgage in the UK – questions and answers (part 2)

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Today’s article is a continuation of our ‘popular questions and answers’ series. We will try to answer readers’ questions about mortgages in the UK. There’s plenty of useful knowledge ahead!

Mortgage in the UK - questions and answers (part 2)
Questions and answers about a mortgage in the UK

There are already a number of articles on our blog explaining mortgage related issues, but I think putting them in one place is a good idea. This way, people planning to buy property in the UK will be able to get to the most important information quickly.

I also encourage you, by the way, to read the earlier article on buying a property: Buying a house in the UK – questions and answers part 1.

1. What is a mortgage?

A mortgage is nothing more than a long term loan from a bank or other financial institution for the purchase of a property. A characteristic feature of such a type of lending is that the security of the loan is the same as the property being purchased, which can be repossessed by the bank if the lender stops paying the mortgage.

Source: Experian

2. What requirements must be met to obtain a mortgage in the UK?

This question can be answered in general and more specifically. For a bank to lend us money, in their eyes we must be able to repay the loan. In practice, to get a mortgage in the UK, you must:

  • have a regular, legal source of income
  • accumulate a deposit of at least 5% of the value of the property
  • have a high, or at least an average, creditworthiness and credit score
  • have the financial means to meet other needs after the mortgage has been paid off

Checking your financial standing is a detailed process. Lenders take into account all your regular household expenses and recurring incoming bills, as well as any debts such as loans and credit cards, to ensure that you have enough to cover your monthly mortgage repayments (source: How do lenders check I can afford a mortgage?). Your income is also verified – you will be asked to show documents proving your earnings.

3. How to get a mortgage in the UK?

Once we have fulfilled the conditions we wrote about in the previous question, we can apply for a mortgage. This process has two phases. First, we contact the bank and receive a decision in principle – a preliminary approval to obtain a mortgage. Once we have found a property, made an offer and it has been accepted, we formally apply for a mortgage.

When thinking about a mortgage, it is useful to know the prices of properties in the area where you want to buy. A good option is to check online listings on RightMove or Zoopla or your local Estate agents.

You can apply for a mortgage in different places. Some people choose their own bank. Another solution is to contact a broker, preferably one who has access to the whole of market. They have access to a large number of mortgage products and will recommend the right product to suit the customer’s situation. If you are curious whether it is easy to get a mortgage at your bank, it is worth checking out our article on the subject.

4. What are the types of mortgages in the UK?

There are many products in the UK mortgage market. We can divide those into several main types. To make it easier for you to understand their specificities, we have categorised them according to particular criteria:

Purpose of buying property: residential vs. investment mortgage

A residential mortgage is one that is used to finance a property in which you yourself plan to live.

An investment mortgage (Buy to let) is used to purchase property for rent.

There are big differences between these mortgages, for example the interest rate on Buy to Let mortgages are usually higher. The money earned from renting out the property may be taken into account by the certain banks when granting the mortgage.

I would like to take this opportunity to remind you that with a residential mortgage, you cannot rent property (there are exceptions – only with the bank’s consent in exceptional situations). By doing so, we are breaking the terms of the mortgage contract and if the bank finds this out, you could be in a lot of trouble.

Capital Repayment versus Interest-only

In the first case, you pay back both the interest and the amount borrowed (capital). The mortgage instalment is higher, but at the end of the mortgage term you have repaid the mortgage in full.

In the second scenario, we pay back only the interest. Here, the mortgage instalments are lower, but at the end of the mortgage term, in order to be a complete owner of the property, you must repay the entire capital, for example by selling the property or using your own savings.

Interest rates: fixed vs. variable rate mortgage

If, when applying for a mortgage, you think that interest rates will go up (as they will throughout 2022), you can opt for a so-called fixed-rate mortgage. By doing this, you are assured that the interest rate and monthly instalment of the mortgage will not change for a given period (usually 2, 3, 5 or 10 years). Such mortgages are more expensive, but are a good option for those who value stability and unchanging interest rates.

Variable rate mortgages (which may be called tracker mortgages, or standard variable rate mortgages) have a variable interest rate that depends on an interest rate set by the Bank of England. This type of mortgage is often more flexible, which can be beneficial for people who plan to make overpayments (you have to stick to certain terms, such as a maximum of 10% per annum).

You can find more information on the types of mortgages on the Understanding mortgages section of the MoneyHelper website and in our article on this subject.

5. What are the interest rates for a mortgage in the UK?

It is very difficult to answer this question as mortgage interest rates depend on many factors. It will certainly not be lower than the Bank of England rate, but each bank adds its own margin. It is influenced by, among other things:

  • Whether the mortgage is taken out for private or rental purposes
  • The repayment period
  • The ratio of the mortgage amount to the value of the property (LTV)
  • The period for which the interest rate is frozen (fixed rate)
  • Your credit score
  • The bank where you take out your mortgage

If you are wondering whether your current situation allows you to purchase a property, we encourage you to contact us. Our advisors will be able to provide you with current mortgage offers and give you an idea of your instalments. We invite to you to read our article about the way of determining interest rates in the UK as well.

6. How much of an equity contribution do you need to get a mortgage?

Actually, we have already answered this question. To get a mortgage in the UK, you must have a deposit of at least 5% of the value of the property. It’s worth remembering that the more you can raise before you buy, the more favourable offers you will get from banks.

Don’t forget that when buying a house or flat, there will still be additional fees that you should be prepared for.

You can find detailed information on this in our article: Additional costs of buying a house or flat in the UK.

7. How long does it take to receive a mortgage offer?

The waiting period for a mortgage offer varies. Much depends on the overall complexity of your application. For some it takes a few weeks, while other customers have to wait much longer.

However, the mortgage offer is not what lengthens the property purchase process the most. It is the conveyancing, the legal steps involved in the transaction, such as checking the legal status and transferring the title to the buyer that makes it take several months to pick up the keys.

For more information, see the article: how long does it take to buy a house in the UK?

8. Is it worth using a mortgage adviser?

Buying a property is never easy. It gets even more difficult if the property is in a location that is new to you, your mortgage has to meet strict requirements, you don’t speak the language well or finance is not your strong suit. It is precisely in these situations that an experienced mortgage adviser will prove extremely helpful! It will save you from many problems. Our specialists will not only answer all your questions, but will also guide you through all the formalities and recommend a mortgage that meets your requirements.

If you are planning to buy a flat or a house in the UK and need the support of a specialist, I encourage you to contact us via our website. Our advisors will be happy to answer all your questions and if you prefer to contact us by phone, you can also call us. Our telephone number is 02476 997 826 and your first consultation is free and without obligation

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Think carefully about securing other debts against your home. Your home or property may be repossessed if you do not keep up repayments on your mortgage or any other debts secured on it.

Your Home (or property) may be repossessed if you do not keep up repayments on your mortgage or any other debts secured on it. Conveyancing services and some forms of Buy to Let mortgages are not regulated by the Financial Conduct Authority.

Your Home (or property) may be repossessed if you do not keep up repayments on your mortgage or any other debts
secured on it.

Your Home (or property) may be repossessed if you do not keep up repayments on your mortgage or any other debts secured on it. Conveyancing services are not regulated by the Financial Conduct Authority.

Extend Finance nor The Right Mortgage Limited can’t provide advice regarding Personal Pensions, Pension planning or investment planning advice. You must seek independent financial advice from a suitably qualified professional financial adviser who may charge you for advice.

Wills, Will writing, Trusts and Trust planning are not regulated by the Financial Conduct Authority.

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