Mortgages & Buying a Home

For most people, a mortgage is the largest financial commitment of their life, taken on at a point when they understand it least. The process moves fast once it starts, and the language is built to make you feel you should already know it. Understanding the mechanics in advance changes the experience completely. You ask better questions, you spot a bad deal, and you make the decision from a position of knowing rather than nodding along.

What a mortgage actually is

A mortgage is a loan secured against a property. Secured means the lender can repossess and sell the home if you stop paying, which is why mortgage interest rates are far lower than rates on unsecured borrowing like credit cards. You borrow a large sum, repay it over a long term (commonly 25 years, though terms now stretch to 35 or 40), and pay interest on the outstanding balance throughout.

Almost all residential mortgages today are repayment mortgages: each monthly payment covers the interest plus a slice of the capital, so the debt reduces to zero by the end of the term. Interest-only mortgages, where you pay only the interest and the full capital remains due at the end, still exist but are now rare for residential buyers and require a credible plan to repay the lump sum.

The deposit and loan-to-value

The deposit is the share of the purchase price you pay yourself. The rest is the mortgage. Loan-to-value, or LTV, is the mortgage expressed as a percentage of the property's value. Borrow £180,000 against a £200,000 home and your LTV is 90%.

LTV matters more than almost any other number, because lenders price risk by it. The more you put down, the lower your LTV, and the better the interest rate you are offered. Rates tend to improve at recognised thresholds, with the clearest gains at 90%, 85%, 75% and 60% LTV. A larger deposit lowers both the rate and the total amount borrowed, which compounds across the whole term.

Fixed, tracker, or standard variable

The interest you pay depends on the type of deal you choose at the outset. The choice is mostly about how much certainty you want and how you expect rates to move.

What lenders look at

Affordability is assessed on more than income. A lender wants evidence you can keep paying if circumstances tighten, so they examine the whole picture.

• Income, typically capped at around 4.5 times annual salary, though this varies by lender and circumstance.
• Regular outgoings: existing debts, childcare, commitments that reduce what is actually available for a mortgage.
• Your credit file and repayment history. A strong record opens better rates, which is covered in Credit, Credit Scores & Borrowing.
• The source of your deposit. Savings, a gift from family, or a government scheme each need documenting.
• A stress test: lenders check you could still afford repayments if rates were higher than today's.

The costs beyond the deposit

The deposit is the headline number, but it is not the only cash you need on the day. Budgeting for the rest prevents a nasty surprise late in the process.

• Stamp Duty Land Tax in England and Northern Ireland (Land Transaction Tax in Wales, Land and Buildings Transaction Tax in Scotland), explained below.
• Conveyancing or solicitor fees for the legal work of transferring ownership.
• A mortgage arrangement or product fee, sometimes added to the loan, sometimes paid upfront.
• A valuation or survey, ranging from a basic lender valuation to a full structural survey on an older property.
• A mortgage broker's fee, where applicable, though many brokers are paid by the lender instead.

Stamp Duty for buyers in England and Northern Ireland

Stamp Duty Land Tax is charged on properties above a threshold, in bands, so you pay the relevant rate only on the portion of the price within each band. For a standard residential purchase, nothing is due on the first £125,000, then 2% to £250,000, 5% to £925,000, 10% to £1.5 million, and 12% above that.

First-time buyers pay nothing on the first £300,000, and 5% on the portion between £300,000 and £500,000. The relief does not apply to purchases above £500,000. Wales and Scotland set their own rates and thresholds, so check the position for the nation you are buying in.

Help for first-time buyers

Getting the deposit together is the hardest part for most first-time buyers, and a few routes exist to make it easier.

When the deal ends: remortgaging

A fixed or tracker deal runs for a set period, and when it ends you roll onto the lender's standard variable rate, which is usually a sharp jump in cost. Remortgaging means arranging a new deal, either with your current lender (often called a product transfer) or by moving to another. Starting this two to three months before your current deal expires avoids spending any time on the expensive default rate.

Whether to use a broker

A mortgage broker searches across lenders, handles much of the paperwork, and can access deals not offered directly to the public. For a first purchase, a complicated income, or a tight affordability case, a good broker often more than pays for themselves. The wider question of when professional advice is worth paying for is covered in Working With Financial Advisers.