How do I get a mortgage?
How do I get a mortgage?
Here are the key questions you should consider before taking the big step of applying for a mortgage.
What is a mortgage?
A mortgage is a loan that’s used to buy property or land. Most mortgages run for 25 years, but the duration (or term) can vary. With a mortgage, the property itself is used as ‘security’ for the loan until it’s paid off. That means if you fail to repay the loan, the lender can take possession of your home. So, a mortgage is clearly a major financial commitment.
What are the main types of mortgage?
The two main types of mortgage are:
- Repayment mortgage – you repay the mortgage debt, plus interest, each month. At the end of the term, if you’ve met all your monthly payments you own your home outright.
- Interest-only mortgage – you pay only the interest charged each month on the mortgage, but pay back none of the original amount you borrowed (the capital). At the end of the mortgage term, you’ll have to repay the capital using other savings or investments. This type of mortgage has become rare in recent years, as lenders are concerned about homeowners being left in huge debt with no way to repay it.
Where can I get a mortgage?
You can get a mortgage directly from a bank or building society, or you could go through a mortgage broker or financial adviser. For a quick indication of how much you could borrow, and what it might cost, use our mortgage calculator.
What are the stages of applying for a mortgage?
There are two main stages: getting a “decision in principle” and making a full mortgage application.
Decision in principle
This is a statement from a mortgage provider giving you an indication of how much they’ll lend you, based on your financial details. Having a ‘decision in principle’ shows estate agents that you’re serious about buying a property – some will insist you have one before they show you around properties. Once you have decision in principle, you’ll be able to progress to a full mortgage application as and when you find a property you want to buy.
At this stage the lender will perform an affordability check, which includes a full credit check – meaning they’ll be able to see all of your bank and credit card accounts, plus any other activity linked to credit that you’ve had in the past. This could include any outstanding loan agreements or debts with utility companies. A lender will be able to see if you’ve made repayments in full and on time.
You’ll be asked to provide relevant documents to support your application. These are likely to include (but aren’t limited to):
- Proof of name and address – typically a full UK driving licence or passport. Plus, a recent utility bill
- Bank statements – usually your three most recent monthly bank statements
- Employment details – with proof of your income
- Evidence of a deposit you’re putting towards a property.
You might also need to show a lender other financial details, such as child maintenance costs or personal expenses. They might also want proof that you’ll be able to keep up repayments if interest rates rise (particularly if you have a variable rate mortgage – examples of which can be found in our guide to first-time buyer mortgages).
Will I be able to get a mortgage?
A lender will only offer you a mortgage if they think you’ll be able to afford it.
How much deposit will I need?
You’ll need to save for a deposit when buying a property. Generally, first-time buyers should aim for a deposit of at least 10% of the property’s purchase price if possible. The more you can save, the more equity (or ownership) you’ll have in your property. Having a higher equity means you might be able to secure a more competitive mortgage deal, which could mean lower monthly payments.
What is a loan to value ratio?
Your loan to value (LTV) ratio shows how much you can borrow on a mortgage compared to the total value of a property. So, if you’re looking to buy a £200,000 property, a £20,000 deposit is 10% of the price – so your mortgage will be £180,000. That makes your LTV 90%.
Lenders tend to have a maximum LTV ratio they’ll offer a customer. Generally, the lower your LTV, the lower a rate of interest you could be charged. The cheapest rates are typically available for people with a 40% deposit or more.
Which schemes are available to help first-time buyers?
There are several government-backed schemes to help first-time buyers, including:
- Help to buy: Equity Loan – the government lends homebuyers up to 20% of the cost of a new-build home
- Starter home scheme – this scheme aims to give first-time buyers the chance of a new home priced at 20% less than its market price
- Right to buy – tenants who currently rent could be supported to buy the home they live in
- Shared ownership – offers the chance to co-own a property with a landlord
- Lifetime ISA
Our guide to first-time buyer mortgages has more details on each of these.