How do mortgages work?
A mortgage is a loan you use to buy a property. It’s a legal agreement between you and a lender, usually a bank or building society.Put simply, it’s a promise between you and a lender that they’ll loan you money to buy your home, and you’ll pay back that loan over time. A mortgage is a ‘secured’ loan because the mortgage uses your home as a ‘security’ – in other words, collateral. That means, if you stop paying back your mortgage, your lender has the right to make you sell your home and use the money to pay them back.
How much mortgage can you afford?
Before you start viewing properties, find out how much you could borrow. It’s good to have a realistic amount in mind, so you don’t risk getting your heart set on a house only to find out you can’t afford it.
There are a few ways to get an idea of what you can borrow: talking to a few different banks or lenders (your bank might be a good starting point), speaking with a mortgage broker (like us), or using a comparison tool or comparison website.
Usually, the house price you’ll be able to afford will be determined by your income and your deposit. Most lenders calculate how much mortgage they’re willing to lend you by using an “income multiple” – basically multiplying your annual income by anywhere from 4 to 5.5, depending on your credit and borrowing history, your deposit percent, and other factors. Add your deposit amount to that, and you’ve got a house price to aim for.
Of course, don’t forget to double check that you have enough deposit – right now, you’ll need at least a 10% deposit to get a mortgage. If your deposit isn’t quite there yet, you could try saving more, but an easy way to bump that percent up is to lower the property price you’re aiming for.
How do you get a mortgage?
Once you’ve had an offer accepted on a property, you’re all ready to go ahead with applying for a mortgage. You can get started right away by signing up or logging in and starting a new application. We’ll ask some questions about you, your situation, and the property you’re buying.
After that, you’ll have a chat with a qualified mortgage expert, who will look at all your details, answer any questions you have, and search the whole market to find out what the best mortgage for you is.
Once you’re happy with their recommendation, next up is answering a few more questions that are specific to your lender (they all have to be unique!), and your supporting documents.
We’ve put together
a pretty comprehensive list of the documents that lenders tend to ask for, but here’s the highlight reel:
- Proof of identity, like your passport or driving licence
- Proof of your current address, like a utility bill or bank statement
- Your last 3 payslips and proof of any other income
- Proof of your deposit, like a bank statement, or a gifted deposit form if it was a gift
The lender will do a credit check and an affordability assessment, and carry out a valuation survey on the property to make sure it’s worth what you’re paying for it. If everything goes well, you’ll receive your formal mortgage offer! 🎉
It typically takes between three to six weeks for the lender to process your mortgage application. But it may take longer in some cases (for example, if the surveyors are unusually busy, it may take them longer to do the survey and complete their report).
What are mortgage interest rates?
All mortgage deals come with an interest rate. It’s the rate of interest charged on the amount you borrowed: your mortgage loan. Rates can be:
- Fixed: With a fixed rate mortgage, your lender guarantees your interest rate will stay the same for a set amount of time (the ‘initial period’ of your loan), which is typically anything between 1–10 years.
- Variable: There are different kinds of variable rates, like discounted and tracker. With a variable rate mortgage, your interest rate, and the amount you pay every month, can go up and down – usually tied to a base rate, like the Bank of England base rate.
While interest rate is definitely important to consider when you’re choosing a mortgage, it’s not the only thing to keep in mind – other factors, like higher fees, less flexibility, or simply not being eligible, can all mean that the mortgage with the lowest rate isn’t necessarily the best one for you.
Use our comparison tool to see what kind of mortgage rates are out there.
What different types of mortgages are there?
Most people choose a repayment mortgage, but there’s also a type called interest-only.
- Repayment mortgages: Your monthly repayments go to paying back the money you’ve borrowed and the interest. At the end of the mortgage term, you’ll have paid off the entire loan. These are also called “capital and interest” mortgages.
- Interest-only mortgages: Your monthly repayments don’t actually pay off any of the mortgage – just the interest. Your monthly payments will be a lot lower, but won’t make a dent in the loan itself. At the end of your term, you have to pay the total amount in full.
There’s also the kind of interest rate you choose: fixed or variable.
With a fixed rate mortgage, your lender guarantees your interest rate will stay the same for a set amount of time (the ‘initial period’ of your loan), which is typically 2, 3, 5, 7, or 10 years. When this period ends, you’ll have to remortgage if you want to fix it again. If you don’t remortgage, you’ll be switched onto your lender’s standard variable rate (SVR).
With a variable rate mortgage, your rate (and monthly payments) could go up or down every month. There are a few main kinds of variable rate mortgages:
- Tracker rate mortgages follow a particular interest rate to determine what you pay each month (for example, the Bank of England base rate), then adding a fixed amount on top. If the base rate goes up or down, so does your interest rate.
- Standard variable rate (SVR) mortgages are sort of like a lender’s default rate. If you’re not on a specific deal (like a fixed or tracker rate) with your lender, you’re probably on a standard variable rate. Each lender is free to set their own SVR, and adjust it how and when they like – they’re usually quite a bit more expensive than if you were on a deal.
- Discounted rate mortgages give you a set discount on the lender’s SVR. This is a type of variable rate, so the amount you pay each month can change if the lender changes their SVR, which they’re free to do as they like.
Some things to think about as you start looking for a mortgage and home, and figuring out what kind of deal is right for you.
Do you qualify for a government scheme?
There are a few schemes out there designed to help you buy a home with support from the government. Find out more on the
Help to Buy website.
Interest rates don’t tell the whole story
Sometimes, mortgage deals with low interest rates actually have chunky fees attached. But these fees won’t always show up in things like comparison tables where you might first set eyes on a deal.
Always check what the total cost would be over the initial period (the time your deal lasts) – and make sure to include all the fees.
Here are all the
fees you might have to pay on a mortgage.
Overpaying your mortgage
Will you want to pay extra towards your mortgage – more than the monthly payments set by your lender? This is called ‘overpaying.’ Most people who overpay do it to pay off their mortgage early.
Most lenders let you overpay by up to 10% of your mortgage amount each year 9any more and they charge you a fee). Some let you overpay more than that. Think about if there are job bonuses, promotions or inheritance in your future, and whether you’d want to use them to overpay. Tell your
mortgage broker what’s important to you, and they’ll factor that into their choice of deals.
Will you want to move home?
If you’re planning on moving home during your mortgage deal, you might have to pay a fee to do it. That’s because almost all mortgages will charge you a fee (called an ‘early repayment charge’) if you want to leave your mortgage early. Make sure you’re aware of those fees before you sign up to any deal.
Should you use a mortgage broker?
It’s not compulsory to use a broker, but it’s a good idea. A broker is a specialist financial adviser, who is trained to offer you advice about mortgages and regulated by the Financial Conduct Authority (FCA).
Brokers are go-betweens – linking borrowers to lenders. As experts in all things mortgages and with in-depth knowledge about different lenders, they can help you find the right mortgage deal for you. Here, ‘the right deal’ doesn’t just mean the cheapest interest rate. It also means a deal you’re actually eligible for, with terms that work for your circumstances, too.
As well as finding you the right deal, a broker can take on most of the application paperwork for you too. That’s a lot of time and hassle saved.
How much do mortgage brokers cost?
Some brokers are free. Some charge a lump sum (typically £500 or so) while others bill by the hour or based on your mortgage amount. Always check what your broker charges upfront.
Habito is a free online mortgage broker – we’ll help you find and get a mortgage, and give you advice on your mortgage journey.
Read about the different types of mortgage brokerWhat's a mortgage in principle?
A mortgage in principle (MIP) is a certificate showing how much you can borrow on your mortgage. Getting an MIP is one of the earliest things you can do when you’ve decided you want to buy a home.
You can get one from a broker or a lender. All you have to do is answer a few questions about things like your income, spending, savings, and the approximate property price you’re looking for.
Your MIP is useful in two big ways:
- It shows you how much you can borrow, so you know what kind of property price to aim for
- It shows estate agents and sellers that you’re serious about buying, and adds credibility to any offers you make
Here come the disclaimers
An MIP is just an estimate of what you can borrow, and not a guarantee you’ll be approved for a mortgage for that amount. It’s useful for sure, but you should expect lots more checks from lenders when it’s time to actually apply for your mortgage.
Read more about MIPs & get one for free There’s a few fees you should be aware of when it’s time to get your mortgage:
Stamp duty
OK, this one’s technically not a fee – it’s a tax you have to pay on properties worth £125,000 and up. But it’s easy to forget when you’re budgeting.
Calculate the stamp duty you might pay.
Arrangement fee
This is an admin fee your lender charges you, typically around £999.
Booking fees
You pay this to the lender to secure your interest rate – though some lenders incorporate it into their arrangement fee. It’s around £100 usually.
Legal fees
These are the fees you pay your solicitor or conveyancer. Costs vary but expect to pay around £1,500 for the legal work to buy your home. (Habito can
help with legal work if you need it.)
Valuation fees
Your lender will hire an inspector to go check out your property before they agree to lend you money for it. Just to make sure that if you stop paying your mortgage, they can sell it and get their money back. This valuation will cost you around £400.
It’s a good idea to get your own, independent inspection of the property too – that could cost anywhere between £400–£1,500. But with your own property survey, you know exactly what you’re buying, and don’t get any nasty surprises when you move in.
Habito’s home-buying service
includes a property survey.
Telegraphic transfer (CHAPS) fee
An admin fee charged by the bank when you transfer your mortgage to your solicitor. It’s usually £25–£30.
Broker fees
Some brokers charge you for their service (helping you find and apply for the right mortgage). It’s usually around £500 or so. Other brokers – like us at Habito – help you find and apply for your mortgage for free.
Read about mortgage fees in more detail.
What happens to your mortgage when you move house?
If you want to move home while you have a mortgage, you have two main options. You can take your current mortgage with you (also called ‘porting’ a mortgage), or you can find a new mortgage deal.
Take your mortgage with you
Porting your mortgage means taking the same mortgage deal with you to a different property – keeping the same lender, interest rate, loan amount and rules. You’ll still have to do some paperwork with your lender, and go through an application process. But if you want to move home while you’re still in your fixed period, porting could help you avoid an exit fee.
Get a new mortgage
You might find it makes more financial sense to apply for a new mortgage deal – either with a new lender or your existing one. Since you still have to go through an application process to port, you might as well check the market to see if there’s a better deal. But just like with porting, if you’re still inside your mortgage’s fixed period, you might have to pay a fee to leave.
More about portingCredit history and mortgages
Before they agree to lend to you, lenders will look at your credit report to see how you manage your money.
‘Credit’ just means ‘money you borrow’. Your credit report shows how you’ve managed the money you’ve borrowed in the past, so things like your debts, bills, credit cards and store cards.
Before you apply for a mortgage, it’s a good idea to get a copy of your credit report. You can get one for free from one of the credit rating agencies (CRAs) who work out your credit score. The three main CRAs are
Experian,
Equifax and
TransUnion.
Usually, having good credit puts you in good stead to get a mortgage. Not so helpfully, what ‘good’ means is
different for every CRA. But the general rule is, the higher the credit score, the more likely you are to be approved for a mortgage.
What if you have bad credit?
A few missed bills won’t stop you from buying a home, but something more serious like a County Court Judgement (CCJ) might restrict your choice of lenders. But hope isn’t lost. Your credit report only shows the last 6 years of your financial activity, so you can still take that time to build up good credit and improve your chances of getting a mortgage.
You can improve your credit score
It helps if you register to vote, cancel cards you don’t use, fix mistakes in your credit report, and stay out of your overdraft and other debts wherever possible. Here’s a
guide to improving your credit score with lots more info.
How do you get a mortgage?
Here are our four top tips to bear in mind as you start your mortgage journey:
- Do the maths. You’ll need a deposit of at least 5% of the property's value, and ideally 10% or more. Figure out what you can borrow and what kind of property price you can afford – our mortgage calculator can help with that. Understand your loan to value. And remember that you’ll need to set aside some money outside your deposit, to cover the other costs of buying. Things like your solicitor and surveyor (which Habito can help with), or your buildings insurance.
- Get your documents ready. When it’s time to apply for your mortgage, you’ll need to show proof of your identity, income and spending, and your address. That means you’ll need high resolution scans or photos of documents like your bank statements and utility bills. Here are all the documents you’ll need. Having them ready in advance will make for a smoother process.
- Be flexible and patient. This is one of those things that’s easy to say and harder to do. But buying a home is a huge purchase, with loads of moving parts. It’s almost inevitable there’ll be some hiccups along the way. Don’t be tempted to rush through a deal that looks good, or go with the first bank you speak to – take time to find the best deal for you.
- Use a broker if you can – a specialist mortgage adviser. Of course we’d say that, you might be thinking, because that’s one of the things we do at Habito. But using a broker can make all the difference in terms of the money, time and hassle you can save. They can find you the best mortgage for you – often with access to deals your own bank won’t even offer you – and help you with the application paperwork too. Here’s more about what a mortgage broker does.
