Everything You Need to Know About Mortgage in the UK

A mortgage is a loan that helps you buy a house. When you take out a mortgage, you borrow money from a bank or lender and use the house as collateral. If you don’t make your payments, the bank can take the house and sell it to get their money back.

Mortgages are usually used for big purchases like buying a house, because most people don’t have enough money saved up to buy a house outright. Instead, they borrow some of the money and use the house as collateral to secure the loan.

Mortgages are different from other types of loans because they’re usually much larger and are paid back over a longer period of time, usually 25 to 35 years. This makes mortgages a good option if you’re looking to buy a house, but it also means that you need to be careful and make sure you understand all the terms and conditions before you take out a mortgage.

When you take out a mortgage, you’ll typically need to put down a deposit, which is a certain percentage of the house’s value. For example, if you’re buying a house that’s worth £100,000, you might need to put down a deposit of £10,000, which is 10% of the house’s value. The bank will then give you a loan for the rest of the money, which is called the mortgage.

There are different types of mortgages and different ways to repay them, so it’s important to do your research and find the right mortgage for you. Some mortgages have fixed interest rates, which means the interest you pay will stay the same for a certain period of time, while others have variable interest rates, which can change.

There are also different types of mortgages for different situations, such as if you’re buying a house to live in or if you’re buying a house to rent out. By doing your research and understanding all the terms and conditions, you can make sure you’re making the right decision when you take out a mortgage.

Deposit Requirements

When you take out a mortgage to buy a house, you’ll typically need to put down a deposit. A deposit is a certain percentage of the house’s value that you pay upfront, and it shows the bank or lender that you’re serious about buying the house and that you have some skin in the game. The deposit also reduces the amount you need to borrow, which can help lower your monthly mortgage payments.

The amount of deposit you need to pay will vary depending on the type of mortgage or mortgage scheme you have. For example, suppose you take advantage of the government’s 95% mortgage scheme. In that case, you’ll only be required to put down a deposit of 5% of the house’s value. This can make it easier for first-time buyers to get onto the property ladder, even if they haven’t saved up a large deposit.

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Term	Definition
Mortgage Deposit	Cash deposit paid upfront when buying a house
Required Deposit	Usually at least 5% or 10% of the property value
Minimum Deposit	Depends on the lender, typically 5% of the total property price
Average First Time Buyer Deposit	National UK average deposit is around 20%
Buy to Let Mortgage Deposit	Usually 25% of the property value
Shared Ownership Deposit	Depends on the part of the property you own, could be smaller

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It’s important to note that having a larger down payment results in lower monthly mortgage payments. This is because you’re borrowing less money, and the bank or lender will view you as a lower risk. You’ll also be able to get a better interest rate if you have a larger deposit, which can save you even more money over the life of the mortgage.

If you’re having trouble saving up a large deposit, there are a few things you can do to help. You could consider living with family or roommates to save money on rent, or you could look into government schemes like help to buy, which can help you save up a deposit more quickly.

Repayment Terms

When you take out a mortgage to buy a house, you’ll need to repay the loan over a period of time, usually 25 to 35 years. There are two main options for repaying a mortgage: interest-only repayments and repayment style mortgages.

Interest-only repayments are when you only pay off the interest on the loan each month. Having a larger deposit means lower monthly mortgage payments, but the full loan amount must still be paid off at the end of the repayment period.. It’s important to make sure you factor this in when you’re considering an interest-only mortgage, as you’ll need to have a plan for how you’ll pay off the full amount you borrowed at the end of the term.

Repayment style mortgages, on the other hand, require you to pay off both the interest and the mortgage each month. Your monthly repayments will be higher, but you’ll clear the entire debt by the end of the 25 to 35 years. This is a good option if you want to make sure your mortgage is paid off completely by the end of the term and you don’t have to worry about paying off a large amount of money later on.

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Terms	Explanation
Mortgage Terms	The complete lifespan of a mortgage, the number of years and months a borrower will make payments to the lender until the mortgage is paid off.
Repayment Mortgage	A mortgage where the term is the length of time a borrower will take to pay back the money borrowed plus interest charged and any other fees. The balance will decrease each month and at the end of the term, there will be no outstanding debt.
Interest-only Mortgage	A mortgage where a borrower only pays the interest charged on the original loan for a specified term, usually several years. At the end of the term, the borrower must pay back the full amount borrowed.
Standard Mortgage Term	The standard mortgage term in the UK is 25 years, but longer-term mortgages of 30 or more years are increasingly common, with some lenders stretching to 40 years. The shortest mortgage term available is generally five years, but some go down to three years.
How Mortgage Terms Affect Interest	The longer the mortgage term, the lower the monthly repayments will be, but more interest will be paid over the lifetime of the mortgage.
Overpayments	The flexibility to make overpayments, paying more than the agreed monthly amount regularly or as a lump sum, effectively shortening the mortgage term.
Extending/Reducing Mortgage Term	It’s possible to change the term after taking out a mortgage, but affordability checks and fees charged by the lender must be considered. Extending the term will reduce monthly repayments but increase the amount of interest paid over the life of the loan.
Making Overpayments or Decreasing Term	Shortening the term means paying less interest overall, but make sure to afford moving to regular, higher monthly payments. Making overpayments allows for more flexibility.

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The type of mortgage you choose will depend on your personal circumstances and what you’re comfortable with. It’s crucial to think about your finances and future financial plans when deciding which type of mortgage is right for you.

Interest Charges

Interest charges are the fees you pay for borrowing money when you take out a mortgage. The interest you pay will depend on the type of mortgage you have and the interest rate you’re charged. There are two main types of interest charges for mortgages: fixed-rate mortgages and variable-rate mortgages.

Fixed-rate mortgages have an interest rate that stays the same for an agreed period of time, usually between two and five years, although some lenders will offer fixed rates for up to 10 to 15 years. This means that you’ll know exactly how much you’ll be paying each month for the agreed period of time, which can make it easier to budget and plan your finances.

Variable-rate mortgages, on the other hand, have interest rates that can change over the life of the mortgage. The interest rate can change due to a variety of factors, such as changes in the Bank of England’s base interest rate, the lender re-evaluating your risk, or changes in the economy. This means that your monthly repayments could go up or down, so it’s important to factor this in when you’re considering a variable-rate mortgage.

Both fixed-rate and variable-rate mortgages have unique pros and cons, so it’s important to weigh up your options and consider your personal circumstances before choosing which type of mortgage is right for you. It may also be helpful to talk to a mortgage advisor who can help you figure out the right type of mortgage for you.

Different Types of Mortgages

When you’re buying a house, there are a variety of different types of mortgages available to choose from, depending on your circumstances and what you want to do with the property. Some of the most common types of mortgages include:

• Buy-to-let mortgages: If you’re planning on renting out the property, you’ll need a buy-to-let mortgage. These mortgages are specifically designed for people who want to buy a property to rent out, and they have different requirements and interest rates compared to standard mortgages.
• Buy-to-sell mortgages: If you’re planning on buying a property with the intention of flipping it, you’ll need a buy-to-sell mortgage, also known as a buy-to-flip mortgage. These mortgages are designed for people who want to buy a property, renovate it, and sell it for a profit.
• Shared ownership: If you’re unable to buy a property outright, shared ownership allows you to buy a percentage of the property and pay a lower rental amount on the rest. This is a good option if you’re a first-time buyer and you haven’t saved up enough money for a deposit.
• Help to buy: The government’s help to buy scheme can help you get onto the property ladder by topping up a percentage of your mortgage. This can be up to 40% for those living in London, and it’s only available to first-time buyers.
• 95% mortgage scheme: The government’s 95% mortgage scheme is available to first-time buyers and allows you to take out a mortgage with just a 5% deposit. This can make it easier for people to get onto the property ladder, even if they haven’t saved up a large deposit.

These are only some of the many types of mortgages available, so it’s important to consider your personal circumstances and speak to a mortgage advisor to figure out the right type of mortgage for you.

Stamp Duty, Freehold and Leasehold

When you buy a property or land worth over a certain threshold in England and Northern Ireland, you’ll need to pay a tax called Stamp Duty Land Tax (SDLT). This tax is an important consideration when you’re buying a property, as it can add a significant amount to the overall cost of your purchase.

Another important consideration when you’re buying a property is whether you’ll own the property outright or whether you’ll lease the land. There are two main types of property ownership: freehold and leasehold.

Freehold means that you own both the house and the land it’s on, with no time limit on your ownership. This is the most common type of property ownership, and it gives you full control over the property and the land it’s on.

Leasehold, on the other hand, means that you own the building but not the land it’s on. This is common for flats in a building, for example, where you lease the land from the landlord for a limited time, which could be upwards of 100 years. When you own a leasehold property, you may need to abide by some rules set by the landlord, such as no pets or subletting.

Negative Equity

Negative equity is a situation that can occur when the value of your property decreases, you have a mortgage that is larger than the value of your property. For example, if you bought a £100,000 house with a 90% loan to value (LTV) mortgage of £90,000, and the market crashes, causing the value of your house to decrease to £80,000, you would be in negative equity as you still owe £90,000 on your mortgage.

Being in negative equity can be a difficult situation to be in, as it means that you have a mortgage that is larger than the value of your property. This can make it difficult to sell the property or refinance your mortgage, and it can also impact your financial situation if you need to move or sell the property for any reason.

If you’re in negative equity, there are a few options available to you. You can continue to make your mortgage repayments as normal, and wait for the value of your property to increase again. You can also speak to your mortgage lender about refinancing your mortgage, although this may not always be possible if you have a large amount of negative equity.

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For more information on protecting your home, check out our guide to Homeowners Insurance.

Try our free, easy-to-use mortgage calculator to determine your monthly mortgage payments.