The Basics Of Taking Out A UK Mortgage

A row of terraced houses in England

Just over 11 million people have a mortgage in the UK. According to the FCA, the value of outstanding mortgages reached a value of £1,430 billion in the third quarter of 2018 . In this article we examine:

  • How mortgages work
  • How much you can borrow with a mortgage
  • How much deposit you need for a mortgage

How does a mortgage work?

A mortgage is basically a loan given to buy property and for the vast majority of Britons, it is their largest outstanding debt. A mortgage is classed as a secured loan in that the sum borrowed is held against the home. Therefore, if the mortgage holders default on their mortgage repayments, they run the risk of having their property repossessed.

A mortgage is a secured loan as the sum borrowed is held against the home

Questions about UK mortgages:

What is a mortgage?

A mortgage is a secured loan from a lender, such as a bank, which is used to buy property. Mortgages can be obtained for residential and business properties, land, property investments and even boats. A mortgage is secured on the property in question until the total sum of the loan has been repaid. If a mortgage holder fails to keep up repayments the property may be repossessed by the lender. Learn how UK mortgages work.

How much can I borrow for a UK mortgage?

The amount you can borrow for a mortgage depends entirely on your personal financial circumstances. This can include your income and expenditure, any existing loans or credit, your credit rating and history and the amount of deposit you can pay. Other factors include the type of mortgage, such as buy to let or residential, the condition of the property and the time in which you wish to repay the mortgage. Generally speaking the amount you can borrow for a mortgage is a multiple of your annual income based on your ability to repay the loan.

How much of a mortgage can I afford?

The amount of mortgage you can afford depends on the value of the mortgage, your deposit amount and the cost of repayments. Most lenders, such as high street banks, will look at your earnings and any deposit before calculating the amount they believe you can afford to pay. It is wise to shop around for mortgages as repayments and UK mortgage interest rates can vary substantially between lenders.

The standard length of a mortgage is 25 years although other terms are possible, and 30-year mortgages are becoming more common. At the beginning of the mortgage, the majority of the monthly repayment to the lender goes towards interest and a part towards paying off the capital. As the capital is whittled down, less interest is charged and more of the original loan is paid back.

How much can I borrow with a mortgage?

Until changes by the FCA in 2014 about how mortgage applications were processed, the amount someone could borrow was as a multiple of their salary. However, nowadays, lenders such as banks and building societies take other factors into account. Although the borrower’s income is assessed, lenders’ primary concern is the affordability of the mortgage. For this reason, they take into consideration factors such as a borrower’s other expenses, the level of their outstanding debts and also carry out a full credit check.

UK houses with colourful doors

As part of the application process, they conduct a stress test to check whether mortgage repayments would still be affordable if there were changes to the lender’s interest rates or a change in the borrower’s personal circumstances like a redundancy or birth of a baby.

Nowadays most mortgage providers would expect you to have saved a minimum of 5% of the property purchase price.

To help you decide how much you can borrow, many lenders have mortgage affordability calculators on their sites. You should also consider the additional expenses of owning your own home such as insurance, maintenance and Council Tax.

How much deposit do I need for a mortgage?

Although 100% mortgages used to be more common before the global crisis, nowadays most mortgage providers would expect you to have saved a minimum of 5% of the property purchase price. These 95% mortgages aren’t offered by all lenders so you’ll find the lending market quite restricted. Another drawback of such a small deposit is that you will find that the interest rates are quite high.

This is because the higher your financial contribution to the purchase price, the less of a risk you represent to the lender. You should, therefore, aim to have at least a 10% deposit with better mortgage deals only available for those who have deposits of 20% or more. When you’re saving up for a house deposit, you should also allow for the extra expenditure of buying a home such as arrangement fees, legal fees, removal fees and so on.