What’s a mortgage? – Be Clever With Your Cash 

Every little thing you want to learn about borrowing to purchase a property

For many of us, a mortgage is totally important relating to shopping for a house. 

With out one you’d want sufficient money to purchase a property outright, and that’s unlikely.

These loans are bigger than your typical mortgage and long-term – however that is all par for the course relating to property possession.  

So what’s a mortgage and the way does it work?

Some articles on the location include affiliate hyperlinks, which give a small fee to assist fund our work. Nonetheless, they received’t have an effect on the value you pay or our editorial independence. Read more here.

Mortgages defined

Briefly, a mortgage is a selected sort of borrowing that helps you purchase a house. The principle distinction between a mortgage and one other sort of mortgage is that the lender makes use of your property as safety for the mortgage. Which means when you can’t sustain together with your repayments, the lender might repossess the property to attempt to get its a reimbursement – which isn’t the case with different loans.

By taking your property as safety for the mortgage, mortgage suppliers can usually supply higher rates of interest than different forms of borrowing as a result of decreased threat. Nonetheless, mortgages are often over the long term which frequently means extra curiosity is charged total.

The typical quantity borrowed to purchase a residential property is simply over £270,000, based on mortgage dealer Tembo, and also you often pay this again over 20 to 40 years, unfold throughout month-to-month funds.

Though there are some lenders who supply 100% mortgages, there aren’t that many. It’s extra possible you’ll have to put down a deposit that’s often between 5% and 20% of the property’s worth and borrow the remaining. I’ll clarify extra about this later. 

Attempt our mortgage calculator

Our mortgage calculator helps simplify issues by supplying you with an concept of how a lot you could possibly borrow and your possible month-to-month repayments.

How a lot can I borrow?

You’ll be able to often get a mortgage that’s between 4 and four-and-a-half instances your revenue however in actuality they are often something from three-and-a-half to 6 instances your revenue. Should you’re getting a joint mortgage with one other particular person, that is based mostly in your mixed revenue.

So say you earn £40,000 a 12 months. You can probably borrow as much as £180,000. And in case your companion’s wage was £50,000, your complete mortgage could possibly be as a lot as £405,000. Nonetheless, bear in mind, the extra you borrow, the bigger your month-to-month repayments might be.

Plus, there’s a giant caveat right here. This 4.5 a number of isn’t assured. You could be provided much less if the lender thinks you received’t be capable to afford the repayments. This could possibly be as a result of a lender will assess your affordability earlier than deciding how a lot to give you. This consists of issues like your credit score rating, you probably have excessive outgoings or numerous debt. 

Or you could possibly be turned down for a mortgage altogether when you don’t meet the lender’s eligibility necessities. 

To verify how a lot you’ll be able to borrow, give our actually helpful affordability calculator a go.

The mortgage deposit and LTV

Most lenders will want you to place down a deposit of 5% to twenty% of the overall property worth, as a way to get the mortgage. The cash might be your preliminary fairness stake within the property. Over time, you’ll get extra fairness within the property as you repay your mortgage debt.

Primarily based on the common UK property worth of £271,000, it means you’d want to save lots of between £13,550 and £27,100 – which is the toughest half relating to shopping for a house.

However that’s simply the beginning. The best way mortgages often work is the larger the deposit, decrease the rate of interest. It’s because when you put more cash into the property, it reduces the loan-to-value (LTV) ratio. The LTV is the share of the property’s worth that’s made up of a mortgage. 

So say you’re shopping for a home for £300,000 and you place down a ten% deposit of £30,000. Your LTV might be 90% as a result of that’s how a lot you’re borrowing in comparison with the property worth. When you’ve got a £75,000 deposit your LTV is 75%. 

The decrease the LTV, the decrease threat you seem to the lender as you’re placing in additional of your personal cash and because of this, the repayments might be extra reasonably priced. Since you’re borrowing extra and are seen as a much less of a threat, it’s extra more likely to give you higher mortgage charges. 

These often come at 5% increments between 95% and 75%  – so when you can afford to spice up your deposit by 5%, then it’s best to get a decrease rate of interest. It’s a little bit of a soar after this to 60% LTV, and when you transcend this there are not any decrease thresholds.

Get one of the best of our cash saving content material each Monday & Thursday, straight to your inbox

Plus, new Quidco clients get a prime paying £20 welcome supply

Forms of mortgage

There are a variety of various forms of mortgage which will have an effect on how a lot you pay – each month-to-month and total – and the rate of interest. These embrace: 

• Compensation – the place you pay again the curiosity and mortgage on the similar time
• Curiosity-only – because it says, you’ll simply be paying off the curiosity every month
• Mounted price – a mortgage with a set price of curiosity for a set time period
• Variable – a mortgage the place the speed of curiosity can change, often consistent with the Financial institution of England base price
• Offset – a mortgage which hyperlinks your mortgage to your financial savings or present account steadiness to cut back the quantity of curiosity you pay total

The rate of interest will rely on plenty of components together with the time period (often two, 5 or 10 years), the lender you select and the scale of your deposit. In order for you extra info, we’ve achieved an entire information on different types of mortgages the place we go into rather more element.

You can too get buy-to-let mortgages, however to maintain issues easy, we’ll simply be speaking about residential mortgages on this article.

Evaluate mortgage charges and offers

On the lookout for a mortgage? Discover the highest charges from over 200,000 offers and 100+ lenders with our dwell tables.

Mortgage eligibility

In addition to whether or not you’ll be able to afford the mortgage based mostly in your revenue, lenders will even produce other standards they contemplate.

For instance, they’ll wish to know:

• Employment info. This consists of whether or not you’re self-employed as you could be assessed in another way and the lender might need tighter guidelines as your revenue isn’t assured in the identical manner as whenever you’re an worker. Some lenders might also wish to see how lengthy you’ve been at your present job – they could be cautious when you’ve simply began a brand new contract because it is probably not as secure as a job you’ve been in for years. 
• Your credit score historical past. That is to offer them a way of your monetary previous and whether or not you’ve been a accountable borrower or not. Should you’ve received a poor credit score historical past chances are you’ll discover it troublesome to get a mortgage or be provided larger rates of interest.
• Outgoings. This consists of common funds like baby care, subscriptions, money owed repayments and your basic spend. They do that to identify any patterns and work out how a lot you’ll be able to afford to repay.
• The dimensions of your deposit. You’ll want to indicate proof of the place the funds have come from. For instance, if it’s been gifted from a member of the family they’ll have to submit their very own financial institution statements to indicate it’s come from a professional supply. 
• Should you’re a gambler. Mortgage lenders usually view playing with warning as it could actually recommend you’ll be able to’t handle your funds responsibly. Lenders will have a look at how a lot you spend on playing regularly, with common, massive, or credit-funded playing can elevate pink flags. 

What are typical mortgage charges?

In addition to your LTV, the mortgage price you could possibly be provided will rely on the kind of mortgage you select and the size of the time period. Mounted-rate and variable price mortgages often have completely different rates of interest connected to them. Lenders might also supply barely completely different charges for various mortgage phrases, with shorter phrases probably having barely decrease rates of interest.  

However listed here are some examples to offer you a flavour of what you may get in the intervening time. 

In line with knowledge agency Moneyfacts, these are the common charges:

• Two 12 months repair: 5.11%
• 5 12 months repair: 5.07%
• 10 12 months repair: 5.47%
• Two 12 months tracker: 4.9%

However these take note of every thing. In order for you a flavour of one of the best offers you could possibly get in the intervening time, based on Tembo’s panel of over 100 mortgage lenders, you could possibly see charges of:

• Two 12 months repair: 3.95%
• 5 12 months repair: 3.89%
• 10 12 months repair: 4.39%
• Two 12 months tracker price: 4.36%

The above charges are all based mostly on a 60% LTV over a 35 12 months time period, as of June 2025. 

How many individuals might be on a mortgage?

You will get a mortgage by yourself, or a ‘joint mortgage’ which might embrace as much as 4 individuals with some lenders. Some lenders might even let you’ve six individuals on the mortgage. This may be useful if you wish to purchase with buddies, siblings and improve how a lot you’ll be able to borrow, or add somebody to your mortgage as a guarantor. 

Nonetheless, most individuals get a joint mortgage with two individuals. It’s value noting with bigger teams making use of, the lender might not contemplate everybody’s revenue. For instance, if 4 of you’re getting a mortgage, you would possibly be capable to use all 4 incomes however some suppliers would possibly solely take note of the best two incomes relating to understanding how a lot you’ll be able to borrow.

Mortgage charges

While you’re shopping for a house with a mortgage you could have to pay:

• An association payment or ‘product payment. That is often upwards of £1,000 and is charged for organising the mortgage. Generally you’ll see a low rate of interest in one of the best purchase tables and whenever you click on on the deal there’s a whopping association payment – so watch out. Fortunately our mortgage comparison tables embrace the association payment to provide the true complete value of the mortgage. You’ll be able to pay this payment upfront, or add it to the mortgage, nevertheless, it’ll entice curiosity. You can get it added to the mortgage and pay it off immediately by ‘overpaying’ in case your lender permits. This prevents curiosity constructing on that sum and means you don’t lose the cash if one thing goes unsuitable. Or if the payment is refundable (to make sure you get the cash again if the property buy doesn’t undergo) you could possibly pay it upfront. Not everybody has to pay the association payment and it’s a good suggestion to check offers with and with out it to see which is the most affordable deal total.
• Reserving payment. These aren’t that widespread anymore however some lenders cost between £100 and £300 to safe a prime deal.
• Valuation payment. That is often round £300 and must be paid upfront. It’s to verify the property is value how a lot you say it’s. In some circumstances, this payment is roofed by the lender and for remortgages and first-time consumers, it could actually usually be free.
• Mortgage dealer payment. Some brokers cost clients a payment as soon as they’ve secured you a deal and also you’ve accomplished. It’s often between £300 and £600 or it could possibly be 1% of the mortgage quantity. Nonetheless, you’ll be able to simply discover a free dealer together with the multi-award successful Tembo, when you go by way of Be Intelligent With Your Money.

How do I get a mortgage?

The simplest manner to make sure you apply for a mortgage you’re eligible for is to make use of a mortgage dealer, as they’ll search the marketplace for you and discover you one of the best deal. 

Some brokers cost you a payment to do the work however we’ve partnered with Tembo, who will examine your eligibility to 1000’s of mortgages and provide you with entry to your very personal mortgage advisor. And thru Be Intelligent With Your Money, it received’t value you a penny!

Alternatively, you’ll find your personal choices. place to start out is by checking our mortgage finest purchase tables, to offer you a way of what offers are on the market, and we’ve additionally received a extremely good mortgage calculator that reveals you what price you could possibly get based mostly in your circumstances.

How lengthy does a mortgage software take?

It often takes between two to 6 weeks for every thing to be permitted you probably have all the best paperwork, like proof of earnings, proof of deposit and legitimate ID. 

What else do I would like to contemplate?

You’ll have to instruct a solicitor or conveyancer to deal with the authorized facet of issues – most lenders will insist on it. This consists of registering the mortgage to your property in addition to managing all the opposite authorized work that comes with shopping for a property.

The charges will fluctuate relying on the value of the property, the kind of property and the way advanced the method is. Nonetheless, it’s more likely to be upwards of £1,000.

You’ll additionally have to get buildings insurance coverage sorted earlier than your property completes to reassure the lender your private home’s lined for from hearth, floods and different injury.