Mortgage FAQs

Buying your own home and getting a mortgage is probably one of the biggest commitments you’ll make, so it’s important to know exactly how a mortgage works. There are two parts to a mortgage – the capital and the interest. The capital refers to the money you borrow, and the interest is a charge from the lender for allowing you to borrow the money. There are different types of mortgages that allow you to pay back interest only, or interest and capital together.

These types of mortgages are repayment mortgages and interest-only mortgages. With a repayment mortgage, you will repay both the interest and some of the capital on a monthly basis. As a result, by the end of the term, you’ll have repaid your loan and will own your property. With an interest-only mortgage, you will repay the interest on the loan, but won’t repay the capital until the end of the mortgage term. How you will make the capital repayments at the end of the mortgage term will be established in a plan between you and the lender. However, lenders and regulators are becoming increasingly sceptical about interest-only mortgages, as it leaves homeowners with a large sum of debt and some have no way of repaying the loan. You can also enquire about combining both a repayment and interest-only mortgage with your lender.

Once you have an idea of how you’d prefer to repay the capital and the interest, you should then consider the type of mortgage that would suit you. Here, you would take into consideration how much you can afford to repay every month, and which mortgage term would be the best option for you. The mortgage term refers to the period of time in which you’ll pay your loan back. This inevitably affects how much you will repay each month. Selecting a mortgage term is a personal preference determined by your own set of circumstances, such as your age and your budget.

Besides your term, you should also consider which interest rate appeals to you. Different mortgage types are usually differentiated by their rate.

• A fixed rate mortgage remains unaffected by external factors – such as the wider economy and the property market. With this, your interest rate will remain the same during the initial mortgage period. This is usually for two or five years.
• An variable rate mortgage (which is also known as an adjustable rate mortgage or a Standard Variable Rate) can fluctuate based on both the lender’s assessment of the property market, their competition and the Bank of England base rate. After the initial period, a mortgage loan will then have this type of rate.
• A tracker rate also changes depending on the Bank of England base rate. The base rate of the lender is added to the base rate of the Bank of England, meaning if the Bank of England base rate is to increase or decrease, the tracker rate will mirror this.
• The Bank of England set the charges for the banks and their lending in the UK. This Bank of England base rate can change depending on numerous factors, including the housing market and the economy more generally. When this base rate increases or decreases, so will the variable interest rate of the lender.

Deciding how much you can borrow is down to your lender. When deciding how much you can borrow from them, your lender will use a loan-to-income ratio. Previously, lenders would calculate the amount you could borrow mainly by using a multiple of your income. As an example, if your income was £60,000 a year, the lender may have allowed you to borrow between three to five times this amount. That would give you a mortgage of up to £300,000. However, lenders have now applied a cap to the amount you are allowed to borrow. This means that when you apply for a mortgage, you will only be able to borrow up to four-and-a-half times your annual income.

You can apply for a home loan through a building society or a bank, that will offer a range of options to suit you and your own personal and financial circumstances. Unless you have experience and expertise in mortgages, it’s usually best to get as much advice as you can before choosing a mortgage. For this advice, you can speak to a mortgage broker or an independent financial adviser (IFA) who will help you to consider your options and compare the different mortgages that are available. Some of these advisors will only compare mortgages from a select number of lenders though and not the entire market, so it’s important to get clarification on this, as well as any charges they require, if you do seek advice.

If you would like some advice regarding your mortgage, a member of the JonSimon team would be happy to help. We understand that navigating the process of getting a mortgage and becoming a homeowner can seem daunting, but with our team on hand to offer friendly and reliable advice regarding buying a property, you can rest assured knowing that we’ll help to make the process as smooth and as stress-free as possible.

To determine how much mortgage you can afford, your lender will consider a range of factors in an affordability assessment. This takes into consideration your monthly income and then other living expenses and outgoings you have, such as bills and regular credit card payments. As well as considering current factors at the time of your assessment by the lender, they will also take into account any future changes that may impact your ability to make your mortgage monthly payments. For example, they might consider your chance of redundancy or pregnancy. These considerations and the process of the assessment will be the same for both a joint or sole mortgage application.

As for your own personal considerations when it comes to affordability, you should also keep in mind any additional costs you’ll face, as well as the purchase price of the property you are buying. These additional costs may include taxes, any relevant insurance you’d like to purchase as a homeowner. Considering all of the costs that come with being a homeowner will help to inform your decisions when selecting a mortgage, and will overall help you to make better financial decisions.

When it comes to considering your affordability, it’s important, again, to consider the two elements of a mortgage – the capital and the interest rate. Regarding the latter, there are ways to better your chance of getting the best interest rate, which will affect how much you can afford to repay. For example, having a good credit score, saving a bigger deposit, and using comparison tools to compare interest rates out there are all steps you can take.