Complete 2023 Guide.

Getting A Residential
Mortgage.

Getting a Residential Mortgage: The Definitive Guide (2023)

This is the definitive guide to getting a residential mortgage in the UK.

In this in-depth guide, you’ll learn:

  • What is a residential mortgage?
  • How do residential mortgages work?
  • The types of residential mortgages in the UK
  • Top tips for securing a mortgage
  • Lots more

So, if you’re ready to learn all about residential mortgages to help you get on the property ladder, keep reading to find out more.

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Residential Mortgage

Unless you’ve got a mountain of cash in your back pocket, buying a home in the UK can seem like an impossible task.

After all:

With average UK house prices reaching almost £280k in March 2022, you will need A LOT of money to secure a property.

Thankfully, there are several ways to get on the property ladder without all this cash.

And the most common way of doing this is through the help of a residential mortgage.

A residential mortgage is a long-term loan used to buy a home to live in.

But while this sounds simple, the process can get quite complex with several different types of mortgages available.

Whether you’re a first-time buyer, looking to move homes, or want to remortgage, you can get a residential mortgage.

However, each mortgage lender will have its own criteria on who they’re willing to lend money.

Generally speaking, a lender will consider eight characteristics before agreeing to a loan, including:

  1.     How much you’re looking to borrow
  2.     Your deposit
  3.     The type of property (an off-plan home might be difficult to mortgage, for example).
  4.     How long you’ve been employed for
  5.     Any outstanding debts
  6.     How much you spend
  7.     Your credit score
  8.     If you can afford the mortgage payments

Getting a residential mortgage means lending cash from a bank or building society and using it to buy a home.

You’ll need a cash deposit to secure a mortgage loan, typically paid back through monthly repayments.

These payments can include paying the capital back (the money you borrow) and the loan’s interest.

A mortgage loan is lent on the basis that you pay it back within a set time, known as a mortgage term.

The most common term is 25 years, but it can stretch up to 40 years depending on your age and the lender.

Lenders will typically lend up to four times your salary (or joint salary if you buy with a partner).

However, it can be more complicated than this, with lenders conducting several checks outside your income.

Lenders scrutinise your finances and debts.

They’ll look at the money you earn and compare it to your outgoings to identify your spendable cash.

And after this, lenders may even require you to have MORE money if mortgage rates rise.

They can stress test you by putting you on a higher interest rate to see how much you can afford.

As a rule of thumb, most borrowers will need a minimum deposit of 10% to get a good choice of mortgages.

Some mortgages are available with a 5% deposit, but these tend to have far higher interest costs every month.

If you can, 20% and even 40% deposits are best.

These large deposits can get you the best mortgage deals with the lowest monthly payments.

In a nutshell:

The higher your deposit, the cheaper the mortgage.

And this can be quite dramatic when you compare prices.

The amount of deposit you have to secure a mortgage loan can dramatically impact your monthly payments.

Based on a two-year fixed-rate mortgage for a first-time buyer on a £200,000 house, a 40% deposit will see you spend just £13,314 in mortgage repayments over two years (according to MoneySavingExpert.com).

A 10% mortgage deposit would see you spend £21,500 over the same period.

When looking for mortgages, you’ll encounter the abbreviation LTV.

But what does it actually mean?

LTV, or loan-to-value ratio, is the percentage of a property value you lend through a mortgage.

Essentially, the LTV shows how much deposit you’ll need to pay.

For example, a 90% LTV mortgage equals a deposit of 10%.

So, if you’re buying a house worth £100k and put down a £10k deposit, you’d require an LTV of 90%.

Unfortunately, it isn’t just as simple as needing 10% of the property’s purchase price.

Mortgage lenders will assess the value of your home before lending and will base the LTV calculation on this assessment.

The value of your home could be worth less than what you want to pay for it.

And because they’ll only lend 90% of this value, you could need a bigger deposit to cover the full purchase price.

What Can I Do To Afford A Mortgage?

Although 5% and 10% deposits sound doable, they can still be incredibly expensive.

For example, a 5% deposit on the average UK house price translates to £13,884.

If you’re renting and have other cash commitments, it can take years to reach this number.

Luckily, several housing schemes and initiatives are designed to reduce the entry cost of property.

However, you’ll usually need to be a first-time buyer to be eligible.

Lifetime ISA 

Lifetime ISAs are a savings account that pays interest on your savings.

You can only pay £4,000 per year into the account.

But what makes LISA’s so special?

For every £1 you put into a Lifetime ISA, the government will give you a free 25% bonus.

TWENTY-FIVE PER CENT!

This means if you save your total £4,000, you’ll get an additional £1,000 per year.

Over 10 years, you could save £50,000 and afford a 20% or even 40% deposit, depending on the property price.

Shared Ownership 

The shared ownership scheme allows buyers to buy between 25% to 75% of a property with the help of a mortgage.

Ideal if you don’t have the cash required to get a 90% or 95% LTV mortgage, you can buy properties from a housing association and increase the share as time goes on.

However, there are some caveats to this.

As you’ll be buying the home with a mortgage, you’ll pay monthly mortgage repayments.

But you’ll also be paying rent to the housing association, which is typically charged at 2.75% of the remaining price not covered by the mortgage.

Naturally, this can make it incredibly difficult to save enough money to buy the rest of the property.

Be sure to crunch the numbers beforehand to ensure this investment is affordable for you.

Extra Fees You Need to Consider 

Aside from monthly mortgage payments and sizeable deposits, borrowers have a few extra fees to consider when buying a house.

(Don’t worry, they aren’t as big as a deposit).

These include:

  1. Arrangement fees. This is the highest extra fee and is a charge you pay your lender to set up your mortgage. Fees can be around £2,000.
  2. Reservation fees. Some lenders will charge an extra fee when securing mortgages like trackers or discount deals (more on this later). Fees can cost around £200.
  3. Valuation fees. Your lender will inspect your new home to estimate its value and determine how much it’s willing to loan. The cost of the valuation fee will depend on your property’s value but typically falls around the £250 mark.
  4. Early Repayment Charge. Some mortgage lenders will charge you an extra fee if you overpay on your mortgage or try to repay and switch to a new deal. The charge usually falls between 1% – 5% of the deal. So, if you overpaid £1,000, you would be charged between £10 and £50.
  5. Home Insurance. All mortgage lenders insist that borrowers get buildings insurance on their freehold property. The insurance should cover the property’s rebuild if it were to burn down or be flooded. You can get this policy paired with contents insurance that’ll cover the costs of your personal belongings and furnishings if they were damaged. The average cost of a contents and buildings insurance policy ranges from £57 to £111 per year (Money Helper).

Of course, that’s without mentioning other fees when buying a property like Stamp Duty.

So, make sure you can meet all these costs before saving for a mortgage deposit.

Download 2023 Residential Mortgage Guide

Types of Mortgages 

Repayment Mortgage vs Interest-Only Mortgage 

There are essentially two types of mortgages, repayment and interest-only.

Repayment mortgages are the most common type for residential buyers.

Here, you’ll pay monthly payments that chip away the overall debt of your loan and the interest that’s accrued.

Meanwhile, interest-only mortgages mean you pay your loan’s interest without touching the overall debt.

Come to the end of your mortgage deal, and you’ll pay the total capital loan back.

Interest-only tends to have much lower repayment costs each month, but you’ll still owe hundreds of thousands at the end of your agreement.

For example, if you loan £100,000 at a 5% interest rate, you’ll pay £5,000 a year.

But the £100k will still need to be paid at the end of the term.

While you may be confused about why you’d opt for this, you shouldn’t worry:

Most lenders will not lend on an interest-only basis due to the risk of no repayment.

The Types of Deals You Can Get on a Residential Mortgage 

You’ll most likely get a repayment mortgage for your new home.

But lenders offer different deals on this mortgage type, each with its own pros and cons.

Below, you’ll find examples of these:

Fixed-rate vs Variable-Rate 

The two main types of mortgage deals are fixed-rate and variable-rate mortgages.

A fixed-rate deal is the most simple:

The loan’s interest rate won’t change for an agreed-upon time.

So whether you fix it for two or even five years, your rates won’t change regardless of how interest rates vary.

While this can be great as you’ll know exactly what costs to expect, it can be a double-edged sword.

If interest rates were to go down, you wouldn’t benefit from lower rates.

After the agreed term ends, most borrowers will be moved to the lender’s standard variable rate, which can be pricey.

With variable-rate mortgages, interest rates can move up and down.

However, variable-rate deals can get complex as there are four main types. 

Types of Variable Rate Mortgages

Tracker Mortgages

Tracker mortgages are a type of variable rate mortgage where the interest rate changes in line with a fixed economic indicator, usually the Bank of England base rate.

So:

If the Bank of England’s base rate rises by 1%, your mortgage payments will do the same.

Trackers can be great because your lender can’t raise rates for their commercial interests.

However, some trackers only last for a set number of years and will then go to the standard variable rate.

 Pros 
  • Only economic changes will impact your rate rather than the commercial desires of your lender.
Cons 
  • Uncertainty as you don’t know how interest rates could change.
  • If rates rise, you’ll be spending more on monthly repayments.

 Standard Variable Rate (SVR) 

Set by the lender, a standard variable rate follows the Bank of England base rate but has a few quirks.

Namely, since the lender is in charge, they usually won’t drop the interest rates too much if the Base Rate drops.

But if the Base Rate rises, they’ll usually increase rates by the total amount.

For example, if the Base Rate drops by 0.25%, they may only reduce the SVR by 0.2%.

SVRs are usually anywhere from 2% to 5% higher than the base rate, making it one of the more expensive mortgage options.

 Pros 
  • If the Base Rate drops, your rates will most likely drop too.
  • There are usually no early repayment charges.

Cons 

  • Uncertainty as you don’t know how interest rates could change.
  • SVRs can get expensive.

Discounted Variable Rate Mortgage 

As the name suggests, discount rates offer a discount on a standard variable rate mortgage.

Discounts typically last for a short period, around two or three years.

Pros 
  • Cheaper than the standard variable rate.
  • If the Base Rate drops, your rates will most likely drop too.
Cons 
  • Uncertainty as to how rates will change.

Capped Deals 

The final type of variable rate mortgage is a hybrid option.

With a capped deal, you’ll have a variable rate with an upper limit that prevents interest rates from rising too high.

However, while capped deals can be a great alternative to SVR, they are now quite rare and hard to find.

Pros 
  • If the interest rate falls, you’ll benefit from lower monthly payments.
  • Capped deals provide some protection from rising interest rates.
Cons 
  • The cap on deals can be set high.
  • Starting rates will typically be higher than normal variable rates.

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How To Find The Right Mortgage

You’ve now decided what type of mortgage is right for you.

So, how do you find the real deal and mortgage provider?

Well, you have two main options.

You can either a) go it alone or b) use a mortgage broker.

a)     Go it Alone 

If you’re confident and know what you want, going it alone can be a great way of finding a mortgage.

As a starting point, you should use cash comparison websites like Money Saving Expert or Compare the Market to get some quotes and compare interest rates.

But keep in mind that you’ll also need to factor in the additional fees, which may not be shown on some websites.

b)     Use a Mortgage Broker 

Finding mortgage deals can be a hassle, especially as a beginner.

But getting the right deal can pay dividends in the long run and result in £100s saved per month.

And while you can certainly search yourself, the best way for beginners is to use a mortgage broker.

Mortgage brokers search the market on your behalf to find the best mortgage deals.

They can act as an advisor, help you with government mortgage schemes, and could increase your chances of being accepted for an offer.

For beginners, mortgage brokers are well-recommended by popular finance sites, so you should consider using their services.

Just remember that they could charge you a fee, typically no more than 1% of the mortgage value.

Applying for a Mortgage 

Found a good mortgage offer? Great work!

Now it’s time to get down to the nitty-gritty of the mortgage process:

How do you actually apply?

Step 1: Find a Property 

Before starting the formal application process, you’ll need to find a property.

For lenders, the property is security if you’re unable to pay.

(They’ll repossess your home to cover the outstanding debt).

As such, you’ll need a property in place with an offer accepted before you can apply in full.

But this doesn’t mean you can’t get the ball rolling beforehand.

You can find out how much you can borrow by talking to your lender (or broker) about your income and other basic details.

Step 2: Choose a Broker or Go it Alone 

If you’ve found your property, it’s time to find a mortgage deal.

To do this, you can either go it alone or pick a mortgage broker.

Brokers are the easiest method for beginners as they can give you advice and get you access to exclusive deals you won’t find in the broader market.

Step 3: Prepare Documents 

You’ll need some documents to apply for a mortgage, including proof of ID, proof of address, employment details, and up to six months of bank statements.

Originals of these documents will be needed rather than scanned documents, but PDFs of bank statements are generally OK.

Step 4: Consider Getting a Mortgage Agreement in Principle (AIP) 

Once you’ve found a mortgage deal that ticks your boxes, it’s good to consider getting a mortgage agreement in principle.

A mortgage agreement in principle is exactly what it says on the tin; a conditional offer that says your lender would be willing to loan based on your income and credit file.

While mortgage agreements in principle aren’t needed and offer no guarantees, you’ll likely be asked for one by the home seller’s agent before they accept your offer.

Step 5: Wait… 

After having an offer on a property accepted and sorting out a formal mortgage application, you’ll now have to wait for your application to be accepted.

Although you shouldn’t have to wait too long (you’ll usually get an offer within four weeks), delays can occur.

Mortgage offers are usually valid for six months, which can be an issue if you buy an off-plan property.

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Frequently Asked Questions

Yes, you can have two residential mortgages, but you may encounter some issues. The terms and conditions of a residential mortgage require you to live there, even if it’s for a short amount of time.

Therefore, you’ll need to explain why you need to take out a mortgage.

As residential mortgages are cheaper than buy-to-let mortgages, your lender will want to ensure you aren’t illegally subletting.

If you were buying a holiday home, you’d need to be living in the house for a certain amount of time per year.

Yes, you can change a residential mortgage to a buy-to-let mortgage by remortgaging.

You may need to do this if you become an accidental landlord or have decided that you want to rent out a home previously purchased with a residential mortgage.

No, you cannot let out a property that has been purchased with a residential mortgage.

This is against the terms of your loan and amounts to mortgage fraud.

You could be forced to repay your mortgage loan in full or face repossession of your property.

Yes, having a buy-to-let mortgage could affect getting a residential mortgage.

If your rental property doesn’t generate enough rent to cover repayments, your lender may be hesitant to loan for a second mortgage.

Yes, you can get an interest-only residential mortgage, but they’re very rare and have tight eligibility criteria.